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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 March 31, 2024

OR

☐   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)

 

Delaware 77-0435679
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
   
5956 Sherry Lane, Suite 650  
Dallas, TX 75225
(Address of Principal Executive Offices) (Zip Code)
   

(Registrant’s Telephone Number, Including Area Code): (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
9.00% Senior Notes due 2027   SWKHL   The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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. ☒   Yes    ☐   NO

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). ☒   Yes     ☐   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   ☐ Accelerated Filer   ☐ Non-Accelerated Filer   ☒ Smaller Reporting Company  x Emerging Growth Company   ☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐   YES     ☒   NO

As of May 8, 2024, there were 12,472,727Close shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 
 

SWK Holdings Corporation

Form 10-Q

Quarter Ended March 31, 2024

Table of Contents

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
  Unaudited Condensed Consolidated Balance Sheets—March 31, 2024 and December 31, 2023 1
     
  Unaudited Condensed Consolidated Statements of Income—Three Months Ended March 31, 2024 and 2023 2
     
  Unaudited Condensed Consolidated Statements of Stockholders’ Equity—Three Months Ended March 31, 2024 and 2023 3
     
  Unaudited Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2024 and 2023 4
     
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
     
Item 4 Controls and Procedures 31
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 32
     
Item 1A. Risk Factors 32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 3. Defaults Upon Senior Securities 32
     
Item 4. Mine Safety Disclosures 32
     
Item 5. Other Information 32
     
Item 6. Exhibits 33
     
  Signatures 34
 
 

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. 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 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

delete

 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

   March 31,
2024		   December 31,
2023		 
Assets:          
Current assets:          
Cash and cash equivalents  $5,498   $4,503 
Restricted cash   —    733 
Interest, accounts receivable and other receivables, net   6,352    4,729 
Other current assets   2,086    1,904 
Total current assets   13,936    11,869 
           
Finance receivables, net of allowance for credit losses of $13,224 and $13,901 as of March 31, 2024 and December 31, 2023, respectively   261,285    274,504 
Collateral on foreign currency forward contract   2,750    2,750 
Marketable investments   394    48 
Deferred tax assets, net   28,077    28,290 
Warrant assets   610    1,759 
Intangible assets, net   6,198    6,487 
Property and equipment, net   5,212    5,438 
Other non-current assets   3,888    3,109 
Total assets  $322,350   $334,254 
           
Liabilities and Stockholders’ Equity:          
Current liabilities:          
Accounts payable and accrued liabilities  $4,376   $3,944 
Total current liabilities   4,376    3,944 
           
Contingent consideration payable   4,900    4,900 
Unsecured senior notes, net   30,927    30,781 
Revolving credit facility   —    12,350 
Other non-current liabilities   1,859    1,964 
Total liabilities   42,062    53,939 
           
Commitments and contingencies (Note 6)          
           
Stockholders’ equity:          
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; 12,481,944 and 12,497,770 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively   12    12 
Additional paid-in capital   4,424,216    4,425,104 
Accumulated deficit   (4,143,940)   (4,144,801)
Total stockholders’ equity   280,288    280,315 
Total liabilities and stockholders’ equity  $322,350   $334,254 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

1

 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

   Three Months Ended
March 31,		 
   2024   2023 
Revenues:          
Finance receivable interest income, including fees  $11,454   $9,260 
Pharmaceutical development   279    118 
Other   46    33 
Total revenues   11,779    9,411 
Costs and expenses:          
Provision for credit losses   5,323   — 
Interest expense   1,256    182 
Pharmaceutical manufacturing, research and development expense   530    719 
Depreciation and amortization expense   514    648 
General and administrative   2,684    2,540 
Income from operations   1,472    5,322 
Other income (expense), net          
Unrealized net loss on warrants   (95)   (982)
Loss on exercise of warrants   (143)   — 
Realized loss on sale of marketable investments   (231)   — 
Gain on foreign currency transactions   87    186 
Income before income tax expense (benefit)   1,090    4,526 
Income tax expense (benefit)   229    (109)
Net income  $861   $4,635 
           
Net income per share          
Basic  $0.07   $0.36 
Diluted  $0.07   $0.36 
Weighted average shares outstanding          
Basic   12,475    12,833 
Diluted   12,540    12,875 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

2

 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

   Three Months Ended March 31, 2024 
                   Total 
   Common Stock   Additional    Accumulated   Stockholders’ 
   Shares   Amount   Paid-In Capital   Deficit   Equity 
Balances at December 31, 2023   12,497,770    12   $4,425,104   $(4,144,801)  $280,315 
Stock-based compensation   —    —    111    —    111 
Forfeiture of unvested restricted stock   (6,446)   —    —    —    — 
Issuance of common stock upon vesting of restricted stock   48,918    —    —    —    — 
Repurchases of common stock in open market   (58,298)   —    (999)   —    (999)
Net income   —    —    —    861    861 
Balances at March 31, 2024   12,481,944   $12   $4,424,216   $(4,143,940)  $280,288 
     
   Three Months Ended March 31, 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 ASU 2016-13   —    —    —    (9,683)   (9,683)
Issuance of common stock upon vesting of restricted stock   16,008    —    —    —    — 
Repurchases 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 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3

 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Three Months Ended
March 31,		 
   2024   2023 
Cash flows from operating activities:          
Net income  $861   $4,635 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for credit losses   5,323   — 
Right-of-use asset amortization   91    68 
Amortization of debt issuance costs   248    15 
Deferred income taxes   229    (122)
Change in fair value of warrants   95    982 
Loss on exercise of warrants   143    — 
Foreign currency transaction (gain) loss   (918)   186 
Realized loss on sale of marketable investments   231    — 
Loan discount and fee accretion on finance receivables   (1,256)   (1,466)
Interest paid-in-kind   (478)   (351)
Stock-based compensation   111    35 
Depreciation and amortization   514    648 
Changes in operating assets and liabilities:          
Interest, accounts, and other receivables   (1,623)   (1,251)
Derivative assets and liabilities, net   831    (388)
Other assets   (283)   (915)
Accounts payable and other liabilities   311    (1,412)
Net cash provided by operating activities   4,430    664 
           
Cash flows from investing activities:          
Sale of marketable investments   258    — 
Investment in finance receivables   (446)   (12,990)
Repayment of finance receivables   9,362    1,906 
Corporate debt securities principal payments   7    10 
Purchases of property and equipment   —    (8)
Net cash provided by (used in) investing activities   9,181    (11,082)
           
