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 June 30, 20222023

OR

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-39184

 

SWK Holdings Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware77-0435679
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
  
14755 Preston Road5956 Sherry Lane, Suite 105650 
Dallas, TX7525475225
(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
Preferred Stock Purchase RightsSWKHThe 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) 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      o   NoNO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).x   Yes     o   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   oAccelerated Filer   oNon-Accelerated Filer   xSmaller Reporting Company  x  Smaller Reporting Company    xEmerging 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     x   NoNO

As of August 3, 2022,5, 2023, there were 12,828,70412,540,483 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

SWK Holdings Corporation

Form 10-Q

Quarter Ended June 30, 20222023

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.Financial Statements1
Unaudited Condensed Consolidated Balance Sheets—June 30, 20222023 and December 31, 202120221
Unaudited Condensed Consolidated Statements of Income —ThreeIncome—Three and Six Months Ended June 30, 20222023 and 202120222
Unaudited Condensed Consolidated Statements of Stockholders’ Equity—Three and Six Months Ended June 30, 20222023 and 202120223
Unaudited Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 20222023 and 202120224
Notes to the Unaudited Condensed Consolidated Financial Statements5
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1922
Item 3.Quantitative and Qualitative Disclosures About Market Risk2630
Item 4Controls and Procedures2630
PART II. OTHER INFORMATION
Item 1.Legal Proceedings2731
Item 1A.Risk Factors2731
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2731
Item 3.Defaults Upon Senior Securities2731
Item 4.Mine Safety Disclosures2731
Item 5.Other Information2731
Item 6.Exhibits2832
Signatures2933

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.” 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,” 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

ITEM 1. FINANCIAL STATEMENTS

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

 June 30,
2022
  December 31,
2021
  June 30,
2023
 December 31,
2022
 
ASSETS                
Current assets:                
Cash and cash equivalents $55,118  $42,863  $6,805  $6,156 
Interest and accounts receivable, net  1,869   1,803   4,381   3,094 
Marketable investments  487   1,034 
Other current assets  1,366   1,727   1,885   1,114 
Total current assets  58,840   47,427   13,071   10,364 
                
Finance receivables, net  174,859   181,553 
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  98   119   59   76 
Cost method investment  3,491   3,491 
Deferred tax assets, net  19,281   20,539   25,689   24,480 
Warrant assets  2,481   3,419   1,459   1,220 
Intangible assets, net  9,042   9,964   7,339   8,190 
Goodwill  8,404   8,404   8,404   8,404 
Property and equipment, net  6,071   5,779   5,598   5,840 
Other non-current assets  1,858   1,970   3,123   1,742 
Total assets $284,425  $282,665  $290,442  $299,621 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities $2,776  $5,087  $2,996  $3,902 
Revolving credit facility     8      2,445 
Total current liabilities  2,776   5,095   2,996   6,347 
                
Contingent consideration payable  8,530   8,530   11,200   11,200 
Other non-current liabilities  1,589   1,804   2,362   2,145 
Total liabilities  12,895   15,429   16,558   19,692 
                
Commitments and contingencies (Note 6)                
                
Stockholders’ equity:                
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively      
Common stock, $0.001 par value; 250,000,000 shares authorized; 12,839,118 and 12,836,133 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively  13   13 
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding      
Common stock, $0.001 par value; 250,000,000 shares authorized; 12,566,519 and 12,843,157 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively  12   12 
Additional paid-in capital  4,431,970   4,431,719   4,425,991   4,430,922 
Accumulated deficit  (4,160,453)  (4,164,496)  (4,152,119)  (4,151,005)
Total stockholders’ equity  271,530   267,236   273,884   279,929 
Total liabilities and stockholders’ equity $284,425  $282,665  $290,442  $299,621 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

1

1

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 Three Months Ended
June 30,
  Six Months Ended
June 30,
  

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 
 2022  2021  2022  2021  2023  2022  2023  2022 
Revenues:                                
Finance receivable interest income, including fees $6,828  $11,805  $17,243  $20,484  $9,278  $6,828  $18,538  $17,243 
Pharmaceutical development  114   10,461   350   10,659   183   114   301   350 
Other        480   496   36      69   480 
Total revenues  6,942   22,266   18,073   31,639   9,497   6,942   18,908   18,073 
Costs and expenses:                                
Provision (benefit) for credit losses  (682)     (682)   
Interest expense  80   94   160   239   363   80   545   160 
Pharmaceutical manufacturing, research and development expense  1,480   1,542   3,381   3,090   1,509   1,480   2,228   3,381 
Change in fair value of acquisition-related contingent consideration     (147)     (147)
Depreciation and amortization expense  626   811   1,330   2,493   637   626   1,285   1,330 
General and administrative  3,018   3,360   6,178   6,245   2,997   3,018   5,537   6,178 
Income from operations  1,738   16,606   7,024   19,719   4,673   1,738   9,995   7,024 
Other (expense) income, net                
Unrealized net (loss) gain on derivatives  (472)  609   (1,165)  892 
Unrealized net (loss) gain on equity securities  (519)  283   (547)  1,215 
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  747   17,498   5,312   21,826   5,388   747   9,914   5,312 
Income tax expense  182   3,528   1,269   4,467   1,454   182   1,345   1,269 
Net income $565  $13,970  $4,043  $17,359  $3,934  $565  $8,569  $4,043 
                
Net income per share                                
Basic $0.04  $1.09  $0.32  $1.36  $0.31  $0.04  $0.67  $0.32 
Diluted $0.04  $1.09  $0.31  $1.35  $0.31  $0.04  $0.67  $0.31 
Weighted average shares outstanding                                
Basic  12,835   12,796   12,833   12,794   12,741   12,835   12,787   12,833 
Diluted  12,885   12,834   12,882   12,822   12,785   12,885   12,830   12,882 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

2

2

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

 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  Six Months Ended June 30, 2022 
          Total        Total 
 Common Stock Additional Accumulated Stockholders’  Common Stock Additional Accumulated Stockholders’ 
 Shares Amount Paid-In Capital Deficit Equity  Shares Amount Paid-In Capital Deficit Equity 
Balances at December 31, 2021  12,836,133   13  $4,431,719  $(4,164,496) $267,236   12,836,133  $13  $4,431,719  $(4,164,496) $267,236 
Stock-based compensation        85      85         85      85 
Issuance of common stock upon vesting of restricted stock  5,495               5,495             
Forfeiture of unvested restricted stock  (6,815)              (6,815)            
Net income           3,478   3,478            3,478   3,478 
Balances at March 31, 2022  12,834,813   13   4,431,804   (4,161,018)  270,799   12,834,813   13   4,431,804   (4,161,018)  270,799 
Stock-based compensation        166      166         166      166 
Issuance of common stock upon vesting of restricted stock  4,305               4,305             
Net income           565   565            565   565 
Balances at June 30, 2022  12,839,118  $13  $4,431,970  $(4,160,453) $271,530   12,839,118  $13  $4,431,970  $(4,160,453) $271,530 
                    
