Home Listing method SWK HOLDINGS CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

SWK HOLDINGS CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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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, 2021
("Annual Report"), as well as our unaudited condensed consolidated financial
statements and the accompanying notes included in this report.



Environment, Social and Governance



As overseers of risk and stewards of long-term enterprise value, our management
and 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 that we support within the company, we are committed to recruiting, motivating and developing a diversity of talents. We promote and encourage a corporate culture where every voice is welcome, heard and respected, regardless of age, gender, race, religion, sexual orientation, physical condition, cultural background or country of origin. ‘origin. Our commitment to ESG initiatives is an effort that the board and management undertake for the overall betterment of people 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.



Insight

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



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Overview of the financial receivables portfolio

The table below provides an overview of our outstanding financial receivables transactions at and for the three and nine months ended September 30, 2022
(in thousands, except rate, share and per share data).

                                                                                               Revenue Recognized
                    Licensed
Royalty Purchases   Technology             Footnote       Funded Amount    
GAAP Balance         Q3           YTD
Beleodaq®           Oncology treatment        (1)        $       7,600     $          -     $      27      $    799
                    Ophthalmic
Besivance®          antibiotic                (2)                6,000                -             8            21
Best ABT, Inc.      Oncology diagnosis      (3), (4)             5,784            3,037             -             -
                    Spinal
                    stenosis/submental
Coflex®/Kybella®    fullness                                     4,350            3,929           105           397
                    NSAID migraine
Cambia®             treatment                 (3)                8,500            1,034           (94 )        (153 )
                    Depressive
Forfivo XL®         disorder treatment                           6,000            1,408           185           857
Ideal Implant,
Inc.                Aesthetics                                   3,000            3,289           134           402
                    Diabetic macular
Iluvien®            edema                                       16,501           15,729           570         1,691
                    Opioid overdose
Narcan®             treatment                                   17,500              487           248         1,908
Ostomy Products
Royalty             Ostomy products           (1)                3,900                -         1,746         1,927
Veru, Inc.          Women's health                              10,000            3,509            30           555




                                                                                                               Revenue Recognized
Term Loans            Type        Footnote      Maturity Date    Principal     GAAP Balance       Rate           Q3           YTD
4Web, Inc.         First lien                     06/03/23      $  28,808  

$31,060 15.8% $1,185 $3,329
AOTI, Inc. First privilege

                     03/21/27         12,000           11,970         11.0 %         426           840

Acer

Therapeutic,

Inc.               First lien                     03/04/24          6,704            6,849         12.0 %         457         1,003
Acerus
Pharmaceuticals
Corporation        First lien        (5)          10/11/23              -                -         12.0 %           -           538
Aziyo Biologics,
Inc.               First lien                     10/08/27         21,000           20,294         11.5 %         265           265
B&D Dental
Corporation        First lien        (5)          12/10/18              -                -         14.0 %           -         2,401
BIOLASE, Inc.      First lien                     05/31/25         13,300  

13,734 10.5% 484 1,390 Biotricity, Inc. First lien

                     12/26/26         12,000           11,845         11.5 %         407         1,193
Epica
International,
Inc.               First lien                     07/23/24         12,000           12,374          9.5 %         385         1,097
eTon
Pharmaceuticals,
Inc.               First lien                     11/13/24          6,615            6,659         10.0 %         221           666
Exeevo, Inc.       First lien                     07/01/27          5,010            4,969         12.5 %         187           187

Flowonix

Medical, Inc. First privilege (4), (6) 12/23/25 10,428

          9,789         14.0 %           -             -
Keystone Dental
Group              First lien        (5)          08/01/23              -                -         11.5 %           -           888

MedMinderComment

Systems, Inc.      First lien                     07/22/27         20,000           19,831         10.9 %         291           291

MolecuLight,

Inc.               First lien                     12/29/26         10,000           10,007         12.5 %         413         1,036
Sincerus
Pharmaceuticals,
Inc.               First lien                     03/19/26         12,820           13,039         13.0 %         534         1,437
Trio Healthcare
Ltd.               First lien                     07/01/26          8,150            8,117         12.5 %         288           780




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                                                                                                             Revenue Recognized