Cash flows from financing activities:          
Net (payments on) proceeds from credit facility   (12,350)   8,037 
Repurchases of common stock, including fees and expenses   (999)   (531)
Net cash (used in) provided by financing activities   (13,349)   7,506 
           
Net increase (decrease) in cash, cash equivalents, and restricted cash   262    (2,912)
Cash, cash equivalents, and restricted cash at beginning of period   5,236    6,156 
Cash, cash equivalents, and restricted cash at end of period  $5,498   $3,244 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4

 

SWK HOLDINGS CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. SWK Holdings Corporation and Summary of Significant Accounting Policies 

Nature of Operations

 

SWK Holdings Corporation (the “Company,” “we,” or “us”) was incorporated in July 1996 in California and reincorporated in Delaware in September 1999. In July 2012, we commenced a strategy of building a specialty finance and asset management business. In August 2019, we commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. Our operations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” We evaluate and invest in a broad range of healthcare related companies and products with innovative intellectual property, including the biotechnology, medical device, medical diagnostics and related tools, animal health and pharmaceutical industries (collectively, “life sciences”). We allocate capital to each segment in order to generate income through the sales of life science products by third parties and related earned income sources. The Company is headquartered in Dallas, Texas, and as of March 31, 2024, the Company had 22 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.

As of May 8, 2024, the Company and its partners have executed transactions with 55 different parties under its specialty finance strategy, funding an aggregate of $779.4 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, we commenced our Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is a clinical development and manufacturing organization providing development services to pharmaceutical partners as well as innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. We seek to generate income by providing customers pharmaceutical development, formulation and manufacturing services as well as licensing its internally developed intellectual property.

With an effective date of April 21, 2023 we entered into a collaboration agreement with a strategic partner under which we would be the exclusive provider of certain contract development and manufacturing organization (CDMO) services to its customers. Fee revenue generated as a result of this agreement is presented as pharmaceutical development revenue on the unaudited condensed consolidated statement of income and is accounted for in accordance with our revenue recognition policy as described under Revenue Recognition below.

With an effective date of January 1, 2024, we entered into an Option and Asset Purchase Agreement with the same strategic partner on March 14, 2024, which granted the partner an exclusive option to acquire certain of Enteris’ assets related to its business of providing CDMO services through Phase 1 and 2 to third parties, subject to certain exclusions. The partner must exercise the option by or before January 1, 2026.

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.

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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, 2024. 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, 2023, filed with the SEC on March 20, 2024.

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; 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 two U.S.-based business segments: its specialty finance and asset management business offering customized financing solutions to a broad range of life-sciences companies, and its business offering CDMO services to pharmaceutical partners as well as innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform.

 

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.

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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 unaudited condensed consolidated statements of income.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 London Inter-Bank Offered Rate (“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.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Public entities are required to adopt the changes retrospectively, recasting each prior-period disclosure for which a comparative income statement is presented in the period of adoption. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements and disclosures.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The standard is intended to provide greater transparency in various income tax components that affect the rate reconciliation based on the applicable taxing jurisdictions, as well as the qualitative and quantitative aspects of those components. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.

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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. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock, 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):

 

   Three Months Ended
March 31,		 
   2024   2023 
Numerator:          
Net income  $861   $4,635 
           
Denominator:          
Weighted-average shares outstanding   12,475    12,833 
Effect of dilutive securities   65    42 
Weighted-average diluted shares   12,540    12,875 
           
Basic net income per share  $0.07   $0.36 
Diluted net income per share  $0.07   $0.36 

 

For the three months ended March 31, 2024 and 2023, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 163,000 and 119,000, respectively, have been excluded from the calculation of diluted net income per share, as such securities were anti-dilutive.

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Note 3. Finance Receivables

 

Finance receivables are reported at their determined principal balances net of any unearned income, cumulative write offs charged against the allowance for credit losses, and unamortized deferred fees and costs. Unearned income and deferred fees and costs are amortized to interest income based on all cash flows expected using the effective interest method.

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

 

   March 31, 2024   December 31, 2023 
Term loans  $210,875   $221,145 
Royalty purchases   63,634    67,260 
Total before allowance for credit losses   274,509    288,405 
Allowance for credit losses   (13,224)   (13,901)
Total carrying value  $261,285   $274,504 

 

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 pools: Term Loans and Royalties.

 

The Company adopted Accounting Standard Update (“ASU”) 2016-13, as amended, on January 1, 2023 using the modified retrospective approach method. 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 March 31, 2024 and December 31, 2023, the Company has recorded a $0.2 million liability for credit losses on off-balance-sheet credit exposures related to unfunded commitments, with this liability included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. 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 pool for each of the three-months ended March 31 (in thousands):

 

 

   March 31, 2024   March 31, 2023 
   Term
Loans		   Royalties   Total  

Term

Loans

   Royalties   Total 
Allowance at beginning of period  $9,731   $4,170   $13,901   $—   $11,846   $11,846 
Effect of adoption of ASU 2016-13   —    —    —    8,900    2,886    11,786 
Provision (benefit) for credit losses   5,547    (224)   5,323    —    —    — 
Write offs(1)   (6,000)   —    (6,000)   —    (11,846)   (11,846)
Allowance at end of period  $9,278   $3,946   $13,224   $8,900   $2,886   $11,786 

 

(1)Reversal of finance receivable-specific ACL recognized in prior periods and the effect of the impairment recorded on the Trio loan during the three months ended March 31, 2024.

 

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 suspended 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 pool, net of allowance for credit loss (in thousands) as of:

   March 31, 2024   December 31, 2023 
   Nonaccrual   Performing   Total   Nonaccrual   Performing   Total 
Term loans  $10,338   $200,537   $210,875   $9,128   $212,017   $221,145 
Royalty purchases   16,496    47,138    63,634    16,854    50,406    67,260 
Total before allowance for credit losses  $26,834   $247,675   $274,509   $25,982   $262,423   $288,405 
Allowance for credit losses  $(1,470)  $(11,754)  $(13,224)  $(1,447)  $(12,454)  $(13,901)
Total carrying value  $25,364   $235,921   $261,285   $24,535   $249,969   $274,504 

 

As of March 31, 2024, the Company had five finance receivables in nonaccrual status: (1) the term loan to Trio Healthcare Ltd. (“Trio”), with a carrying value of $3.6 million; (2) the term loan to Exeevo, Inc (“Exeevo”), with a carrying value of $6.8 million; (3) the Flowonix Medical, Inc. (“Flowonix”) royalty, with a carrying value of $10.4 million (see Loan Modifications Made to Borrowers Experiencing Financial Difficulty below for further details); (4) the Best ABT, Inc. (“Best”) royalty, with a carrying value of $2.5 million; and (5) the Ideal Implant, Inc. (“Ideal”) royalty, with a carrying value of $3.6 million. As of March 31, 2024 Trio was considered impaired by $6.0 million, with the $6.0 million impairment recognized in provision for credit losses on the unaudited condensed consolidated statements of income for the three months ended March 31, 2024. The Company collected $0.7 million and $0.1 million on its nonaccrual finance receivables during the three months ended March 31, 2024 and 2023, respectively.