 Six Months Ended June 30, 2021 
          Total 
 Common Stock Additional Accumulated Stockholders’ 
 Shares Amount Paid-In Capital Deficit Equity 
Balances at December 31, 2020  12,792,586  $13  $4,430,924  $(4,190,425) $240,512 
Stock-based compensation        177      177 
Issuance of common stock upon vesting of restricted stock  3,021             
Net income           3,389   3,389 
Balances at March 31, 2021  12,795,607   13   4,431,101   (4,187,036)  244,078 
Stock-based compensation        187      187 
Issuance of common stock upon vesting of restricted stock  2,940             
Net income           13,970   13,970 
Balances at June 30, 2021  12,798,547  $13  $4,431,288  $(4,173,066) $258,235 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3

3

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 Six Months Ended
June 30,
  

Six Months Ended
June 30,

 
 2022  2021  2023  2022 
Cash flows from operating activities:                
Net income $4,043  $17,359  $8,569  $4,043 
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision (benefit) for credit losses  (682)   
Right-of-use asset amortization  156   113 
Amortization of debt issuance costs  29   93   168   29 
Deferred income taxes  1,257   4,369   1,316   1,257 
Change in fair value of warrants  1,165   (892)  583   1,165 
Change in fair value of equity securities  547   (1,215)     547 
Change in fair value of acquisition-related contingent consideration     (147)
Loan discount amortization and fee accretion  (780)  (1,130)
Interest income paid-in-kind  (1,599)  (26)
Foreign currency transaction gain  (516   
Loan discount and fee accretion  (2,297)  (780)
Interest paid-in-kind  (957)  (1,599)
Stock-based compensation  251   364   199   251 
Depreciation and amortization expense  1,330   2,493 
Depreciation and amortization  1,285   1,330 
Changes in operating assets and liabilities:                
Interest and accounts receivable  (66)  (728)  (1,287)  (66)
Other assets  (256)  (477)  (792)  (256)
Accounts payable and other liabilities  (2,526)  (813)  (357)  (2,526)
Net cash provided by operating activities  3,395   19,250   5,388   3,508 
                
Cash flows from investing activities:                
Proceeds from sale of investments  13,942    
Investment in finance receivables  (25,350)  (20,100)  (13,101)  (25,350)
Repayment of finance receivables  34,195   22,779   3,041   34,195 
Corporate debt securities principal payments  21   31   17   21 
Purchases of property and equipment  (111)  (671)  (191)  (111)
Other  113   163 
Net cash provided by investing activities  8,868   2,202   3,708   8,755 
                
Cash flows from financing activities:                
Payments for financing costs  (872)   
Net payments on credit facility  (8)  (11,758)  (2,445)  (8)
Payment of acquisition-related contingent consideration     (6,083)
Repurchases of common stock, including fees and expenses  (5,130)   
Net cash used in financing activities  (8)  (17,841)  (8,447)  (8)
                
Net increase in cash and cash equivalents  12,255   3,611   649   12,255 
Cash and cash equivalents at beginning of period  42,863   3,008   6,156   42,863 
Cash and cash equivalents at end of period $55,118  $6,619  $6,805  $55,118 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4

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 operations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” The Company allocates capital to each segment in order to generate income through the sales of life science products by third parties. The Company is headquartered in Dallas, Texas, and as of June 30, 2022,2023, the Company had 3423 full-time employees.

The Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important and substantial asset. However, at this time, under current law, the Company does not anticipate that the Finance Receivables and/or Pharmaceutical Development segments will generate sufficient income to permit the Company to utilize all of its NOLs prior to their respective expiration dates. As such, it is possible that the Company might pursue additional strategies that it believes might result in the ability to utilize more of the NOLs.

As of August 3, 2022,5, 2023, the Company and its partners have executed transactions with 4650 different parties under its specialty finance strategy, funding an aggregate of $649.6$725.7 million 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.

 

During 2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is a clinical stage biopharmaceutical company offeringdevelopment 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. Since its founding in 2013, Enteris has advanced multiple internal and external programs leveraging Peptelligence®, 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. Peptelligence® utilizes a unique multifaceted approach to increase the solubility and absorption of peptides and small molecules, addressing the complex challenges regarding solubility and permeability of therapeutics with low oral bioavailability. Peptelligence® is protected by an extensive patent estate that extends until 2036.

Basis of Presentation and Principles of Consolidation 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The 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 the Company, as the general partner or managing member, exercises effective control, even though the Company’s ownership may be less than 50 percent, the related governing agreements provide the Company with broad powers, and the other parties do not participate in the management of the entities and do not effectively have the 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 consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company.

5

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, 2022.2023. 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, 2021,2022, filed with the SEC on March 25, 2022.31, 2023.

Use of Estimates 

The preparation of the Company’s 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 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; stock-based compensation; valuation of interest and accounts receivable; impairment of finance receivables; allowance for credit losses; long-lived assets; property and equipment; intangible assets; goodwill; valuation of warrants and other investments; contingent consideration; income taxes; 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 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 2two 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.

6

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 March 2022,2020, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard Update (“ASU”) 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” which updates the requirements for accounting for credit losses under Accounting Standards Codification 326, eliminates the accounting guidance on troubled debt restructurings for creditors, and enhances creditors’ disclosure requirements related to loan refinancings and restructurings for borrowers experiencing financial difficulty. The ASU also amends the guidance on vintage disclosures to require disclosure of gross write-offs by year of origination. The amendments are effective in periods beginning after December 15, 2022 using either a prospective or modified retrospective transition. Early adoption of certain or all of the amendments is permitted. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU adds an impairment model, known as the current expected credit loss (“CECL”) model, that is based on expected losses rather than incurred losses. Under this 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. This 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. On November 15, 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies. Under ASU 2019-10, the effective date for implementation of CECL for smaller reporting companies was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently evaluating the new guidance but believes it is likely to incur more upfront losses on its portfolio under the new CECL model.