Cost method Investment under license Technology Footnote Maturity Date Principal GAAP Balance Rate

            Q3               YTD

Tissue

Regeneration    Umbilical
Therapeutics,   cord
Inc.            banking          (4)           N/A        $    3,491     $      3,491          N/A     $        -         $        -




                                                                                                              Income (Loss) Recognized
                                            Number of
Marketable Investments                        Shares       Footnote     Funded Amount     GAAP Balance         Q3                 YTD
Secured Royalty Financing (Marketable
Investment)                                      N/A          (4)      $       3,000     $         88     $       -         $           -
Bioventus, Inc. Common Stock                  71,361                             N/A              500            13                  (534 )
Epica International, Inc.                     25,000                             N/A                -             -                     -
Sincerus Pharmaceuticals, Inc.                26,575                       
     N/A                -             -                     -




                                                                                                                        Income (Loss) Recognized
                                                                                 Exercise Price
Warrants to Purchase Stock                  Number of Shares       Footnote       per Share ($)      GAAP Balance          Q3               YTD
4Web, Inc.                                               TBD                    $             -     $          -     $         -       $         -
AOTI, Inc.                                            92,490                                  -                -               -                 -
Acer Therapeutics, Inc.                              150,000                               2.46              116              17              (110 )
Acer Therapeutics, Inc.                              100,000                               1.51               90              (2 )              (2 )
Acerus Pharmaceuticals Corporation                 7,764,004               
          0.053 CAD               20             (33 )             (82 )
Aziyo Biologics                                      157,895                               6.65              895             116               116
BIOLASE, Inc.                                         22,039                               0.39               26             (37 )            (158 )
Biotricity, Inc.                                      57,536                               6.26               21             (39 )            (155 )
CeloNova BioSciences, Inc.                               TBD         (7)                      -                -               -                 -
DxTerity Diagnostics, Inc.                         2,019,231         (7)                      -                -               -                 -
Epica International, Inc.                                TBD                                  -                -               -                 -
eTon Pharmaceuticals, Inc.                            51,238                               5.86               21             (15 )             (74 )
eTon Pharmaceuticals, Inc.                            18,141                               6.62                8              (5 )             (26 )
Exeevo, Inc.                                             930                                  -                -               -                 -
EyePoint Pharmaceuticals, Inc.                        40,910                              11.00              129              (4 )            (147 )
EyePoint Pharmaceuticals, Inc.                         7,773               
              19.30               17              (1 )             (24 )
Flowonix Medical, Inc.                               155,561       (4), (6)                   -                -               -                 -
Harrow Health, Inc.                                  373,847         (7)                   2.08            3,797           1,791             1,285




                                                 Total Revenue
                                 Assets         Q3          YTD
Total finance receivables      $ 212,959     $ 8,502     $ 25,745
Total marketable investments         588         N/A          N/A
Cost method investment             3,491         N/A          N/A
Fair value of warrant assets       5,140         N/A          N/A
Total assets/revenues          $ 222,178     $ 8,502     $ 25,745





(1) The royalty was paid during the third quarter of 2022. (2) The US royalty was paid 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 nine months ended September 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.



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Significant Accounting Policies and Estimates

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



Recent accounting pronouncements

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



Comparison of the Three Months Ended September 30, 2022 and 2021 (in millions)



                                                     Three Months Ended
                                                       September 30,
                                                   2022              2021             Change
Revenues                                      $      13.6        $       9.6       $      4.0
Interest expense                                      0.1                0.1                -
Pharmaceutical manufacturing, research
and development expense                               1.8                2.5             (0.7 )
Depreciation and amortization expense                 0.6                0.8             (0.2 )
General and administrative                            4.3                3.6              0.7
Other income, net                                     1.8                0.1              1.7
Income tax expense                                    1.9                0.5              1.4
Net income                                            6.6                2.2              4.4




Revenues



Revenues increased to $13.6 million for the three months ended September 30,
2022 from $9.6 million for the three months ended September 30, 2021. The $4.0
million increase in revenue was due to $5.0 million of milestone revenue related
to Enteris' License Agreement with Cara received during the three months ended
September 30, 2022, which did not occur during the three months ended September
30, 2021. The increase in revenue was partially offset by a $0.9 million net
decrease in Finance Receivables segment revenues. The decrease in Finance
Receivables segment revenue was due to a $1.3 million net decrease in royalty
income primarily due to the achievement of return premiums that caused a step
down in royalty rates, which was partially offset by a net increase of $0.4
million in interest and fees earned on finance receivables.