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Loan Modifications Made to Borrowers Experiencing Financial Difficulty

 

Effective January 1, 2023, the Company adopted the provisions of ASU 2022-02, which eliminated the accounting for TDRs while expanding loan modification and vintage disclosure requirements. The update specifically required additional disclosures on loan modifications to borrowers experiencing financial difficulties that involved an interest rate reduction, other-than-insignificant payment delay, a term extension, principal forgiveness or a combination thereof.

 

The Company evaluates the carrying value of each finance receivable for impairment. A term loan is considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. 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 collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the Company may place a finance receivable on nonaccrual status but conclude it is not impaired. The Company may retain independent third-party valuations on such nonaccrual positions to support impairment decisions. On an ongoing basis, the Company monitors the performance of modified loans to their restructured terms.

 

Credit Quality of Finance Receivables

 

The Company evaluates all finance receivables on a quarterly basis and assigns a risk rating based upon management’s assessment of the borrower’s ability and likelihood of repayment. The assessment is subjective and based on multiple factors, including but not limited to, financial strength of borrowers and operating results of the underlying business. The credit risk analysis and rating assignment is performed quarterly in conjunction with the Company’s assessment of its allowance for credit losses. The Company uses the following definitions for its risk ratings for Term Loans:

 

1: Borrower performing well below Company expectations, and the borrower’s ability to raise sufficient capital to operate its business or repay debt is highly in question. Finance receivables rated a 1 are on non-accrual and are at an elevated risk for principal impairment.

2: Borrower performing below plan, and the loan-to-value is generally worse than at the time of underwriting. Borrower has limited access to additional capital to operate its business. Finance receivables rated a 2 are generally on non-accrual, and while no loss of impairment is anticipated, there is potential for future principal impairment.

3: Borrower performing in-line-to-modestly below Company expectations, and loan-to-value is similar to slightly worse than at the time of underwriting. Borrower has demonstrated access to capital markets.

4: Borrower performing in-line-to-modestly above Company expectations and loan-to-value similar or modestly better than underwriting case. Borrower has demonstrated access to capital markets.

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

The Company uses an internal credit rating system which rates each Royalty on a color scale of Green to Red, with Green typically indicative of a Royalty that is exceeding base underwritten case and Red reflective of underperformance relative to plan.

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The following table summarizes the carrying value of Finance Receivables by origination year, grouped by risk rating as of March 31, 2024 and December 31, 2023 (in thousands):

   March 31, 2024 
   2023   2022   2021   2020   2019   Prior   Total 
Term Loans                                   
5  $—   $—   $13,785   $—   $5,344   $—   $19,129 
4   25,951    55,507    —    —    —    9,787    91,245 
3   24,440    —    10,271    —    28,998    —    63,709 
2   —    6,765    12,508    —    —    13,946    33,219 
1   —    —    3,573    —    —    —    3,573 
Subtotal - Term Loans  $ 50,391   $ 62,272   $ 40,137   $ —   $ 34,342   $ 23,733   $ 210,875 
                                    
Royalties                                   
Green  $12,445   $12,390   $—   $14,363   $—   $1,317   $40,515 
Yellow   —    —    —    3,184    —    3,439    6,623 
Red   —    —    3,566    10,433    —    2,497    16,496 
Subtotal - Royalties  $ 12,445   $ 12,390   $ 3,566   $ 27,980   $ —   $ 7,253   $ 63,634 
                                    
Total Finance Receivables, gross  $62,836   $74,662   $43,703   $27,980   $34,342   $30,986   $274,509 

 

   December 31, 2023 
   2023   2022   2021   2020   2019   Prior   Total 
Term Loans                                   
5  $—   $—   $13,734   $—   $5,696   $—   $19,430 
4   25,799    32,211    —    —    —    10,485    68,495 
3   24,341    24,285    10,227    —    31,807    —    90,660 
2   —    6,924    12,493    —    —    14,015    33,432 
1   —    —    9,128    —    —    —    9,128 
Subtotal - Term Loans  $50,140   $63,420   $45,582   $—   $37,503   $24,500   $221,145 
                                    
Royalties                                   
Green  $27,785   $—   $—   $14,650   $—   $1,340   $43,775 
Yellow   —    —    —    3,212    —    3,419    6,631 
Red   —    —    3,834    10,433    —    2,587    16,854 
Subtotal - Royalties  $27,785   $—   $3,834   $28,295   $—   $7,346   $67,260 
Total Finance Receivables, gross  $77,925   $63,420   $49,416   $28,295   $37,503   $31,846   $288,405 

 

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Note 4. Intangible Assets

 

As of March 31, 2024 and December 31, 2023, the gross book value, accumulated amortization, net book value and estimated useful life of acquired intangible assets were as follows (in thousands, except estimated useful life data):

 

   March 31, 2024 
   Gross Book
Value		   Accumulated
Amortization		   Net Book
Value		   Estimated
Useful Life		 
Licensing Agreement(1)  $29,400   $23,445   $5,955    10 
Trade names and trademarks   210    97    113    10 
Customer relationships   240    110    130    10 
Total intangible assets  $29,850   $23,652   $6,198      
                               
   December 31, 2023 
   Gross Book
Value		   Accumulated
Amortization		   Net Book
Value		   Estimated
Useful Life		 
Licensing Agreement(1)  $29,400   $23,167   $6,233    10 
Trade names and trademarks   210    92    118    10 
Customer relationships   240    104    136    10 
Total intangible assets  $29,850   $23,363   $6,487      
(1)Prior to our acquisition of Enteris, Enteris entered into 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 was $0.3 million and $0.4 million for the three months ended March 31, 2024 and 2023, respectively, and was recognized within depreciation and amortization expense on the unaudited condensed consolidated statements of income. Based on amounts recorded at March 31, 2024, the Company will recognize acquired intangible asset amortization as follows (in thousands):

 

Remainder of 2024  $866 
2025   1,154 
2026   1,154 
2027   1,154 
2028   1,037 
Thereafter   833 
Total  $6,198 
      

Note 5. Debt

 

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.