In March 2020, the FASB issued ASU 2020-04, “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 exceptions 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 debt securities classified as held-to-maturity. ASU 2020-04 was effective upon issuance, and the provisions generally can be applied prospectively as of January 1, 2020 through December 31, 2024. The Company has identified existing loans that reference LIBOR and is in the process of evaluating alternatives in each situation. The Company expects that it will elect to apply some of the expedients and exceptions provided in ASU 2020-04 and does not believe the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

The Company adopted 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 retrospective approach 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 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 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 origination in the vintage disclosures. The Company adopted ASU 2022-02 on January 1, 2023 and incorporated the required disclosures into Note 3, Finance Receivables.

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Note 2. Net Income per Share

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.

 

The following table shows the computation of basic and diluted net income per share for the following periods (in thousands, except per share amounts):

 

Schedule of Basic and Diluted Earning per Share 

 Three Months Ended
June 30,
  Six Months Ended
June 30,
  

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 
 2022  2021  2022  2021  2023  2022  2023  2022 
Numerator:                         
Net income $565  $13,970  $4,043  $17,359  $3,934  $565  $8,569  $4,043 
                                
Denominator:                                
Weighted-average shares outstanding  12,835   12,796   12,833   12,794   12,741   12,835   12,787   12,833 
Effect of dilutive securities  50   38   49   28   44   50   43   49 
Weighted-average diluted shares  12,885   12,834   12,882   12,822   12,785   12,885   12,830   12,882 
                                
Basic net income per share $0.04  $1.09  $0.32  $1.36  $0.31  $0.04  $0.67  $0.32 
Diluted net income per share $0.04  $1.09  $0.31  $1.35  $0.31  $0.04  $0.67  $0.31 

 

For the three months ended June 30, 20222023 and 2021,2022, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 308,000118,000 and 391,000308,000, respectively, have been excluded from the calculation of diluted net income per share, as such securities were anti-dilutive. For the six months ended June 30, 20222023 and 2021,2022, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 309,000119,000 and 401,000309,000, respectively, have been excluded from the calculation of diluted net income per share, as all such securities were anti-dilutive.

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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.

As of June 30, 2022 and December 31, 2021, the Company had a credit loss allowance of $8.4 million. Of the total $8.4 million, $1.2 million and $0.6 million are associated with the Company’s Cambia® and Besivance® royalties, respectively. The remaining $6.6 million is related to the ABT Molecular Imaging, Inc., now known as Best ABT, Inc. (“Best”), second lien term loan that was recognized in order to reflect the Best royalty at its estimated fair value. Approximately $23,000 of cash receipts received from the Company’s Besivance® royalty during the six months ended June 30, 2022 were applied toward the allowance for credit losses.

The carrying values of finance receivables are as follows (in thousands):

Schedule of carrying value of finance receivables

 June 30, 2022  December 31, 2021  June 30, 2023  December 31, 2022 
Term loans $133,004  $136,312  $189,283  $188,836 
Royalty purchases  50,220   53,629   44,771   59,565 
Total before allowance for credit losses  183,224   189,941   234,054   248,401 
Allowance for credit losses  (8,365)  (8,388)  (11,104)  (11,846)
Total carrying value $174,859  $181,553 
Total finance receivables, net $222,950  $236,555 

 

Allowance for Credit Losses

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 its finance receivables. Recognition of income is suspended, and the finance receivable is placed on non-accrual status when management determines that collection of future income is not 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 collectibility of remaining principal and interest is no longer doubtful.

The following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands):

Schedule of analysis of nonaccrual and performing loans by portfolio segment

  June 30, 2022  December 31, 2021 
  Nonaccrual  Performing  Total  Nonaccrual  Performing  Total 
Term loans $9,789  $123,215  $133,004  $18,288  $118,024  $136,312 
Royalty purchases, net of credit loss allowance  3,127   38,728   41,855   3,362   41,879   45,241 
Total carrying value $12,916  $161,943  $174,859  $21,650  $159,903  $181,553 
  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 June 30, 2022,2023, the Company had twothree finance receivables in nonaccrual status: (1) the term loan to Flowonix Medical, Inc. (“Flowonix”), with a net carrying value of $9.811.9 million and; (2) the Best royalty, with a net carrying value of $3.12.8 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 Flowonix term loan was notfinance receivables were considered impaired as of June 30, 2022 and December 31, 2021.2023. The Company collected $0.6$0.2 million on its nonaccrual finance receivables during the six months ended June 30, 2022.2023.

 

Note 4. Credit Quality of Finance Receivables

Marketable Investments

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:

 

Investments1: 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 available-for-sale corporate debt securitiesquestion. Finance receivables rated a 1 are on non-accrual and equity securities asare 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 June 30, 2022underwriting. 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 December 31, 2021 consistloan-to-value is similar to slightly worse than at the time of the following (in thousands):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.

Schedule5: Borrower performing in excess of marketable investmentsCompany expectations, and loan-to-value is better than at time of origination.

  June 30, 2022  December 31, 2021 
Corporate debt securities $98  $119 
Equity securities  487   1,034 
Total marketable investments $585  $1,153 

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The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding lossesCompany 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 fair valuesRed reflective of available-for-sale corporate debt securities as of June 30, 2022 and December 31, 2021, are as follows (in thousands):

Schedule of marketable investments

  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Loss
  Fair Value 
June 30, 2022 $98  $  $  $98 
December 31, 2021 $119  $  $  $119 

underperformance relative to plan.

The following table presents unrealized net (loss) gain on equity securities duringsummarizes the three and six months endedcarrying value of Finance Receivables by origination year, grouped by risk rating as of June 30, 2022 and 2021 (in thousands):2023:

Schedule of Proceeds from sales, gross unrealized gains and gross unrealized losses for available-for-sale securitiesFinancing Receivable by origination year

  Three Months Ended
June 30,
  Six Months Ended June 30, 
  2022  2021  2022  2021 
Unrealized net (loss) gain on equity securities reflected in the unaudited condensed consolidated statements of income $(519) $283  $(547) $1,215 
  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 5.4. Intangible Assets

 

The following table summarizes the gross book value, accumulated amortization and net book value balances of intangible assets as of June 30, 20222023 and December 31, 20212022 (in thousands):

Schedule of Intangible Assets

 June 30, 2022  December 31, 2021  June 30, 2023  December 31, 2022 
 Gross Book
Value
  Accumulated
Amortization
  Net Book
Value
  Gross Book
Value
  Accumulated
Amortization
  Net Book
Value
  Gross Book
Value
  Accumulated
Amortization
  Net Book
Value
  Gross Book
Value
  Accumulated
Amortization
  Net Book
Value
 
Licensing Agreement(1) $29,400  $20,680  $8,720  $29,400  $19,780  $9,620  $29,400  $22,338  $7,062  $29,400  $21,509  $7,891 
Trade names and trademarks  210   60   150   210   50   160   210   81   129   210   71   139 
Customer relationships  240   68   172   240   56   184   240   92   148   240   80   160 
Total intangible assets $29,850  $20,808  $9,042  $29,850  $19,886  $9,964  $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 and $0.7 million for both the three months ended June 30, 20222023 and 2021,2022, respectively. Amortization expense related to intangible assets was $0.9 million and $2.3 million for both the six months ended June 30, 20222023 and 2021,2022, respectively.

