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SWK Holdings Corp - Quarter Report: 2021 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2021

OR

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

Commission File Number: 001-39184

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SWK Holdings Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware 77-0435679
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
   
14755 Preston Road, Suite 105  
Dallas, TX 75254
(Address of Principal Executive Offices) (Zip Code)

 

(Registrant’s Telephone Number, Including Area Code): (972) 687-7250

Securities registered pursuant to Section 12(b) of the Act: 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on Which Registered
         
Common Stock, par value $0.001 per share   SWKH   The Nasdaq Stock Market LLC
Preferred Stock Purchase Rights   SWKH   The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x   Yes      o NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  x   Yes     o   NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer   o   Accelerated Filer   o   Non-Accelerated Filer   x   Smaller Reporting Company    x    Emerging Growth Company   o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

As of November 8, 2021, there were 12,809,438 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 
 

SWK Holdings Corporation

Form 10-Q

Quarter Ended September 30, 2021

Table of Contents

   
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 2
     
  Unaudited Condensed Consolidated Balance Sheets—September 30, 2021 and December 31, 2020 2
     
  Unaudited Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2021 and 2020 3
     
  Unaudited Condensed Consolidated Statements of Stockholders’ Equity—Three and Nine Months Ended September 30, 2021 and 2020 4
     
  Unaudited Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2021 and 2020 5
     
  Notes to the Unaudited Condensed Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
     
Item 4. Controls and Procedures 28
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
     
Item 1A. Risk Factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 30
     
  Signatures 31
 
 

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,” “estimate,” “expects,” “intend,” “plan,” “will” and variations of these words and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially (both favorably and unfavorably) from those expressed or forecasted in the forward-looking statements.

These risks and uncertainties include, but are not limited to, those described in Part II, Item 1A, “Risk Factors,” and elsewhere in this report. Forward-looking statements that were believed to be true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

1
 

PART I. FINANCIAL INFORMATION

 

ITEM 1.      FINANCIAL STATEMENTS

 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

   September 30,
2021
   December 31,
2020
 
ASSETS          
Current assets:          
Cash and cash equivalents  $18,639   $3,008 
Interest and accounts receivable, net   2,254    1,911 
Marketable investments   2,767    1,210 
Other current assets   1,101    542 
Total current assets   24,761    6,671 
           
Finance receivables, net   196,141    204,491 
Marketable investments   198    241 
Cost method investment   3,491    3,491 
Deferred tax assets, net   22,649    27,491 
Warrant assets   3,650    2,972 
Intangible assets, net   10,507    13,617 
Goodwill   8,404    8,404 
Property and equipment, net   5,791    5,211 
Other non-current assets   1,029    1,312 
Total assets  $276,621   $273,901 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $4,494   $3,652 
Revolving credit facility   8    11,758 
Total current liabilities   4,502    15,410 
           
Contingent consideration payable   10,670    16,900 
Other non-current liabilities   779    1,079 
Total liabilities   15,951    33,389 
           
Commitments and contingencies (Note 7)          
           
Stockholders’ equity:          
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively        
Common stock, $0.001 par value; 250,000,000 shares authorized; 12,801,313 and 12,792,586 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively   13    13 
Additional paid-in capital   4,431,480    4,430,924 
Accumulated deficit   (4,170,823)   (4,190,425)
Total stockholders’ equity   260,670    240,512 
Total liabilities and stockholders’ equity  $276,621   $273,901 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

2
 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Revenues:                    
Finance receivables interest income, including fees  $9,373   $7,869   $29,857   $22,738 
Pharmaceutical development   187    2,778    10,846    3,076 
Other           496    9 
Total revenues   9,560    10,647    41,199    25,823 
Costs and expenses:                    
Impairment expense               163 
Interest expense   53    101    292    365 
Pharmaceutical manufacturing, research and development expense   2,487    1,182    5,577    3,311 
Change in fair value of acquisition-related contingent consideration       174    (147)   1,964 
Depreciation and amortization expense   812    2,681    3,305    9,629 
General and administrative   3,580    2,527    9,825    8,215 
Total costs and expenses   6,932    6,665    18,852    23,647 
Other income (expense), net                    
Unrealized net (loss) gain on warrants   (214)   87    678    (1,151)
Unrealized net gain (loss) on equity securities   342    (178)   1,557    (666)
Income before income tax expense (benefit)   2,756    3,891    24,582    359 
Income tax expense (benefit)   513    (451)   4,980    (199)
Consolidated net income  $2,243   $4,342   $19,602   $558 
Net income per share                    
Basic  $0.18   $0.34   $1.53   $0.04 
Diluted  $0.17   $0.34   $1.53   $0.04 
Weighted Average Shares                    
Basic   12,798    12,905    12,796    12,891 
Diluted   12,859    12,916    12,834    12,898 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3
 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