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The outstanding principal balance of the Credit Agreement will bear interest at a rate per annum equal to the sum of (i) Term Secured Overnight Financing Rate, or 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.

 

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 percent, 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. As of March 31, 2024 the Company was in compliance with all covenants.

 

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.

 

On October 10, 2023, the Company entered into a First Amendment to Credit Agreement pursuant to which Woodforest National Bank was added as a lender under the Credit Agreement for an aggregate commitment of $15.0 million, thereby increasing the aggregate commitments under the Credit Agreement from $45.0 million to $60.0 million.

 

As of March 31, 2024 there were no amounts outstanding under the new Credit Agreement. During the three months ended March 31, 2024 and 2023, the Company recognized $0.3 million and $0.2 million, respectively, of interest expense relating to the Credit Agreement and Prior Credit Agreement, respectively.

 

Senior Notes Due 2027

 

On October 3, 2023, the Company issued a $30.0 million aggregate principal amount of 9 percent Senior Notes due 2027 (“2027 Senior Notes” or “Notes”) in a registered underwritten public offering. On October 27, 2023, the underwriter exercised in full, its over-allotment option by purchasing an additional approximately $3.0 million aggregate principal amount of the 2027 Senior Notes. The interest rates are fixed at 9% per annum and are payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, commencing on December 31, 2023, and until maturity. The Notes will mature on January 31, 2027. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $30.6 million. The Company intends to use the net proceeds from the offering for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures, and funding working capital.

14

 

The following table summarizes the outstanding balance of the Notes, net of debt issuance costs (in thousands):

 

 

   March 31,
2024		   December 31,
2023		 
2027 Senior Notes  $32,969   $32,969 
Debt issuance costs   (2,042)   (2,188)
Total unsecured senior notes, net  $30,927   $30,781 

 

The Company’s future principal obligations for the Notes were as follows (in thousands):

 

   March 31,
2024		 
Remainder of 2024  $— 
2025   — 
2026   — 
2027   32,969 
Total unsecured senior notes, net  $32,969 

 

The Company may redeem the Notes for cash in whole or in part at any time (i) on or after September 30, 2025 (the “First Call Date”) and prior to September 30, 2026, at a price equal to the sum of 102% of their principal amount, and (ii) on or after September 30, 2026 at a price equal to the sum of 100% of their principal amount, plus (in each case noted above) accrued and unpaid interest to, but excluding, the date of redemption. At any time prior to the First Call Date, the Company may, at its option, redeem the Notes for cash, in whole at any time or in part from time to time at a redemption price equal to (i) 100% of the principal amount of Notes redeemed, plus (ii) a Make-Whole Amount (as defined in the Indenture), plus (iii) accrued and unpaid interest, if any, to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. Additionally, upon the occurrence of a Triggering Event (as defined in the Indenture), holders of the Notes will have the right to require the Company to make an offer to repurchase all or any portion of their Notes for cash at a purchase price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the date of purchase.

 

The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.

 

The Company evaluated the 2027 Senior Notes for derivatives pursuant to Accounting Standard Codification (“ASC”) 815, “Derivatives and Hedging,” and identified an embedded derivative that required bifurcation as the feature is not clearly and closely related to the host instrument. The embedded derivative was a default provision, which could require additional interest payments. The Company reassesses the feature quarterly to determine if it requires separate accounting. There have been no changes to the Company’s assessment through March 31, 2024 that the fair value of the embedded derivative is immaterial.

 

Note 6. Commitments and Contingencies

 

Lease Obligations

 

All the Company’s material leases are operating leases. Right-of-use (“ROU”) assets related to operating leases are included on the unaudited condensed consolidated balance sheets in other non-current assets. Operating lease cost is recognized over the lease term on a straight-line basis and is recorded within general and administrative expenses on the unaudited condensed consolidated statements of income. In March of 2023, the Company entered into a new lease for additional office space in Dallas, Texas. The Company’s corporate office spaces in Dallas, Texas total approximately 6,850 square feet consisting of the two office locations. Total rent expense recognized was $0.06 million and $0.03 million for three months ended March 31, 2024 and 2023, respectively. The respective office leases expire in August 2028 and August 2025.

 

The Enteris headquarters is located in Boonton, New Jersey, where Enteris leases approximately 32,000 square feet of space. Total rent expense recognized under the lease was $0.06 million for both the three months ended March 31, 2024 and 2023, respectively. The office lease expires in December 2024 with an option to renew for an additional five years.

15

 

The components of lease cost was as follows (in thousands):

   Three Months Ended
March 31,		 
   2024   2023 
Operating lease cost  $125   $98 
Variable lease cost   15    1 
Total lease cost  $140   $99 

 

Future minimum rent on the Company’s operating leases was as follows as of March 31, 2024 (in thousands):

 

Remainder of 2024  $384 
2025   504 
2026   461 
2027   465 
2028   405 
Thereafter   272 
Total future lease payments  $2,491 

 

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 March 31, 2024 and December 31, 2023 was $4.9 million. The Company did not recognize a change in the estimated fair value of its contingent consideration during the three months ended March 31, 2024 and 2023.

 

Unfunded Commitments

 

As of March 31, 2024, the Company’s unfunded commitments were as follows (in thousands):

 

Journey Medical Corporation  $5,000 
Total unfunded commitments  $5,000 

16

 

Per 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, and in the case of loan transactions, are subject to being advanced as long as an event of default does not exist.

 

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 March 31, 2024, 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 March 31, 2024 and December 31, 2023.

17

 

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 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 three months ended March 31, 2024 and 2023.

 

The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying 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.

 

Finance Receivables

 

Finance receivables are measured at amortized cost, which approximates fair value. The fair value of finance receivables is 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.

18

 

Contingent Consideration

 

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.

 

As of both March 31, 2024 and December 31, 2023, the acquisition-related contingent consideration liability was $4.9 million. For both the three months ended March 31, 2024 and 2023, the Company did not record a change in the estimated fair value of contingent consideration. The Company made no payments during the three months ended March 31, 2024 and 2023 against the contingent consideration liability. The contingent consideration payable is valued using a discounted cash flow approach and includes a significant unobservable input which is the discount rate. As of the three months ended March 31, 2024 and year ended 2023 the discount rate was 14.5% for both periods, respectively. During the year ended December 31, 2023 there was a change in the range of outcomes as a result of royalty and milestone cash flow projections being decreased for the License Agreement.