 

The estimated future amortization expense related to intangible assets as of June 30, 20222023 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 

 

Fiscal Year Amount 
Remainder of 2022 $851 
2023  1,703 
2024  1,546 
2025  1,076 
2026  1,076 
Thereafter  2,790 
Total $9,042 

Note 5. Revolving Credit Facility

On June 28, 2023, the Company entered into a new Credit Agreement (the “Credit Agreement”) by and among SWK Funding LLC, the Company’s wholly-owned subsidiary (together with the 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 of loan assets will not be less than 4.5%, for such calendar month, (iv) the net charge-off percentage in relation 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 the 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 at each reporting date until the contingency is resolved, with changes in the estimated fair value recognized in earnings. The estimated fair value of contingent consideration as of June 30, 20222023 and December 31, 20212022 was $8.5 million.$11.2 million. The Company did not recognize a change in the estimated fair value of its contingent consideration during the six months ended June 30, 2023 and 2022. The Company recognized a $0.1 million gain on the change in fair value of its contingent consideration during the six months ended June 30, 2021.

 

Unfunded Commitments

 

As of June 30, 2022,2023, the Company’s unfunded commitments were as follows (in millions):

 

Schedule of Unfunded Commitments

Trio Healthcare Ltd. Loan $1.4 
MedMinder Systems, Inc. $5.0 
Duo Royalty  2.4 
Total unfunded commitments $1.4  $7.4 

 

UnfundedPer the terms of the 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, 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.

On January 1, 2023, the Company adopted ASU 2016-13, which replaced the incurred loss methodology with an expected loss model known as the CECL model. See Note 3 for information regarding the Company’s allowance for credit losses related to its unfunded commitments.

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Litigation

The Company is involved in, or has been involved in, arbitrations or various other legal proceedings that arise from the normal course of its business. 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 capacity, or in other capacities at the Company’s request. The term of the indemnification period is for the officer’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 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 the estimated fair value of these indemnification agreements is insignificant. Accordingly, the Company had no liabilities recorded for these agreements as of June 30, 2023 and December 31, 2022.


Note 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 1Unadjusted 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 2Quoted 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 3Unobservable 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.

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 six months ended June 30, 2023 and 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 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.

Marketable Investments

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.

15

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.

12

Marketable Investments and Derivative Securities  

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 following table presents financialCompany 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 measured at fair value on a recurring basisin the consolidated balance sheets as of June 30, 2022 (in thousands):

Schedule2023 and December 31, 2022. The Company recognized $1.6 million of changes in fair value assets measured on recurring basisrelated to its foreign currency forward during the six months ended June 30, 2023.

  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 $2,481  $  $  $2,481 
Marketable investments  585   487      98 
                 
Financial Liabilities                
Contingent consideration payable $8,530  $  $  $8,530 

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021June 30, 2023 (in thousands):

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)
  

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 $3,419  $  $  $3,419  $1,459  $  $  $1,459 
Marketable investments  1,153   1,034      119   59         59 
Foreign currency forward contract    811         811 
                                
Financial Liabilities                                
Contingent consideration payable $8,530  $  $  $8,530  $11,200  $  $  $11,200 
                

16

13

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 (in thousands):

  

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 $1,220  $  $  $1,220 
Marketable investments  76         76 
                 
Financial Liabilities                
Contingent consideration payable $11,200  $  $  $11,200 
Foreign currency forward contract  754         754 

The changes in fair value of the warrant assets during the six months ended June 30, 20222023 and 20212022 were as follows (in thousands):

 

Schedule of fair value assets measured on recurring basis unobservable input reconciliation

       
June 30, 2022 June 30, 2021
Fair value - December 31, 2021 $3,419  Fair value - December 31, 2020 $2,972 
June 30, 2023June 30, 2023 June 30, 2022
Fair value - December 31, 2022 $1,220  Fair value - December 31, 2021 $3,419 
Issued  227  Issued     822  Issued  227 
Canceled    Canceled       Canceled   
Change in fair value  (1,165) Change in fair value  892   (583) Change in fair value  (1,165)
Fair value - June 30, 2022 $2,481  Fair value - June 30, 2021 $3,864 
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

June 30, 20222023December 31, 20212022
Dividend rate range0
Risk-free rate range2.9% to 3.0%4.9%0.97%4.0% to 1.44%4.3%
Expected life (years) range 2.1 to 6.72.61.7 to 7.02.0 to 6.9
Expected volatility range52.6%63.6% to 147.5%137.8% 60.2%54.8% to 142.0%139.4%


As of June 30, 2022 and2023, 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, 2021,2022, 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 these royalties measured at fair value on a nonrecurring basis as of June 30, 20222023 and December 31, 20212022 (in thousands):

Schedule of fair value of assets and liabilities measured on nonrecurring 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)
 
June 30, 2022 $4,604  $  $  $4,604 
                 
December 31, 2021 $5,612  $  $  $5,612 
  

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 June 30, 20222023 and December 31, 2021.2022.

 

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 measured at fair value on a recurring and non-recurring basis.

