UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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the Quarterly Period Ended
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SWK Holdings Corporation
Form 10-Q
Quarter Ended March 31, 2024
Table of Contents
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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
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 | $ | $ | ||||||
| Restricted cash | ||||||||
| Interest, accounts receivable and other receivables, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Finance receivables, net of allowance for credit losses of $ | ||||||||
| Collateral on foreign currency forward contract | ||||||||
| Marketable investments | ||||||||
| Deferred tax assets, net | ||||||||
| Warrant assets | ||||||||
| Intangible assets, net | ||||||||
| Property and equipment, net | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Total current liabilities | ||||||||
| Contingent consideration payable | ||||||||
| Unsecured senior notes, net | ||||||||
| Revolving credit facility | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
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 | $ | $ | ||||||
| Pharmaceutical development | ||||||||
| Other | ||||||||
| Total revenues | ||||||||
| Costs and expenses: | ||||||||
| Provision for credit losses | ||||||||
| Interest expense | ||||||||
| Pharmaceutical manufacturing, research and development expense | ||||||||
| Depreciation and amortization expense | ||||||||
| General and administrative | ||||||||
| Income from operations | ||||||||
| Other income (expense), net | ||||||||
| Unrealized net loss on warrants | ( | ) | ( | ) | ||||
| Loss on exercise of warrants | ( | ) | ||||||
| Realized loss on sale of marketable investments | ( | ) | ||||||
| Gain on foreign currency transactions | ||||||||
| Income before income tax expense (benefit) | ||||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net income | $ | $ | ||||||
| Net income per share | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted average shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
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 | $ | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Forfeiture of unvested restricted stock | ( | ) | — | — | — | — | ||||||||||||||
| Issuance of common stock upon vesting of restricted stock | ||||||||||||||||||||
| Repurchases of common stock in open market | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Balances at March 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Paid-In Capital | Deficit | Equity | ||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Effect of adoption of ASU 2016-13 | — | ( | ) | ( | ) | |||||||||||||||
| Issuance of common stock upon vesting of restricted stock | ||||||||||||||||||||
| Repurchases of common stock in open market | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
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 | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for credit losses | ||||||||
| Right-of-use asset amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Change in fair value of warrants | ||||||||
| Loss on exercise of warrants | ||||||||
| Foreign currency transaction (gain) loss | ( | ) | ||||||
| Realized loss on sale of marketable investments | ||||||||
| Loan discount and fee accretion on finance receivables | ( | ) | ( | ) | ||||
| Interest paid-in-kind | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Interest, accounts, and other receivables | ( | ) | ( | ) | ||||
| Derivative assets and liabilities, net | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Sale of marketable investments | ||||||||
| Investment in finance receivables | ( | ) | ( | ) | ||||
| Repayment of finance receivables | ||||||||
| Corporate debt securities principal payments | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Net (payments on) proceeds from credit facility | ( | ) | ||||||
| Repurchases of common stock, including fees and expenses | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ) | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
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.
5
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 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
Revenue Recognition
The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.
Deferred revenue includes amounts that have been billed per the contractual terms but have not been recognized as revenue. The Company classifies as current the portion of deferred revenue that is expected to be recognized within one year from the balance sheet date and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.
6
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.
7
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.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net income | $ | $ | ||||||
| Denominator: | ||||||||
| Weighted-average shares outstanding | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted-average diluted shares | ||||||||
| Basic net income per share | $ | $ | ||||||
| Diluted net income per share | $ | $ | ||||||
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 and , respectively, have been excluded from the calculation of diluted net income per share, as such securities were anti-dilutive.
8
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 | $ | $ | ||||||
| Royalty purchases | ||||||||
| Total before allowance for credit losses | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Total carrying value | $ | $ | ||||||
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.
9
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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Effect of adoption of ASU 2016-13 | ||||||||||||||||||||||||
| Provision (benefit) for credit losses | ( | ) | ||||||||||||||||||||||
| Write offs(1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Allowance at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Royalty purchases | ||||||||||||||||||||||||
| Total before allowance for credit losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for credit losses | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Total carrying value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 $
10
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.