 

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 benchmark 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 Instruments

 

For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, would be classified as Level 1. For non-exchange traded derivatives, fair value is based on option pricing models and are classified as Level 3.

 

The Company uses a foreign currency forward contract to manage the impact of fluctuations in foreign currency denominated cash flows expected to be received from one of its royalty finance receivables denominated in a foreign currency. The foreign currency forward contract is not designated as a hedging instrument, and changes in fair value are recognized in earnings. The foreign currency forward was recorded in other non-current assets in the consolidated balance sheets as of March 31, 2024 and December 31, 2023 and totaled to $1.8 million and $1.0 million, respectively. The Company recognized a $0.9 million and $0.2 million gain due to changes in fair value related to its foreign currency forward contract during the three months ended March 31, 2024 and March 31, 2023, respectively.

19

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 (in thousands):

 

Schedule of fair value assets measured on recurring basis

   Total
Carrying
Value in
Consolidated
Balance
Sheets		   Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 
Financial Assets                    
Warrant assets  $610   $—   $—   $610 
Foreign currency forward contract   1,844    —    —    1,844 
Marketable investments   394    353    —    41 
                     
Financial Liabilities                    
Contingent consideration payable  $4,900   $—   $—   $4,900 

 

The contingent consideration payable is valued using a discounted cash flow approach and includes a significant unobservable input which is the discount rate. As of the three months ended March 31, 2024 and year ended 2023 the discount rate was 14.5% for both periods, respectively. During the year ended December 31, 2023 there was a change in the range of outcomes as a result of royalty and milestone cash flow projections being decreased for the License Agreement.

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 (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  $1,759   $—   $—   $1,759 
Marketable investments   48    —    —    48 
Foreign currency forward contract   974    —    —    974 
                     
Financial Liabilities:                    
Contingent consideration payable  $4,900   $—   $—   $4,900 

 

The changes in fair value of the warrant assets during the three months ended March 31, 2024 and 2023 were as follows (in thousands):

 

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

March 31, 2024    March 31, 2023  
Fair value - December 31, 2023  $1,759   Fair value - December 31, 2022  $1,220 
Issued   —   Issued   445 
Canceled   —   Canceled   — 
Exercised   (984)  Exercised   — 
Change in fair value   (95)  Change in fair value   (982)
Loss on foreign currency transactions   (70)  Loss on foreign currency transactions  $— 
Fair value - March 31, 2024  $610   Fair value - March 31, 2023  $683 

20

 

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:

 

   March 31, 2024   December 31, 2023 
Dividend rate range   —    — 
Risk-free rate range   4.2% to 4.4%    3.8% to 4.8% 
Expected life (years) range   2.6 to 5.5    1.2 to 5.8 
Expected volatility range   78.1% to 176.0%    75.3% to 154.3% 

 

The warrant assets are valued using a market approach and include significant unobservable inputs such as risk-free rate, expected life, and expected volatility. For the three months ended March 31, 2024 the risk-free rate range weighted average was 4.4%, and had a median of 4.2%. For the year ended December 31, 2023 the risk-free rate range weighted average was 4.3%, and had a median of 3.8%. For the three months ended March 31, 2024 the expected life range weighted average was 3.4 years, and had a median of 4.4 years. For the year ended December 31, 2023 the expected life range weighted average was 3.4 years, and had a median of 4.4 years. For the three months ended March 31, 2024 the expected volatility range weighted average was 124.6%, and had a median of 134.4%. For the year ended December 31, 2023 the expected volatility range weighted average 124.6%, and median of 134.4%.

As of March 31, 2024 and December 31, 2023, the Company had one royalty, Best, that was deemed to be impaired based on reductions in carrying value in prior periods. As of March 31, 2024, the Company had one loan, Trio Healthcare, that was deemed to be impaired based on reductions in carrying value during the three months ended March 31, 2024. The following table presents this royalty and loan measured at amortized cost using the effective interest method, which approximates fair value, on a nonrecurring basis as of March 31, 2024 and December 31, 2023 (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)		 
March 31, 2024  $6,070   $—   $—   $6,070 
December 31, 2023  $2,587   $—   $—   $2,587 

 

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023.

 

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.

21

 

The following table presents the fair value of financial assets and liabilities as of March 31, 2024 (in thousands):

   Carrying
Value		   Fair Value   Level 1   Level 2   Level 3 
Financial Assets                         
Finance receivables, net  $261,285   $261,285   $—   $—   $261,285 
Marketable investments   394    394    353    —    41 
Warrant assets   610    610    —    —    610 
Foreign Currency Forward Contract   1,844    1,844    —    —    1,844 
Financial Liabilities                         
Contingent consideration payable  $4,900   $4,900   $—   $—   $4,900 

 

The following table presents the fair value of financial assets and liabilities as of year ended December 31, 2023 (in thousands):

   Carrying
Value		   Fair Value   Level 1   Level 2   Level 3 
Financial Assets                         
Finance receivables, net  $274,504   $274,504   $—   $—   $274,504 
Marketable investments   48    48    —    —    48 
Warrant assets   1,759    1,759    —    —    1,759 
Foreign Currency Forward Contract   974    974    —    —    974 
                          
Financial liabilities                         
Contingent consideration payable  $4,900   $4,900   $—   $—   $4,900 

 

Note 8. Revenue Recognition

 

The Company’s Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as we believe 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 months ended March 31, 2024 and 2023 (in thousands):

 

   Three Months Ended
March 31,		 
   2024   2023 
Pharmaceutical Development Segment          
Pharmaceutical Development  $279   $118 
Total contract revenue  $279   $118 

 

The Company’s contract liabilities represent advance consideration received from customers and are recognized as revenue when the related performance obligation is satisfied.

22

 

The Company’s contract liabilities are presented as deferred income and are included in accounts payable and accrued liabilities in the consolidated balance sheets (in thousands):

 

   March 31,
2024		   December 31,
2023		 
Pharmaceutical Development Segment          
Deferred income  $1,509   $     9 
Total contract liabilities  $1,509   $9 

 

During the three months ended March 31, 2024, the Company did not recognize any of the 2023 deferred income from satisfaction of performance obligations. The Company did not have any contract assets as of March 31, 2024 or December 31, 2023.

 

Enteris Exclusive Option and Asset Purchase Agreement

 

With an effective date of January 1, 2024, we entered into an exclusive option and asset purchase agreement with a strategic partner on March 14, 2024 which granted the partner an exclusive option to acquire certain of Enteris’ assets related to its business of providing clinical manufacturing and development services. The partner must exercise the option by or before January 1, 2026. In exchange for the exclusive purchase option the partner is to provide consideration in the form of an “option fee” and “guaranteed revenue payments.”