14

Schedule of fair value by balance sheet grouping

As of June 30, 20222023 (in thousands):

 

 Carrying 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 $55,118  $55,118  $55,118  $  $ 
Finance receivables  174,859   174,859         174,859  $222,950  $222,950  $  $  $222,950 
Marketable investments  585   585   487      98   59   59         59 
Warrant assets  2,481   2,481         2,481   1,459   1,459         1,459 
Foreign currency forward contract  811   811         811 
                                        
Financial Liabilities                                        
Contingent consideration payable $8,530  $8,530  $  $  $8,530  $11,200  $11,200  $  $  $11,200 

 

As of December 31, 20212022 (in thousands):

 Carrying 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 $42,863  $42,863  $42,863  $  $ 
Finance receivables  181,553   181,553         181,553  $236,555  $236,555  $  $  $236,555 
Marketable investments  1,153   1,153   1,034      119   76   76         76 
Warrant assets  3,419   3,419         3,419   1,220   1,220         1,220 
                                        
Financial Liabilities                                        
Contingent consideration payable $8,530  $8,530  $  $  $8,530  $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, 20222023 and 20212022 (in thousands):

 

Schedule of Revenue Recognized by Revenue Source

 Three Months Ended
June 30,
  Six Months Ended
June 30,
  

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 
 2022  2021  2022  2021  2023  2022  2023  2022 
Pharmaceutical Development Segment                                
License Agreement $16  $10,431  $132  $10,610  $10  $16  $10  $132 
Pharmaceutical Development and other  98   30   698   545   173   98   291   698 
Total contract revenue $114  $10,461  $830  $11,155  $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.

15

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):

Schedule of Company's Contract Liabilities

 June 30,
2022
  December 31,
2021
  June 30,
2023
  December 31,
2022
 
Pharmaceutical Development Segment                
Deferred revenue $56  $185  $30  $33 
Total contract liabilities $56  $185  $30  $33 

 

During the six months ended June 30, 2022,2023, the Company recognized $0.1 million of 20212022 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, 20222023 or December 31, 2021.2022.

16

Note 9. Segment Information

 

Selected financial and descriptive information is required to be provided 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 chief executive officerCEO uses to make decisions about the Company’s operating matters.

As described in 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 net incomeprofit (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 SegmentsRevenue by Geographic Region

  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 
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 
  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

  Three Months Ended June 30, 2021 
  Finance
Receivables
  Pharmaceutical
Development and
Other
  Holding Company
and Other
  Consolidated 
Revenue $11,805  $10,461  $  $22,266 
Interest expense  94         94 
Manufacturing, research and development     1,542      1,542 
Depreciation and amortization expense     809   2   811 
Change in fair value of acquisition-related contingent consideration     (147)     (147)
General and administrative  950   983   1,427   3,360 
Other income, net  892         892 
Income tax expense        3,528   3,528 
Net income (loss)  11,653   7,274   (4,957)  13,970 
17

  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 
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 

          
 Six Months Ended June 30, 2021  Six Months Ended June 30, 2022 
 Finance
Receivables
  Pharmaceutical
Development and
Other
  Holding Company
and Other
  Consolidated  Finance
Receivables
  Pharmaceutical
Development
and Other
  Holding Company
and Other
  Consolidated 
Revenue $20,484  $10,659  $  $31,143  $17,243  $350  $  $17,593 
Other revenue     496      496      480      480 
Interest expense  239         239   160         160 
Manufacturing, research and development     3,090      3,090 
Pharmaceutical manufacturing, research and development     3,381      3,381 
Depreciation and amortization expense     2,490   3   2,493      1,329   1   1,330 
Change in fair value of acquisition-related contingent consideration     (147)     (147)
General and administrative  1,134   2,088   3,023   6,245   104   1,940   4,134   6,178 
Other income, net  2,107         2,107 
Other expense, net  (1,712)        (1,712)
Income tax expense        4,467   4,467         1,269   1,269 
Net income (loss)  21,218   3,634   (7,493)  17,359   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.

Note 10. Subsequent Events

Exeevo, Inc.

 

On July 1, 2022, SWK Funding, a subsidiary of the Company, entered into a credit agreement pursuant to which SWK Funding provided to Exeevo, Inc. (“Exeevo”) a term loan in the amount of $7.5 million. SWK Funding funded $5.0 million at closing with the remaining $2.5 million becoming available upon Exeevo’s satisfaction of certain future conditions. The loan matures on July 1, 2027. In connection with the loan, SWK Funding also received a warrant to purchase 930 shares of Exeevo common stock.

Beleodaq® Royalty

On July 1, 2022, SWK Funding received $4.3 million for the payoff of the Beleodaq® royalty.

Trio Healthcare Ltd., (Ostomy Products Royalty)

On July 25, 2022, SWK Funding received $6.1 million for the payoff of the Ostomy Products Royalty.

18

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, 20212022 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report.

 

Overview

We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way the Company evaluates its business performance and manages its operations. Please refer to Item 1. Financial Statements, Note 9 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information.

22

Finance Receivables Portfolio Overview

The table below provides an overview of our outstanding finance receivables transactions as of, and for the three and six months ended June 30, 2023 (in thousands, except rate, share and per share data).

             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 

             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

             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)US royalty was paid off during the year ended December 31, 2021. SWK continues to receive insignificant royalties on international sales.
(2)Investment considered partially impaired.
(3)Investment on nonaccrual.
(4)Royalty was paid off during the six months ended June 30, 2023.
(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. 

24

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.

 

Overview

We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way the Company evaluates its business performance and manages its operations. Please refer to Item 1. Financial Statements, Note 9 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information.

19

Finance Receivables Portfolio Overview

The table below provides an overview of our outstanding finance receivables transactions as of, and for the three and six months ended June 30, 2022 (in thousands, except rate, share and per share data).

                  Revenue
Recognized
 
Royalty Purchases Licensed
Technology
  Footnote  Funded
Amount
  GAAP
Balance
  Q2  YTD 
Beleodaq®  Oncology treatment   (1) $7,600  $4,242  $470  $772 
Besivance®  Ophthalmic antibiotic   (2)  6,000      3   13 
Best ABT, Inc.  Oncology diagnosis   (3), (4)   5,784   3,127       
Coflex®/Kybella®/Zalviso®  Spinal stenosis/submental fullness       4,350   4,001   167   292 
Cambia®  NSAID migraine treatment   (3)  8,500   1,477   (44)  (59)
Forfivo XL®  Depressive disorder treatment       6,000   1,416   224   672 
Ideal Implant, Inc.  Aesthetics       3,000   3,259   134   268 
Iluvien®  Diabetic macular edema       16,501   15,916   536   1,121 
Narcan®  Opioid overdose treatment       17,500   497   236   1,660 
Ostomy Products Royalty  Ostomy products   (1)  3,900   3,961   18   181 
Veru, Inc.  Women’s health       10,000   3,959   237   525 

                          