   Nine Months Ended September 30, 2021 
   Common Stock   Additional    Accumulated    Total
Stockholders’
 
   Shares   Amounts   Paid-In Capital   Deficit   Equity 
Balances at December 31, 2020   12,792,586   $13   $4,430,924   $(4,190,425)  $240,512 
Stock-based compensation           177        177 
Issuance of common stock   3,021                 
Net income               3,389    3,389 
Balances at March 31, 2021   12,795,607    13    4,431,101    (4,187,036)   244,078 
Stock-based compensation           187        187 
Issuance of common stock   2,940                 
Net income               13,970    13,970 
Balances at June 30, 2021   12,798,547    13    4,431,288    (4,173,066)   258,235 
Stock-based compensation            192        192 
Issuance of common stock   2,766                 
Net income               2,243    2,243 
Balances at September 30, 2021   12,801,313   $13   $4,431,480   $(4,170,823)  $260,670 
                          
   Nine Months Ended September 30, 2020 
   Common Stock   Additional    Accumulated    Total
Stockholders’
 
   Shares   Amounts   Paid-In Capital   Deficit   Equity 
Balances at December 31, 2019   12,917,348   $13   $4,432,146   $(4,195,627)  $236,532 
Stock-based compensation           187        187 
Issuance of common stock   5,937                 
Repurchases of common stock in open market   (5,279)       (62)       (62)
Net loss               (4,660)   (4,660)
Balances at March 31, 2020   12,918,006    13    4,432,271    (4,200,287)   231,997 
Stock-based compensation           183        183 
Issuance of common stock in lieu of payment of employee cash bonuses   5,200        60        60 
Issuance of common stock   4,569                 
Repurchases of common stock in open market   (78,537)       (1,033)       (1,033)
Net income               876    876 
Balances at June 30, 2020   12,849,238   $13    4,431,481    (4,199,411)   232,083 
Stock-based compensation           179        179 
Issuance of common stock   3,089                 
Repurchases of common stock in open market   (70,176)       (903)       (903)
Net income               4,342    4,342 
Balances at September 30, 2020   12,782,151   $13   $4,430,757   $(4,195,069)  $235,701 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4
 

SWK HOLDINGS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Nine Months Ended
September 30,
 
   2021   2020 
Cash flows from operating activities:          
Consolidated net income  $19,602   $558 
Adjustments to reconcile net income to net cash provided by operating activities:          
Impairment expense       163 
Amortization of debt issuance costs   35    141 
Deferred income taxes   4,842    (206)
Change in fair value of warrants   (678)   1,151 
Change in fair value of equity securities   (1,557)   666 
Change in fair value of acquisition-related contingent consideration   (147)   1,964 
Loan discount amortization and fee accretion   (2,016)   (1,598)
Interest paid-in-kind   (698)   (2,369)
Stock-based compensation   556    549 
Depreciation and amortization expense   3,305    9,629 
Changes in operating assets and liabilities:          
Interest and accounts receivable   (343)   (2,054)
Other assets   (371)   (819)
Accounts payable and other liabilities   542    1,434 
Net cash provided by operating activities   23,072    9,209 
           
Cash flows from investing activities:          
Investment in finance receivables   (20,100)   (12,458)
Repayment of finance receivables   31,162    5,928 
Corporate debt securities principal payment   43    49 
Purchases of property and equipment   (877)   (2,354)
Other   164    (220)
Net cash provided by (used in) investing activities   10,392    (9,055)
           
Cash flows from financing activities:          
Net (payments on) proceeds from credit facility   (11,750)    
Payment of acquisition-related contingent consideration   (6,083)    
Repurchases of common stock, including fees and expenses       (1,998)
Net cash used in financing activities   (17,833)   (1,998)
           