 

The option fee is broken into two components: A low-single digit million fee due within 30 business days of executing the agreement; and should the option not be exercised by the first anniversary of the effective date, an additional low-single digit million fee will be due at that time. The first option fee was paid in April 2024. Option fee payments will be included in deferred income until the earlier of term expiration or exercise of the purchase option. Should the partner exercise the purchase option, any option fee payments made will be applied towards the purchase price.

 

The guaranteed revenue payments include two components: A mid-single digit million guaranteed revenue payment in 2024 and a mid-single digit million guaranteed revenue payment in 2025. The revenue is to be derived by the partner under an existing collaboration agreement, and partner is to pay the difference should the minimum amount not be met each year. Each years' guaranteed revenue amount is to be paid in two installments semi-annually each year. Should revenue exceed the 2024 or 2025 guaranteed revenue amounts after receiving a difference payment in the first half of the year, we must repay the partner the amount of such overpayment. We are evaluating the revenue recognition policy of the guaranteed revenue payments. No guaranteed revenue was recognized during the three months ended March 31, 2024.

 

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 CEO 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 profit (loss) to evaluate segment performance because the Company believes this measure is indicative of performance trends and the overall earnings potential of each segment. The Company does not report assets by reportable segment, as this metric is not used by the Company’s CEO in assessing performance or allocating resources to the segments.

23

 

The following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands):

                               
   Three Months Ended March 31, 2024 
   Finance
Receivables		   Pharmaceutical
Development
and Other		   Holding
Company
and Other		   Consolidated 
Revenue  $11,454   $279   $—   $11,733 
Other revenue   46    —    —    46 
Provision for credit losses   5,323    —    —    5,323 
Interest expense   1,256    —    —    1,256 
Manufacturing, research and development   —    530    —    530 
Depreciation and amortization expense   —    492    22    514 
General and administrative   78    710    1,896    2,684 
Other expense, net   (382)   —    —    (382)
Income tax expense   —    —    229    229 
Net income (loss)   4,461    (1,453)   (2,147)   861 
                     
   Three Months Ended March 31, 2023 
   Finance
Receivables		   Pharmaceutical
Development
and Other		   Holding
Company
and Other		   Consolidated 
Revenue  $9,260   $118   $—   $9,378 
Other revenue   31    —    2    33 
Interest expense   182    —    —    182 
Manufacturing, research and development   —    719    —    719 
Depreciation and amortization expense   —    644    4    648 
General and administrative   30    727    1,783    2,540 
Other expense, net   (796)   —    —    (796)
Income tax benefit   —    —    (109)   (109)
Net income (loss)   8,283    (1,972)   (1,676)   4,635 

 

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.

24

 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

delete

 

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, 2023 (“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.

25

 

Finance Receivables Portfolio Overview

The table below provides an overview of our outstanding finance receivables transactions as of, and for the three months ended March 31, 2024 (in thousands, except rate, share and per share data).

Royalty Purchases  Licensed Technology  Footnote   Funded
Amount		   GAAP
Balance		   Revenue
Recognized		 
Besivance®  Ophthalmic antibiotic  (1)  $6,000   $—   $9 
Best ABT, Inc.  Oncology diagnosis  (2), (3)    5,784    2,497    — 
Coflex®/Kybella®  Spinal stenosis/submental fullness       4,350    3,184    93 
Cambia®  NSAID migraine treatment  (4)   8,500    —    117 
Duo Royalty  Japanese Women’s health/cystic fibrosis       15,353    12,390    615 
Flowonix Medical, Inc.  Drug delivery device  (3), (5)    12,455    10,433    — 
Forfivo XL®  Depressive disorder treatment       6,000    1,317    480 
Ideal Implant, Inc.  Aesthetics  (3), (6)    4,025    3,566    — 
Immune Globuin  Immune Globulin Therapeutics       14,100    12,445    1,234 
Iluvien®  Diabetic macular edema       16,501    14,363    558 
Veru, Inc.  Women’s health       10,000    3,439    129 

 

Term Loans  Type  Footnote   Maturity
Date		   Principal   GAAP
Balance		   Rate   Revenue
Recognized		 
4Web, Inc.  First lien      12/31/24   $26,411   $28,998    12.8%  $1,322 
AOTI, Inc.  First lien      03/21/27    12,478    12,620    11.0%   521 
Elutia, Inc.  First lien      08/10/27    21,045    22,708    12.0%   966 
BIOLASE, Inc.  First lien      05/31/25    12,970    13,946    11.3%   578 
Biotricity, Inc.  First lien      12/21/26    12,364    12,508    14.5%   518 
CDMO Manufacturer  First lien      09/13/27    5,000    5,092    13.3%   198 
Epica International, Inc.  First lien      07/23/24    9,000    9,787    9.5%   356 
eTon Pharmaceuticals, Inc.  First lien      11/13/24    5,075    5,344    10.0%   213 
Journey Medical Corporation  First lien      12/27/27    15,000    14,848    15.0%   541 
Exeevo, Inc.  First lien  (3)  07/01/27    6,793    6,765    12.8%   — 
MedMinder Systems, Inc.  First lien      08/18/27    20,000    20,179    12.9%   722 
MolecuLight, Inc.  First lien      12/29/26    10,000    10,271    12.8%   476 
Nicoya Lifesciences, Inc.  First lien      11/30/26    6,000    6,011    12.8%   257 
NeoLight, LLC  First lien      02/17/27    5,000    5,038    13.5%   212 
Shield Therapeutics, Plc  First lien      09/28/28    20,000    19,402    14.3%   814 
SKNV  First lien      05/15/27    13,496    13,785    10.4%   525 
Trio Healthcare Ltd.  First lien  (2), (3)  07/01/26    3,598    3,573    12.5%   — 

26

 
Marketable Investments  Number of
Shares		   Footnote   Funded
Amount		   GAAP
Balance		   Revenue
Recognized		 
Secured Royalty Financing (Marketable Investment)   N/A   (2), (3)   $3,000   $41   $— 
Eyepoint Pharma Common Stock   17,066   (7)   N/A    353    — 

 