 Revenue Recognized

 
Term Loans Type  Footnote  Maturity
Date
  Principal  GAAP
Balance
  Rate  Q2  YTD 
4Web, Inc.  First lien       06/03/23  $27,797  $29,876   15.8% $1,088  $2,144 
AOTI, Inc.  First lien       03/21/27   12,000   11,919   11.0%  375   414 
Acer Therapeutics, Inc.  First lien       03/04/24   6,500   6,488   12.0%  416   546 
Acerus Pharmaceuticals Corporation  First lien   (5)  10/11/23         12.0%     538 
B&D Dental Corporation  First lien   (5)  12/10/18         14.0%     2,401 
BIOLASE, Inc.  First lien       05/31/25   13,300   13,633   10.5%  461   906 
Biotricity, Inc.  First lien       12/26/26   12,000   11,823   11.5%  400   786 
Epica International, Inc.  First lien       07/23/24   12,000   12,291   9.5%  359   712 
eTon Pharmaceuticals, Inc.  First lien       11/13/24   6,615   6,615   10.0%  202   445 
Flowonix Medical, Inc.  First lien   (4), (6)  12/23/25   10,428   9,789   14.0%      
Keystone Dental Group  First lien   (5)  08/01/23         11.5%  440   888 
MolecuLight, Inc.  First lien       12/29/26   10,000   9,951   12.5%  349   623 
Sincerus Pharmaceuticals, Inc.  First lien       03/19/26   12,300   12,504   13.0%  491   903 
Trio Healthcare Ltd.  First lien       07/01/26   8,150   8,115   12.5%  266   492 

                          Revenue Recognized 
Cost Method Investment Licensed
Technology
  Footnote  Maturity
Date
  Principal  GAAP
Balance
  Rate  Q2  YTD 
Tissue Regeneration Therapeutics, Inc.  Umbilical cord banking   (4)  N/A  $3,491  $3,491   N/A  $  $ 
20
              Income (Loss) Recognized 
Marketable Investments Number of
Shares
  Footnote  Funded
Amount
  GAAP
Balance
  Q2  YTD 
Secured Royalty Financing (Marketable Investment)  N/A   (4) $3,000  $98  $  $ 
Bioventus, Inc. Common Stock  71,361       N/A   487   (519)  (547)
Epica International, Inc.  25,000       N/A          
Sincerus Pharmaceuticals, Inc.  26,575       N/A          

              Income (Loss) Recognized 
Warrants to Purchase Stock Number of
Shares
  Footnote  Exercise Price
per Share ($)
  GAAP
Balance
  Q2  YTD 
4Web, Inc.  TBD      $  $  $  $ 
AOTI, Inc.  92,490                 
Acer Therapeutics, Inc.  150,000       2.46   99   (131)  (127)
Acerus Pharmaceuticals Corporation  7,764,004       0.053 CAD   52   (178)  (49)
BIOLASE, Inc.  22,039       0.39   63   (67)  (121)
Biotricity, Inc.  57,536       6.26   61   (16)  (116)
CeloNova BioSciences, Inc.  TBD   (7)            
DxTerity Diagnostics, Inc.  2,019,231   (7)            
Epica International, Inc.  TBD                 
eTon Pharmaceuticals, Inc.  51,238       5.86   36   (62)  (59)
eTon Pharmaceuticals, Inc.  18,141       6.62   13   (22)  (21)
EyePoint Pharmaceuticals, Inc.  40,910       11.00   134   (137)  (143)
EyePoint Pharmaceuticals, Inc.  7,773       19.30   18   (22)  (23)
Flowonix Medical, Inc.  155,561   (4), (6)            
Harrow Health, Inc.  373,847   (2)  2.08   2,005   163   (506)

     Total Revenue 
  Assets  Q2  YTD 
Total finance receivables $174,859  $6,828  $17,243 
Total marketable investments  585   N/A   N/A 
Cost method investment  3,491   N/A   N/A 
Fair value of warrant assets  2,481   N/A   N/A 
Total assets/revenues $181,416  $6,828  $17,243 

(1)Royalty was paid off during the third quarter of 2022.
(2)US royalty was paid off during the year ended December 31, 2021. SWK continues to receive insignificant royalties on international sales.
(3)Investment considered impaired.
(4)Investment on nonaccrual.
(5)Loan was paid off during the six months ended June 30, 2022.
(6)Flowonix is evaluating strategic alternatives for the business.
(7)Loan was paid off during the year ended December 31, 2021.

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.

21

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report. We believe there have been no new critical accounting policies or material changes to our existing critical accounting policies and estimates during the six months ended June 30, 2022,2023, compared to those discussed in our Annual Report.

 

Recent Accounting Pronouncements

 

Refer to Part I. Financial Information, Item 1. Financial Statements, Note 1 of the notes to the unaudited condensed consolidated financial statements for a listing of recent accounting pronouncements and their potential impact to our consolidated financial statements.

 

Comparison of the Three Months Endedthree months ended June 30, 2023 and 2022 and 2021 (in millions)

 

Three Months Ended
June 30,

    

Three Months Ended
June 30,

   
 2022  2021  Change  2023  2022  Change $ 
Revenues $6.9  $22.3  $(15.4) $9.5  $6.9  $2.6 
Provision (benefit) for credit losses  (0.7)     (0.7)
Interest expense  0.1   0.1      0.4   0.1   0.3 
Pharmaceutical manufacturing, research and development expense  1.5   1.5      1.5   1.5    
Change in fair value of acquisition-related contingent consideration     (0.1)  0.1 
Depreciation and amortization expense  0.6   0.8   (0.2)  0.6   0.6    
General and administrative  3.0   3.4   (0.4)  3.0   3.0    
Other (expense) income, net  (1.0)  0.9   (1.9)
Other income (expense), net  0.7   (1.0)  1.7 
Income tax expense  0.2   3.5   (3.3)  1.5   0.2   1.3 
Net income  0.6   14.0   (13.4)  3.9   0.6   3.3 

 

Revenues

 

Revenues decreasedincreased to $9.5 million for the three months ended June 30, 2023 from $6.9 million for the three months ended June 30, 2022 from $22.32022. The $2.6 million increase in revenue for the three months ended June 30, 2021. The $15.4 million decrease in revenue2023 consisted of a $10.3$2.5 million decreaseincrease in Finance Receivables segment revenue and a $0.1 million increase in Pharmaceutical Development segment revenue and a $5.0revenue. The $2.5 million decreaseincrease in Finance Receivables segment revenue. The decrease in Pharmaceutical Development segment revenue included $10.0 million of milestone revenue related to Enteris’ License Agreement with Cara received during the three months ended June 30, 2021, which did not recur during the three months ended June 30, 2022. The $5.0 million decrease in Finance Receivables segment revenues primarily consists of a $3.1 million decrease in interest and fees earned on finance receivables that were either paid off or paid down since the second quarter of 2021 and a $4.0 million decrease in net royalty incomewas primarily due to the achievement of return premiums that caused a step down in royalty rates. The decrease in revenue was partially offset by a $2.1$2.5 million increase in interest and fees earned due to funding new and existing loans.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.