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 for both the three months ended September 30,
2022 and 2021 was $0.1 million, respectively.



Pharmaceutical manufacturing, research and development expenditures



Pharmaceutical manufacturing, research and development expense decreased from
$2.5 million for the three months ended September 30, 2021 to $1.8 million for
the three months ended September 30, 2022. The $0.7 million decrease was
primarily due to a decrease in manufacturing materials for pipeline projects and
clinical trials.


Depreciation and amortization

The $0.2 million decrease in depreciation and amortization expense for the three
months ended September 30, 2022 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.



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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 increased to $4.3 million for the three months ended
September 30, 2022 from $3.6 million for the three months ended September 30,
2021. The $0.7 million increase was primarily due to a $1.3 million increase in
salaries and benefits expense, of which $1.1 million is related to the former
CEO's severance pay pursuant to the Separation and Release Agreement dated
August 31, 2022, and a $0.2 million increase in salaries and benefits expense
due to an increase in personnel and the performance-based bonus accrual. The
increase in general and administrative expense also included a $0.7 million
increase in audit and legal fees related to amending the Company's Articles of
Incorporation and Bylaws and other corporate governance, financing and strategic
matters. The increase was partially offset by a $0.9 million decrease in
corporate strategic planning and related special committee board fees, as well
as a $0.1 million decrease in stock-based compensation expense related to the
forfeiture of stock-options held by the former CEO upon his departure on
September 30, 2022.



Other (Expense) Income, Net



Other expense, net for three months ended September 30, 2022 reflected a net
aggregate fair market value gain of $1.8 million on our warrant derivatives and
Bioventus common stock. Other income, net for three months ended September 30,
2021 reflected a net fair market value loss of $0.2 million on our warrant
derivatives and a net fair market value gain of $0.3 million on our Misonix
common stock, which was tendered in October 2021 in exchange for $1.9 million in
cash and 71,361 shares of Bioventus common stock.



Income Tax Expense



During the three months ended September 30, 2022 and 2021, we recognized income
tax expense of $1.9 million and $0.5 million, respectively. The $1.4 million
increase in income tax expense is the result of an increase in taxable income
for the three months ended September 30, 2022 when compared to the same period
of the previous year.



Comparison of the Nine Months Ended September 30, 2022 and 2021 (in millions)



                                                  Nine Months Ended September 30,
                                                     2022                  2021              Change
Revenues                                      $         31.7         $         41.2       $     (9.5 )
Interest expense                                         0.2                    0.3             (0.1 )
Pharmaceutical manufacturing, research
and development expense                                  5.2                    5.6             (0.4 )
Change in fair value of
acquisition-related contingent
consideration                                              -                   (0.1 )            0.1
Depreciation and amortization expense                    2.0                    3.3             (1.3 )
General and administrative                              10.5                    9.8              0.7
Other income, net                                        0.1                    2.2             (2.1 )
Income tax expense                                       3.2               
    5.0             (1.8 )
Net income                                              10.7                   19.6             (8.9 )




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Revenues


Revenues decreased to $31.7 million for the nine months ended September 30, 2022
from $41.2 million for the nine months ended September 30, 2021. The $9.5
million decrease in revenue consisted of a $5.4 million decrease in
Pharmaceutical Development segment revenue and a $4.1 million decrease in
Finance Receivables segment revenue. The decrease in Pharmaceutical Development
segment revenue included $5.0 million of milestone revenue related to Enteris'
License Agreement with Cara received during the nine months ended September 30,
2022, compared to $10.0 million of milestone revenue for the same period of
2021. The decrease in Finance Receivables segment revenue was due to a $5.1
million net decrease in royalty income primarily due to the achievement of
return premiums that caused a step down in royalty rates, which was partially
offset by a net increase of $1.0 million in interest and fees earned on finance
receivables.