Warrants to Purchase Stock  Number of
Shares		   Footnote   Exercise
Price per
Share ($)		   GAAP
Balance		   Change in
Fair Value		 
4Web, Inc.    TBD        $—   $—   $— 
AOTI, Inc.   92,490        —    —    — 
Acer Therapeutics, Inc.   150,000        2.46    —    — 
Acer Therapeutics, Inc.   100,000              1.51    —    — 
Acer Therapeutics, Inc.   250,000        2.39    —    — 
Acer Therapeutics, Inc.   500,000        1.00    —    — 
Aziyo Biologics, Inc.   157,895        6.65    312    29 
Aziyo Biologics, Inc.   30,075        6.65    59    6 
BIOLASE, Inc.   22,039        9.80    1    — 
Biotricity, Inc.   57,536        6.26    6    2 
CDMO Manufacturer   211,442        1.42    —    — 
CeloNova BioSciences, Inc.    TBD         —    —    — 
DxTerity Diagnostics, Inc.   2,019,231        —    —    — 
Epica International, Inc.    TBD         —    —    — 
eTon Pharmaceuticals, Inc.   51,239        5.86    74    (23)
eTon Pharmaceuticals, Inc.   18,141        6.62    28    (8)
Exeevo, Inc.   930        —    —    — 
Shield Warrant   8,910,540        —    130    (250)
MedMinder Systems, Inc.   72,324        —    —    — 
MolecuLight, Inc.    TBD         —    —    — 

 

   Assets   Revenue
Recognized		 
Total finance receivables, gross  $274,509   $11,454 
Total marketable investments   394    — 
Fair value of warrant assets   610    — 
Total assets, gross/revenues  $275,513   $11,454 

 

(1) U.S. 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 non-accrual.
(4) Investment was paid off during the nine months ended September 30, 2023. SWK continues to receive insignificant royalties.
(5) Flowonix Medical assets were sold to a medical device company during the nine months ended September 30, 2023. In exchange for releasing its lien, SWK received cash at close and is expected to receive royalties on sales of two products. The finance receivable is now classified as a royalty.
(6) In July 2023, Ideal Implant assets were sold to an aesthetics company, which is expected to pay SWK a mid-single digit, capped royalty on implant sales beginning in 2024.
(7) Eyepoint warrants exercised in 1Q24 and converted to shares.
   

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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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 three months ended March 31, 2024, 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 March 31, 2024 and 2023 (in millions)

 

   Three Months Ended
March 31,		     
   2024   2023   Change $ 
Revenues  $11.8   $9.4   $2.4 
Provision for credit losses   5.3    —    5.3 
Interest expense   1.3    0.2    1.1 
Pharmaceutical manufacturing, research and development expense   0.5    0.7    (0.2)
Depreciation and amortization expense   0.5    0.6    (0.1)
General and administrative expense   2.7    2.5    0.2 
Other (expense) income, net   (0.4)   (0.8)   0.4 
Income tax expense (benefit)   0.2    (0.1)   0.3 
Net income   0.9    4.6    (3.7)

 

Revenues

 

Revenues increased to $11.8 million for the three months ended March 31, 2024 from $9.4 million for the three months ended March 31, 2023. The $2.4 million increase in revenue for the three months ended March 31, 2024 consisted of a $2.2 million increase in Finance Receivables segment revenue and a $0.2 million increase in Pharmaceutical Development segment revenue. The $2.2 million increase in Finance Receivables segment revenue was primarily due to a $4.1 million increase in interest and fees earned due to funding new and existing loans offset by $1.9 million decrease in interest, fees and royalties earned on finance receivables that were paid off in 2023.

 

Allowance 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. We recognized a net provision for credit losses of $5.3 million during the three months ended March 31, 2024 and no recognition for provision for credit loss during three months ended March 31, 2023, respectively. The $6.0 million impairment on the Trio loan was included within the provision for credit losses. See Note 3 to the unaudited condensed consolidated financial statements for further information on the allowance for credit losses.

 

Interest Expense

 

Interest expense consists of interest accrued on our revolving line of credit, 9.00% Senior Notes due 2027, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense increased to $1.3 million for the three months ended March 31, 2024 from $0.2 million for the three months ended March 31, 2023. The $1.1 million increase in interest expense was mainly due to issuing approximately $32.9 million of Notes in an underwritten public offering in October of 2023, and the establishment of the Credit Agreement as of March 31, 2023. See Note 6 for further information on the Notes, new Credit Agreement, and Prior Credit Agreement.

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Pharmaceutical Manufacturing, Research and Development Expense

 

Pharmaceutical manufacturing, research and development expense decreased from $0.7 million for the three months ended March 31, 2023 to $0.5 million for the three months ended March 31, 2024. The $0.2 million decrease was primarily due to reduction in research and development and clinical trial expenditures during the period.

 

Depreciation and Amortization

 

The $0.1 million decrease in depreciation and amortization expense for the three months ended March 31, 2024 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 $2.7 million for the three months ended March 31, 2024 from $2.5 million for the three months ended March 31, 2023. The $0.2 million increase included a $0.1 million decrease to salaries & wages and a $0.2 million increase in professional fees.

 

Other (Expense) Income, Net

 

Other expense, net decreased to $0.4 million for the three months ended March 31, 2024 from $0.8 million for the three months ended March 31, 2023. The $0.4 million decrease reflected a net aggregate decrease in unrealized loss on warrants of $0.8 million related to changes in fair value of warrants assets and foreign currency adjustments offset by $0.4 million in realized losses on sales of marketable investments and exercise of warrants.

 

Income Tax (Benefit) Expense

 

During the three months ended March 31, 2024 we recognized $0.2 million of income tax expense, while for the three months ended March 31, 2023 we recognized income tax benefit of $0.1 million. The change in income tax expense (benefit) is primarily attributed to changes in pre-tax net income, the Company's effective tax rate, which was 20.9% and 10.1% as of March 31, 2024 and 2023, respectively, and a release of valuation allowance on deferred tax assets of $0.6 million during the three months ended March 31, 2023.

 

Liquidity and Capital Resources

 

As of March 31, 2024, we had $5.5 million in cash and cash equivalents, compared to $4.5 million in cash and cash equivalents as of December 31, 2023. The primary driver of the $1.0 million increase in our cash balance was $19.0 million of interest, fees, principal and royalty payments received on our finance receivables. The increase in cash and cash equivalents was partially offset by $0.4 million of investment funding, net of deferred fees and origination expenses; $0.8 million holdback repayment; a net credit facility payment of $12.4 million; a payroll and benefits expense of $2.4 million; $2.3 million of accounts payable; and $1.0 million to repurchase shares of the Company's common stock on the open market, pursuant to the Company’s stock repurchase program.