25

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 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 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.

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 boththree months ended June 30, 2023 from $0.1 million for the three months ended June 30, 20222022. 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 2021 was $0.1 million, respectively.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 further information regarding the Credit Agreement with First Horizon.

 

Pharmaceutical Manufacturing, Research and Development Expense

 

PharmaceuticalWe recognized $1.5 million of pharmaceutical manufacturing, research and development expense for both the three months ended June 30, 20222023 and 2021 was $1.5 million, respectively. Pharmaceutical manufacturing, research and development expense primarily consists of manufacturing materials for our pipeline projects and clinical trials.2022.

22

Depreciation and Amortization

 

The $0.2We recognized $0.6 million decrease inof depreciation and amortization expense forduring both the three months ended June 30, 20222023 and 2022. Depreciation and amortization primarily consists of a decrease in 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; stock-based compensation and related costs for management, staff and Board; legal and audit expenses; and corporate governance expenses. GeneralWe recognized $3.0 million of general and administrative expenses decreased to $3.0 millionexpense for both the three months ended June 30, 2022 from $3.4 million for the three months ended June 30, 2021. The $0.4 million decrease was primarily due to a $0.4 million decrease in corporate strategic planning2023 and related board fees and a $0.2 million decrease in the performance-based bonus accrual. The decrease was partially offset by a $0.2 million increase in legal fees related to corporate governance.2022.

 

Other (Expense) Income, Net

 

Other income, net for three months ended June 30, 2023 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 fair value of the foreign currency forward contract.

Other expense, net for the three months ended June 30, 2022 reflected a net aggregate fair market value loss of $1.0 million on our warrant derivatives and Bioventus common stock. Other income, net for three months ended June 30, 2021 reflected a net fair market value gain of $0.6 million on our warrant derivatives and a net fair market value gain of $0.3 million on our MisonixOur Bioventus common stock which was tendered in October 2021 in exchange for $1.9 million in cash and 71,361 shares of Bioventus common stock.sold during the year ended December 31, 2022.

 

Income Tax Expense

 

During the three months ended June 30, 20222023 and 2021,2022, we recognized income tax expense of $0.2$1.5 million and $3.5$0.2 million respectively. The $3.3 million decreaseincrease in income tax expense is athe result of lowerhigher taxable income for the three months ended June 30, 2023 when compared to the same period of 2021.the prior year.

26

Comparison of the Six Months Endedsix months ended June 30, 2023 and 2022 and 2021 (in millions)

  

Six Months Ended
June 30,

    
  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 

  Six Months Ended June 30,    
  2022  2021  Change 
Revenues $18.1  $31.6  $(13.5)
Interest expense  0.2   0.2    
Pharmaceutical manufacturing, research and development expense  3.4   3.1   0.3 
Change in fair value of acquisition-related contingent consideration     (0.1)  0.1 
Depreciation and amortization expense  1.3   2.5   (1.2)
General and administrative  6.2   6.2    
Other (expense) income, net  (1.7)  2.1   (3.8)
Income tax expense  1.3   4.5   (3.2)
Net income  4.0   17.4   (13.4)
23

Revenues

 

Revenues decreasedincreased to $18.9 million for the six months ended June 30, 2023 from $18.1 million for the six months ended June 30, 2022 from $31.62022. The $0.8 million increase in revenue for the six months ended June 30, 2021. The $13.5 million decrease in revenue2023 consisted of a $10.3$1.3 million increase in Finance Receivables segment revenue and a $0.5 million decrease in Pharmaceutical Development segment revenue and a $3.2revenue. The $1.3 million decreaseincrease in Finance Receivables segment revenue. The decrease in Pharmaceutical Development segment revenue included $10.0 million of milestone revenue related to Enteris’ License Agreement with Cara received during the six months ended June 30, 2021, which did not recur during the six months ended June 30, 2022. The $3.2 million decrease in Finance Receivables segment revenues primarily consists of a $5.0 million decrease in interest and fees earned on finance receivables that were either paid off or paid down since the second quarter of 2021 and a $3.8 million decrease in net royalty income primarilywas due to the achievement of return premiums that caused a step down in royalty rates. The decrease in revenue was partially offset by a $3.4$4.9 million increase in interest and fees earned due to funding new and existing loans, and 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 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 payoffform of the provision in order to bring our allowance for credit losses for loans and unfunded commitments to a term loanlevel deemed appropriate by management. Our allowance for credit losses decreased by $0.7 million during the six months ended June 30, 2022.2023 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.

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 bothsix months ended June 30, 2023 from $0.2 million for the six months ended June 30, 20222022. 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 six months ended June 30, 2023 as compared to the six months ended June 30, 2022. On June 28, 2023, we terminated the Prior Credit Agreement with Cadence Bank and 2021 was $0.2 million, respectively.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 further information regarding the Credit Agreement with First Horizon.

 

Pharmaceutical Manufacturing, Research and Development Expense

 

Pharmaceutical manufacturing, research and development expense increaseddecreased from $3.1 million for the six months ended June 30, 2021 to $3.4 million for the six months ended June 30, 2022.2022 to $2.2 million for the six months ended June 30, 2023. The $0.3$1.2 million increasedecrease was primarily due to an increasea was primarily due to a reduction in manufacturing materials for pipeline projectsheadcount as well as a reduction in R&D and clinical trials.trial expenditures.

27

Depreciation and Amortization

 

The $1.2We recognized $1.3 million decrease inof depreciation and amortization expense forduring both the six months ended June 30, 20222023 and 2022. Depreciation and amortization primarily consists of a decrease in 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; stock-based compensation and related costs for management, staff and Board; legal and audit expenses; and corporate governance expenses. General and administrative expenses decreased to $5.5 million for both the six months ended June 30, 20222023 from $6.2 million for the six months ended June 30, 2022. The $0.7 million decrease included a net $0.6 million decrease in salaries, benefits, general office and 2021maintenance expense mainly due to a reduction in employee headcount in our Pharmaceutical Development segment; and a $0.3 million decrease in corporate strategic planning and related professional fees expense. The decrease was $6.2 million.partially offset by $0.2 million increase in Board fees due to a revised Board compensation plan.