Net increase in cash and cash equivalents   15,631    (1,844)
Cash and cash equivalents at beginning of period   3,008    11,158 
Cash and cash equivalents at end of period  $18,639   $9,314 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5
 

SWK HOLDINGS CORPORATION

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

Nature of Operations

 

SWK Holdings Corporation (the “Company”) was incorporated in July 1996 in California and reincorporated in Delaware in September 1999. In July 2012, the Company commenced its strategy of building a specialty finance and asset management business. In August 2019, the Company commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing business. The Company’s operations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical Development.” The Company allocates capital to each segment in order to generate income through the sales of life science products by third parties. The Company is headquartered in Dallas, Texas, and as of September 30, 2021, the Company had 35 employees.

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

As of November 8, 2021, the Company and its partners have executed transactions with 42 different parties under its specialty finance strategy, funding an aggregate of $600.0 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.

 

On August 26, 2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”). Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. Since its founding in 2013, Enteris has advanced multiple internal and external programs leveraging Peptelligence®, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules, in an enteric-coated tablet formulation. Peptelligence® utilizes a unique multifaceted approach to increase the solubility and absorption of peptides and small molecules, addressing the complex challenges regarding solubility and permeability of therapeutics with low oral bioavailability. Peptelligence® is protected by an extensive patent estate that extends until 2036.

Basis of Presentation and Principles of Consolidation 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of all subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests. The Company consolidates a variable interest entity (“VIE”) when it possesses both the power to direct the activities of the VIE that most significantly impact its economic performance and the Company is either obligated to absorb the losses that could potentially be significant to the VIE or the Company holds the right to receive benefits from the VIE that could potentially be significant to the VIE, after elimination of intercompany accounts and transactions.

 

The Company owns interests in various partnerships and limited liability companies, or LLCs. The Company consolidates its investments in these partnerships or LLCs where the Company, as the general partner or managing member, exercises effective control, even though the Company’s ownership may be less than 50 percent, the related governing agreements provide the Company with broad powers, and the other parties do not participate in the management of the entities and do not effectively have the ability to remove the Company. The Company has reviewed each of the underlying agreements to determine if it has effective control. If circumstances change and it is determined this control does not exist, any such investment would be recorded using the equity method of accounting. Although this would change individual line items within the Company’s consolidated financial statements, it would have no effect on its operations and/or total stockholders’ equity attributable to the Company.

 

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, 2021. 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, 2020, filed with the SEC on March 31, 2021.

6
 

Reclassification

 

Certain prior period amounts have been reclassified to conform to current period presentation. The amounts for prior periods have been reclassified to be consistent with current presentation and have no impact on previously reported total assets, total stockholders’ equity or net income.

 

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 accounts receivable; impairment of finance receivables; long-lived assets; property and equipment; intangible assets; goodwill; valuation of warrants and other investments; contingent consideration; income taxes; and contingencies and litigation, among others. Some of these judgments can be subjective and complex, and consequently, actual results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable.

The Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause changes to those estimates and assumptions. Market conditions, such as illiquid credit markets, health crises such as the COVID-19 global pandemic, volatile equity markets, and economic downturns, can increase the uncertainty already inherent in the Company’s estimates and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Segment Information

The Company earns revenues from its two U.S.-based business segments: its specialty finance and asset management business offering customized financing solutions to a broad range of life-sciences companies, and its business offering oral therapeutic formulation solutions built around Enteris’ pharmaceutical Peptelligence® platform, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules in an enteric-coated tablet formulation.

 

Revenue Recognition

 

The Company’s Pharmaceutical Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

 

Deferred revenue includes amounts that have been billed per the contractual terms but have not been recognized as revenue. The Company classifies as current the portion of deferred revenue that is expected to be recognized within one year from the balance sheet date and is included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.

 

Research and Development

 

Research and development expenses include the costs associated with internal research and development and research and development conducted for the Company by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants, and supplies. All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under research and development contracts, which are not refundable, are recorded as a reduction to pharmaceutical manufacturing research and development expense in the consolidated statements of income.