29

 

We entered into a $45.0 million revolving credit facility in June 2023 with First Horizon Bank. The Credit Agreement provides for one or more incremental increases not to exceed $80.0 million, subject to the consent of the Agent and each Lender, at any time prior to the Commitment Termination Date. On October 10, 2023, the Company entered into a First Amendment to Credit Agreement pursuant to which Woodforest National Bank was added as a lender under the Credit Agreement for an aggregate commitment of $15.0 million, thereby increasing the aggregate commitments under the Credit Agreement from $45.0 million to $60.0 million. As of March 31, 2024, $0.0 million was outstanding under the new Credit Agreement, and $55.0 million was available for borrowing.

 

Our Prior Credit Agreement with Cadence Bank was terminated in connection with the establishment of the new Credit Agreement (please refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 6 of the notes to the consolidated financial statements for further information regarding the Credit Agreement with First Horizon Bank).

 

On October 3, 2023, the Company completed a registered underwritten public offering of $30.0 million of the Notes. On October 27, 2023, the underwriters exercised their option to purchase an additional approximately $3.0 million in aggregate principal amount of the Notes. The Notes will mature on January 31, 2027, unless earlier redeemed, and will bear interest at a rate of 9.00% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year and at maturity, commencing on December 31, 2023. The Company received net proceeds after discounts, commissions, expenses and fees, of approximately $30.6 million.

 

Primary Driver of Cash Flow

Our ability to generate cash in the future depends primarily upon our success in implementing our Finance Receivables business model of generating income by providing capital to a broad range of life science companies, institutions and inventors, as well as the success of our Pharmaceutical Development segment. We generate income primarily from four sources:

 

1.Primarily owning or financing through debt investments, royalties generated by the sales of life science products and related intellectual property;

 

2.Receiving interest and other income by advancing capital in the form of secured debt to companies in the life science sector;

 

3.Pharmaceutical development, manufacturing, and licensing activities utilizing the Peptelligence® platform; and

 

4.To a lesser extent, realizing capital appreciation from equity-related investments in the life science sector.

 

As of March 31, 2024, our finance receivables portfolio contains $261.3 million of net finance receivables and $0.4 million of marketable investments. We expect these assets to generate positive cash flows in 2024. We continuously monitor the short and long-term financial position of our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates. Changes in interest rates, including the levels of the underlying reference rates may affect the interest income for debt instruments with floating rates. We believe we are well positioned to benefit should market interest rates rise in the future.

 

We continue to evaluate multiple attractive opportunities that, if consummated, we believe would similarly generate additional income. Since the timing of any investment is difficult to predict, our Finance Receivables segment may not be able to generate positive cash flow above what our existing assets are expected to produce in 2024. We do not assume any near-term repayments from borrowers, and as a result, no assurances can be given that actual results would not differ materially from the statement above.

 

Off-Balance Sheet Arrangements

 

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

 

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

 

As of March 31, 2024, we had $5 million of unfunded commitments. Please refer to Item 1., Financial Statements, Note 6 of the notes to the unaudited condensed consolidated financial statements for further information regarding the Company’s commitments and contingencies.

30

 

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

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During the three months ended March 31, 2024, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions. The fair value of our cash and cash equivalents at March 31, 2024 approximated its carrying value.

 

Investment and Interest Rate Risk 

We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flow.

As we seek to provide capital to a broad range of life science companies, institutions and investors with the majority of our finance receivables portfolio paying interest based on floating interest rates with a reference rate floor, our net investment income is dependent, in part, upon the difference between the rate at which we earn on our cash and cash equivalents and the rate at which we lend those funds to third parties. As a result, we 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 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

 

Certain 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 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.

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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, 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, 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 has 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 three months ended March 31, 2024 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31

 

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, 2023, filed with the SEC on March 20, 2024. 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, 2023.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

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 “Repurchase Program”). The actual timing, number and value of shares repurchased under the 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 Repurchase Program. Our Board may also suspend or discontinue the Repurchase Program at any time, in its sole discretion. The purchase period for the 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 March 31, 2024:

 

Period  Total Number of
Shares Purchased		   Average
Price Paid
per Share		   Total Number of
Shares Purchased
as Part of Publicly
Announced Plan		   Maximum Approximate
Dollar Value
of Shares That May
Yet Be Purchased
Under the Plan		 
January 1, 2024 - January 31, 2024   42,267   $17.14    42,267    3,847 
February 1, 2024 - February 29, 2024   5,124    16.73    5,124    3,761 
March 1, 2024 - March 31, 2024   10,907    17.25    10,907    3,573 
    58,298   $17.12    58,298      

 

As of March 31, 2024, the Company has repurchased an aggregate of 384,386 shares under the Repurchase Program at a total cost of $6.4 million, or $16.72 per share. As of March 31, 2024, the maximum dollar value of shares that may yet be purchased under the Repurchase Program was approximately $3.6 million shares of common stock.

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

ITEM 5.      OTHER INFORMATION.

delete

 

None.

32

 

ITEM 6.       EXHIBITS

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                Filing   Filed
Number   Exhibit Description   Form   Exhibit   Date   Herewith
                     
10.01   Exclusive Option and Asset Purchase Agreement, by and between Enteris Biopharma, Inc., SWK Holdings Corporation and AptarGroup, Inc., dated March 13, 2024.   8-K   10.1   3/19/24    
                     
10.02†   Consulting Agreement, by and between SWK Holdings Corporation and Yvette Heinrichson, dated February 14, 2024.**               ☒
                     
31.01   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               ☒
                     
32.01   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*               ☒
                     
101.INS+   XBRL Instance               ☒
                     
101.SCH+   XBRL Taxonomy Extension Schema               ☒
                     
101.CAL+   XBRL Taxonomy Extension Calculation               ☒
                     
101.DEF+   XBRL Taxonomy Extension Definition               ☒
                     
101.LAB+   XBRL Taxonomy Extension Labels               ☒
                     
101.PRE+   XBRL Taxonomy Extension Presentation               ☒

 

*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.
  
**Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report.
  
+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.
  
†Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The registrant agrees to furnish supplementally an unredacted copy of the exhibit to the SEC upon request.
  
#Exhibits and/or schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally copies of any omitted exhibits or schedules to the SEC upon request; provided, however, that the registrant may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any exhibits or schedules so furnished.

33

 

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 May 15, 2024.

  SWK Holdings Corporation
     
  By: /s/ Joe D. Staggs
    Joe D. Staggs
    Chief Executive Officer
    (Principal Executive Officer, Principal Financial and Accounting Officer)
     
34