11
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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 4 | ||||||||||||||||||||||||||||
| 3 | ||||||||||||||||||||||||||||
| 2 | ||||||||||||||||||||||||||||
| 1 | ||||||||||||||||||||||||||||
| Subtotal - Term Loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Royalties | ||||||||||||||||||||||||||||
| Green | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Yellow | ||||||||||||||||||||||||||||
| Red | ||||||||||||||||||||||||||||
| Subtotal - Royalties | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Total Finance Receivables, gross | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||
| Term Loans | ||||||||||||||||||||||||||||
| 5 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 4 | ||||||||||||||||||||||||||||
| 3 | ||||||||||||||||||||||||||||
| 2 | ||||||||||||||||||||||||||||
| 1 | ||||||||||||||||||||||||||||
| Subtotal - Term Loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Royalties | ||||||||||||||||||||||||||||
| Green | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Yellow | ||||||||||||||||||||||||||||
| Red | ||||||||||||||||||||||||||||
| Subtotal - Royalties | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Total Finance Receivables, gross | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
12
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) | $ | $ | $ | 10 | ||||||||||||
| Trade names and trademarks | 10 | |||||||||||||||
| Customer relationships | 10 | |||||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Gross Book Value | Accumulated Amortization | Net Book Value | Estimated Useful Life | |||||||||||||
| Licensing Agreement(1) | $ | $ | $ | 10 | ||||||||||||
| Trade names and trademarks | 10 | |||||||||||||||
| Customer relationships | 10 | |||||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||||||
| (1) |
Amortization
expense was $
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
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 $
13
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 $
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 $
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 | $ | $ | ||||||
| Debt issuance costs | ( | ) | ( | ) | ||||
| Total unsecured senior notes, net | $ | $ | ||||||
The Company’s future principal obligations for the Notes were as follows (in thousands):
| March 31, 2024 | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total unsecured senior notes, net | $ | |||
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
$
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 $
15
The components of lease cost was as follows (in thousands):
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating lease cost | $ | $ | ||||||
| Variable lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
Future minimum rent on the Company’s operating leases was as follows as of March 31, 2024 (in thousands):
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total future lease payments | $ |
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 $
Unfunded Commitments
As of March 31, 2024, the Company’s unfunded commitments were as follows (in thousands):
| Journey Medical Corporation | $ | |||
| Total unfunded commitments | $ |
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):
| 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 | $ | $ | $ | $ | ||||||||||||
| Foreign currency forward contract | ||||||||||||||||
| Marketable investments | ||||||||||||||||
| Financial Liabilities | ||||||||||||||||
| Contingent consideration payable | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | $ | $ | ||||||||||||
| Marketable investments | ||||||||||||||||
| Foreign currency forward contract | ||||||||||||||||
| Financial Liabilities: | ||||||||||||||||
| Contingent consideration payable | $ | $ | $ | $ | ||||||||||||
The changes in fair value of the warrant assets during the three months ended March 31, 2024 and 2023 were as follows (in thousands):
| March 31, 2024 | March 31, 2023 | |||||||||
| Fair value - December 31, 2023 | $ | Fair value - December 31, 2022 | $ | |||||||
| Issued | Issued | |||||||||
| Canceled | Canceled | |||||||||
| Exercised | ( | ) | Exercised | |||||||
| Change in fair value | ( | ) | Change in fair value | ( | ) | |||||
| Loss on foreign currency transactions | ( | ) | Loss on foreign currency transactions | $ | ||||||
| Fair value - March 31, 2024 | $ | Fair value - March 31, 2023 | $ | |||||||
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 | to | to | ||||||
| Expected life (years) range | to | to | ||||||
| Expected volatility range | to | to | ||||||
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 , and had a median of . For the year ended December 31, 2023 the risk-free rate range weighted average was , and had a median of . For the three months ended March 31, 2024 the expected life range weighted average was , and had a median of . For the year ended December 31, 2023 the expected life range weighted average was , and had a median of . For the three months ended March 31, 2024 the expected volatility range weighted average was , and had a median of . For the year ended December 31, 2023 the expected volatility range weighted average , and median of .
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 | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | $ | $ | $ | |||||||||||||||
| Marketable investments | ||||||||||||||||||||
| Warrant assets | ||||||||||||||||||||
| Foreign Currency Forward Contract | ||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Contingent consideration payable | $ | $ | $ | $ | $ | |||||||||||||||
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 | $ | $ | $ | $ | $ | |||||||||||||||
| Marketable investments | ||||||||||||||||||||
| Warrant assets | ||||||||||||||||||||
| Foreign Currency Forward Contract | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Contingent consideration payable | $ | $ | $ | $ | $ | |||||||||||||||
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 | $ | $ | ||||||
| Total contract revenue | $ | $ | ||||||
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 | $ | $ | | |||||
| Total contract liabilities | $ | $ | ||||||
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
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 | $ | $ | $ | $ | ||||||||||||
| Other revenue | ||||||||||||||||
| Provision for credit losses | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Manufacturing, research and development | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Other expense, net | ( | ) | ( | ) | ||||||||||||
| Income tax expense | — | — | 229 | 229 | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||
| Finance Receivables | Pharmaceutical Development and Other | Holding Company and Other | Consolidated | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Other revenue | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Manufacturing, research and development | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Other expense, net | ( | ) | ( | ) | ||||||||||||
| Income tax benefit | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
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
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.
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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 | % | — | ||||||||||||||||
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| 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.
27
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.
28
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.
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.
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.
None.
32
ITEM 6. EXHIBITS
| 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 |