7
 

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards 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 is effective from March 12, 2020 through December 31, 2022. An entity may elect to adopt the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The one-time election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity may be made at any time after March 12, 2020 but no later than December 31, 2022. The Company expects that it will elect to apply some of the expedients and exceptions provided in ASU 2020-04; however, the Company is still evaluating the guidance, and therefore, the impact of the adoption of ASU 2020-04 on the Company’s financial condition and results of operations has not yet been determined.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This standard adds an impairment model, known as the current expected credit loss (“CECL”) model, that is based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of losses. This ASU describes the impairment allowance as a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be measured in a manner similar to current GAAP; however, the amendments in this update require that credit losses be presented as an allowance rather than as a write-down, which will allow an entity the ability to record reversals of credit losses in current period net income. On November 15, 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies. Under ASU 2019-10, the effective date for implementation of CECL for smaller reporting companies was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently evaluating the new guidance but believes it is likely to incur more upfront losses on its portfolio under the new CECL model.

8
 

Note 2. Net Income per Share

Basic net income per share is computed using the weighted average number of outstanding shares of common stock. Diluted net income per share is computed using the weighted average number of outstanding shares of common stock, and when dilutive, shares of common stock issuable upon exercise of options and warrants deemed outstanding using the treasury stock method.

 

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

 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Numerator:                    
Net income  $2,243   $4,342   $19,602   $558 
                     
Denominator:                    
Weighted-average shares outstanding   12,798    12,905    12,796    12,891 
Effect of dilutive securities   61    11    38    7 
Weighted-average diluted shares   12,859    12,916    12,834    12,898 
                     
Basic net income per share  $0.18   $0.34   $1.53   $0.04 
Diluted net income per share  $0.17   $0.34   $1.53   $0.04 

 

For the three months ended September 30, 2021 and 2020, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 367,000 and 409,000, respectively, have been excluded from the calculation of diluted net income per share as such securities were anti-dilutive. For the nine months ended September 30, 2021 and 2020, outstanding options to purchase shares of common stock and outstanding shares of restricted stock in an aggregate of approximately 390,000 and 455,000, respectively, have been excluded from the calculation of diluted net income per share as such securities were anti-dilutive.

9
 

Note 3. Finance Receivables, Net

 

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

As of September 30, 2021 and December 31, 2020, the Company had a credit loss allowance of $8.4 million. Of the total $8.4 million, $1.2 million and $0.6 million are associated with the Company’s Cambia® and Besivance® royalties, respectively. The remaining $6.6 million is related to the ABT Molecular Imaging, Inc., now known as Best ABT, Inc. (“Best”), second lien term loan that was recognized in order to reflect the Best royalty at its estimated fair value.

 

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

 

Portfolio  September 30,
2021
   December 31,
2020
 
Term loans  $149,874   $164,032 
Royalty purchases   54,655    48,847 
Total before allowance for credit losses   204,529    212,879 
Allowance for credit losses   (8,388)   (8,388)
Total carrying value  $196,141   $204,491 

 

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

 

   September 30, 2021   December 31, 2020 
   Nonaccrual   Performing   Total   Nonaccrual   Performing   Total 
Term loans  $8,334   $141,540   $149,874   $8,334   $155,698   $164,032 
Royalty purchases, net of credit loss allowance   3,472    42,795    46,267    3,863    36,596    40,459 
Total carrying value  $11,806   $184,335   $196,141   $12,197   $192,294   $204,491 

 

As of September 30, 2021, the Company had two finance receivables in nonaccrual status: (1) the term loan to B&D Dental Corporation (“B&D”), with a net carrying value of $8.3 million and (2) the Best royalty, with a net carrying value of $3.5 million. Although in nonaccrual status, the B&D term loan was not considered impaired as of September 30, 2021 and December 31, 2020. The Company collected $0.4 million on the Best royalty during the nine months ended September 30, 2021, which was credited toward the royalty’s carrying value.