 

Other (Expense) Income,Expense, Net

 

Other expense, net for the six months ended June 30, 2023 reflected a net aggregate fair market value loss of $0.6 million on our warrant derivatives and a $0.5 million gain from the remeasurement of foreign currency transactions into our functional currency, net of changes in fair value of the foreign currency forward contract.

Other expense, net for the six months ended June 30, 2022 reflected a net aggregate fair market value loss of $1.7 million on our warrant derivatives and Bioventus common stock. Other income, net for six months ended June 30, 2021 reflected a net fair market value gain of $0.9 million on our warrant derivatives and a net fair market value gain of $1.2 million on our MisonixOur Bioventus common stock which was tendered in October 2021 in exchange for $1.9 million in cash and 71,361 shares of Bioventus common stock.sold during the year ended December 31, 2022.

 

Income Tax Expense

 

During the six months ended June 30, 2022 and 2021, weWe recognized income tax expense of $1.3 million for both the six months ended June 30, 2023 and $4.5 million, respectively.2022. The $3.2 million decreasenominal increase in income tax expense is awas the result of loweran increase in taxable income for the six months ended June 30, 2023 when compared to the same period of 2021.the prior year.

Liquidity and Capital Resources

 

As of June 30, 2022,2023, we had $55.1$6.8 million in cash and cash equivalents, compared to $42.9$6.2 million in cash and cash equivalents as of December 31, 2021.2022. The primary driver of the $12.3$0.6 million increase in our cash balance was $49.0$31.6 million of interest, fees, principal and royalty payments received on our finance receivables and $0.6 million of customer payments generated by our Pharmaceutical Development segment.receivables. The increase in our cash balanceand cash equivalents was partially offset by $25.0$13.7 million of investment funding, net of deferred fees and origination expenses; $5.9 million ofpayroll, accounts payable including $1.1and new credit facility closing costs totaled $9.6 million; $5.1 million for Enteris’s internal pipeline projects; payrollto repurchase shares of the Company’s common stock in the open market; and benefits expensenet payments of $6.3 million and $0.1$2.4 million of credit facility draws, principal, interest and other expenses.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 exceed $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 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, as well as the success of our Pharmaceutical Development segment. We generate income primarily from four sources:

1.Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property;
2.
2.Receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector;
3.
3.Pharmaceutical development, manufacturing, and licensing activities utilizing the Peptelligence® platform; and
4.
4.To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector.

As of June 30, 2022,2023, our finance receivables portfolio contains $174.9$223.0 million of net finance receivables $0.6and $0.1 million of marketable investments, and $3.5 million related to our cost method investment. In the aggregate, weinvestments. We expect these assets to generate positive cash flows in 2022.2023. 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, including LIBOR 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 expectcontinue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income. Since the Pharmaceutical Developmenttiming of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive cash flow above its expenseswhat our existing assets are expected to produce in 2023. We do not assume any near-term repayments from proceeds received under its license agreementsborrowers, and customer relationships; however,as a result, no assurances can be given that actual results would not differ materially from the timing of the receipt of payments under the license agreements is uncertain and dependent upon the success of our technology licensees’ pharmaceutical development candidates.

Though we expect in the aggregate that the Company will generate positive cash flow in excess of our expenses, given the abrupt decline in global economic activity, and the uncertain recovery from such decline, we cannot predict this with certainty.

We entered into a $20.0 million revolving credit facility in June 2018. The credit facility was amended on September 27, 2021 to extend the termination date to September 30, 2022 and to increase the credit facility commitment to $22.0 million. We continue to explore options to either extend our current credit facility or obtain a new credit facility. As of June 30, 2022, $22.0 million was available for borrowing under the credit facility.statement above.

 

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage partner companies’ requests for funding and take the form of loan commitments and lines of credit.

 

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

As of June 30, 2023, we had $7.4 million of unfunded commitments. Please refer to Item 1., Financial Statements, Note 6 of the notes to the unaudited condensed consolidated financial statements.statements for further information regarding the Company’s commitments and contingencies. 

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ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

During the six months ended June 30, 2022,2023, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions. The fair value of our cash and cash equivalents at June 30, 20222023 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 LIBORreference 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 are 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 have 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 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 six months ended June 30, 20222023 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

 

ITEM 1.      LEGAL PROCEEDINGS 

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.

 

ITEM 1A.    RISK FACTORS

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, 2021,2022, filed with the SEC on March 25, 2022.31, 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, 2021.2022.

 

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.

 

ITEM 5.      OTHER INFORMATION.

 

None.

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ITEM 6.       EXHIBITS

NumberExhibit DescriptionFilingFiled
FormExhibitDateHerewith
31.01Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X
31.02Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.X
32.01Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*X
32.02Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*X
101.INS+XBRL InstanceX
101.SCH+XBRL Taxonomy Extension SchemaX
101.CAL+XBRL Taxonomy Extension CalculationX
101.DEF+XBRL Taxonomy Extension DefinitionX
101.LAB+XBRL Taxonomy Extension LabelsX
101.PRE+XBRL Taxonomy Extension PresentationX
      Filing Filed
Number Exhibit Description Form Exhibit Date Herewith
           
10.1 Credit Agreement dated June 28, 2023 by and among the Company, SWK Funding LLC, the Lenders party thereto and First Horizon Bank as a Lender and Agent. 8-K 10.1 June 20, 2023  
           
31.01 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.       X
           
31.02 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.       X
           
32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*       X
           
32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*       X
           
101.INS+ XBRL Instance       X
           
101.SCH+ XBRL Taxonomy Extension Schema       X
           
101.CAL+ XBRL Taxonomy Extension Calculation       X
           
101.DEF+ XBRL Taxonomy Extension Definition       X
           
101.LAB+ XBRL Taxonomy Extension Labels       X
           
101.PRE+ XBRL Taxonomy Extension Presentation       X
           

* 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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SIGNATURES

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 August 10, 2022.2023.

 SWK Holdings Corporation
   
 By:/s/ Winston L. BlackJoe D. Staggs
  Winston L. BlackJoe D. Staggs
  President and Chief Executive Officer
  (Principal Executive Officer)
   
 By:/s/ CharlesYvette M. JacobsonHeinrichson
  CharlesYvette M. JacobsonHeinrichson
  Chief Financial Officer
  (Principal Financial Officer)
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