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 for the nine months ended September 30, 2022
and 2021 was $0.2 million and $0.3 million, respectively.



Pharmaceutical manufacturing, research and development expenditures



Pharmaceutical manufacturing, research and development expense decreased from
$5.6 million for the nine months ended September 30, 2021 to $5.2 million for
the nine months ended September 30, 2022. The $0.4 million decrease was
primarily due to a decrease in manufacturing materials for pipeline projects and
clinical trials.


Depreciation and amortization

The $1.3 million decrease in depreciation and amortization expense for the nine
months ended September 30, 2022 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 increased to $10.5 million for the nine months ended
September 30, 2022 from $9.8 million for the nine months ended September 30,
2021. The $0.7 million increase was primarily due to a $1.1 million increase in
salaries and benefits expense related to the former CEO's severance pay pursuant
to the Separation and Release Agreement dated August 31, 2022. The increase in
general and administrative expense also included a $0.9 million increase in
audit and legal fees related to amending the Company's Articles of Incorporation
and Bylaws and other corporate governance, financing and strategic matters. The
increase was partially offset by a $1.4 million decrease in corporate strategic
planning and related special committee board fees, as well as a $0.1 million
decrease in stock-based compensation expense related to the forfeiture of
stock-options held by the former CEO upon his departure on September 30, 2022.



Other Income, Net


Other income, net for the nine months ended September 30, 2022 reflected a net
aggregate fair market value gain of $0.1 million on our warrant derivatives and
Bioventus common stock. Other income, net for the nine months ended September
30, 2021 reflected a net fair market value gain of $0.7 million on our warrant
derivatives and a net fair market value gain of $1.6 million on our Misonix
common stock, which was tendered in October 2021 in exchange for $1.9 million in
cash and 71,361 shares of Bioventus common stock.



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Income Tax Expense



During the nine months ended September 30, 2022 and 2021, we recognized income
tax expense of $3.2 million and $5.0 million, respectively. The $1.8 million
decrease in income tax expense is the result of a decrease in taxable income for
the nine months ended September 30, 2022 when compared to the same period of the
previous year.


Cash and capital resources



As of September 30, 2022, we had $19.4 million in cash and cash equivalents,
compared to $42.9 million in cash and cash equivalents as of December 31, 2021.
The primary driver of the $23.5 million decrease in our cash balance was $71.2
million of investment funding, net of deferred fees and origination expenses;
$8.2 million for payments of accounts payable, including $1.9 million for
Enteris's internal pipeline and business development projects; payroll and
benefits expense of $8.3 million; $0.6 million to repurchase shares of the
Company's common stock on the open market; and $0.3 million of credit facility
interest and other expenses. The decrease in cash and cash equivalents was
partially offset by $64.4 million of interest, fees, principal and royalty
payments received on our finance receivables and $0.7 million of customer
payments generated by our Pharmaceutical Development segment.



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. Holding or funding primarily through debt investments, royalties generated by

    the sales of life science products and related intellectual property;



2. Receive interest and other income by advancing capital in the form of

    secured debt to companies in the life science sector;



3. Pharmaceutical development, manufacturing and licensing activities using

    the Peptelligence® platform; and



4. To a lesser extent, achieve capital appreciation from

investments in the life sciences sector.

As of September 30, 2022, our finance receivables portfolio contains $213.0
million of finance receivables, $0.6 million of marketable investments, and $3.5
million related to our cost method investment. In the aggregate, we expect these
assets to generate positive cash flows in 2022. In addition, the majority of our
finance receivables portfolio are debt instruments that carry floating interest
rates with a reference rate-based interest rate floor. Changes in interest
rates, including the underlying reference rates, may affect the interest income
for debt instruments with floating rates. We believe we are well positioned to
benefit should market interest rates rise in the future.



We entered into a $20.0 million revolving credit facility in June 2018. The
credit facility was amended on September 26, 2022 to extend the termination date
to November 29, 2022. We continue to work with our current lender to extend our
credit facility. As of September 30, 2022, $22.0 million was available for
borrowing under the credit facility.



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. Please refer to Item 1. Financial
Statements, Note 6 of the notes to the unaudited condensed consolidated
financial statements



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