 

Note 4. Marketable Investments

 

Investments in available-for-sale corporate debt securities and equity securities as of September 30, 2021 and December 31, 2020 consist of the following (in thousands):

 

   September 30,
2021
   December 31,
2020
 
Corporate debt securities  $198   $241 
Equity securities   2,767    1,210 
Total marketable investments  $2,965   $1,451 

 

The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale corporate debt securities as of September 30, 2021 and December 31, 2020, are as follows (in thousands):

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Loss
   Fair Value 
September 30, 2021  $198   $   $   $198 
                     
December 31, 2020  $241   $   $   $241 

10
 

The following table presents unrealized net income (loss) on equity securities during the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Unrealized net income (loss) on equity securities reflected in the unaudited condensed consolidated statements of income  $342   $(178)  $1,557   $(666)

 

Note 5. Goodwill and Intangible Assets

 

Goodwill

 

There was no change in the carrying amount of goodwill from December 31, 2020 to September 30, 2021, and net book value remains at $8.4 million. The net book value of goodwill is solely related to the Enteris acquisition in 2019.

 

Intangible Assets

 

The following table summarizes the gross book value, accumulated amortization and net book value balances of intangible assets as of September 30, 2021 and December 31, 2020 (in thousands):

 

   September 30, 2021   December 31, 2020 
   Gross Book
Value
   Accumulated
Amortization
   Net Book
Value
   Gross Book
Value
   Accumulated
Amortization
   Net Book
Value
 
Licensing Agreement(1)  $29,400   $19,249   $10,151   $29,400   $16,336   $13,064 
Patents               198    153    45 
Trade names and trademarks   210    44    166    210    29    181 
Customer relationships   240    50    190    240    32    208 
    29,850    19,343    10,507    30,048    16,550    13,498 
Deferred patent costs               119        119 
Total intangible assets  $29,850   $19,343   $10,507   $30,167   $16,550   $13,617 

 

(1)Prior to the acquisition, Enteris entered into a non-exclusive commercial license agreement (the “License Agreement”) with Cara Therapeutics, Inc. (“Cara”), for oral formulation rights to Enteris’ Peptelligence® technology to develop and commercialize Oral KORSUVATM in any indication worldwide, excluding South Korea and Japan. Cara is obligated to pay Enteris certain development, regulatory and tiered commercial milestone payments, as well as low single-digit royalties based on net sales in the licensed territory.

 

Amortization expense related to intangible assets was $0.6 million and $2.6 million for the three months ended September 30, 2021 and 2020, respectively. Amortization expense related to intangible assets was $2.9 million and $9.4 million for the nine months ended September 30, 2021 and 2020, respectively.

 

The estimated future amortization expense related to intangible assets as of September 30, 2021 is as follows (in thousands):

 

Fiscal Year  Amount 
Remainder of 2021  $548 
2022   1,828 
2023   1,757 
2024   1,413 
2025   1,069 
2026 and thereafter   3,892 
Total  $10,507 

11
 

Note 6. Revolving Credit Facility

 

On September 27, 2021, the Company entered into the Third Amendment to Loan and Security Agreement (the “Third Amendment”) with Cadence Bank, N.A. as a lender and the administrative agent. Pursuant to the Third Amendment, the Loan and Security Agreement dated as of June 29, 2018 (“Loan Agreement”) was amended to extend the Loan Agreement Termination Date to September 30, 2022 and increase the Loan Agreement Commitment to $22.0 million. The Loan Agreement requires the payment of an unused line fee of 0.50 percent and also provides for quarterly minimum fee income of $60,000 less the aggregate interest and unused line fees paid during the immediately preceding quarter. Unused line fees and minimum fee income are recorded as interest expense.

 

The Loan Agreement accrues interest at the Daily LIBOR Rate, with a floor of 1.00 percent, plus a 3.25 percent margin and principal is repayable in full at maturity. Interest is generally required to be paid monthly in arrears. In connection with the Third Amendment, the Company paid a $50,000 amendment fee, which was capitalized as deferred financing costs and is being amortized on a straight-line basis over the remaining term of the Loan Agreement.

 

The Loan Agreement has an advance rate against the Company’s finance receivables portfolio, including 85 percent against senior first lien loans, 70 percent against second lien loans and 50 percent against royalty receivables, subject to certain eligibility requirements as defined in the Loan Agreement. The Loan Agreement contains certain affirmative and negative covenants including minimum asset coverage and minimum interest coverage ratios.

 

During the nine months ended September 30, 2021 and 2020, the Company recognized $0.3 million and $0.4 million, respectively, of interest expense. As of September 30, 2021, approximately $8,000 was outstanding under the revolving credit facility, and approximately $22.0 million was available for borrowing.

 

Note 7. Commitments and Contingencies

 

Contingent Consideration

 

The Company recorded contingent consideration related to the August 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement. 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. As of September 30, 2021 and December 31, 2020, the fair value of contingent consideration was $10.7 million and $16.9 million, respectively. During the nine months ended September 30, 2021, the Company recognized $10.0 million of revenue related to the completion of a milestone under the License Agreement with Cara. During the nine months ended September 30, 2021, the Company paid $6.1 million of such amount to the seller of Enteris, pursuant to the earnout provisions of the merger agreement. The Company also recognized a $0.1 million change in the estimated fair value of its contingent consideration during the nine months ended September 30, 2021.

 

Unfunded Commitments

 

As of September 30, 2021, the Company’s unfunded commitments were as follows (in millions):

 

      
Trio Healthcare Ltd. Loan  $4.4 
Ideal Implant, Inc.   2.0 
Total unfunded commitments  $6.4 

 

Unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a specified date or period of time per the terms of the royalty purchase or credit agreements, and in the case of loan transactions, are only subject to being advanced as long as an event of default does not exist. 

12
 

Note 8. 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 nine months ended September 30, 2021. 

The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments, other than investment in affiliates.

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.

Cash and cash equivalents 

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

Marketable Investments

Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices).

Finance Receivables

The fair values of finance receivables are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the finance receivables. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. These receivables are classified as Level 3. Finance receivables are not measured at fair value on a recurring basis, but estimates of fair value are reflected below.

Contingent Consideration

The Company recorded contingent consideration related to the August 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement.

 

The fair value measurements of contingent consideration obligations 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. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

13
 

Marketable Investments and Derivative Securities  

Marketable Investments

If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities would be classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets or broker quotes utilizing observable inputs, and accordingly these securities would be classified as Level 2. If market prices are not available and there are no observable inputs, then fair value would be estimated by using valuation models including discounted cash flow methodologies, commonly used option-pricing models and broker quotes. Such securities would be classified as Level 3, if the valuation models and broker quotes are based on inputs that are unobservable in the market. If fair value is based on broker quotes, the Company checks the validity of received prices based on comparison to prices of other similar assets and market data such as relevant bench mark indices. Available-for-sale securities are measured at fair value on a recurring basis, while securities with no readily available fair market value are not, but estimates of fair value are reflected below.

 

Derivative Securities

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

 

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 (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  $3,650   $   $   $3,650 
Marketable investments   2,965    2,767        198 
                     
Financial Liabilities:                    
Contingent consideration payable  $10,670   $   $   $10,670 

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 (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  $2,972   $   $   $2,972 
Marketable investments   1,451    1,210        241 
                     
Financial Liabilities:                    
Contingent consideration payable  $16,900   $   $   $16,900 

 

The changes in fair value of the warrant assets during the nine months ended September 30, 2021 were as follows (in thousands):

 

Fair value – December 31, 2020  $2,972 
Issued    
Canceled    
Change in fair value   678 
Fair value – September 30, 2021  $3,650 

14
 

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:

 

 

   September 30,
2021
   December 31,
2020
 
Dividend rate range        
Risk-free rate range   0.53% to 1.32%            0.17% to 0.65% 
Expected life (years) range   2.8 to 6.6     3.6 to 7.4  
Expected volatility range   61.3% to 157.9%     74.3% to 174.7%  

 

As of September 30, 2021 and December 31, 2020, the Company had three royalties, Besivance®, Best, and Cambia®, that were deemed to be impaired based on reductions in carrying values in prior periods. The following table presents these royalties measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020 (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)
 
September 30, 2021  $6,109   $   $   $6,109 
                     
December 31, 2020  $7,937   $   $   $7,937 

 

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.

 

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.

 

 

As of September 30, 2021 (in thousands):

 

   Carrying
Value
   Fair Value   Level 1   Level 2   Level 3 
Financial Assets                         
Cash and cash equivalents  $18,639   $18,639   $18,639   $   $ 
Finance receivables   196,141    196,141            196,141 
Marketable investments   2,965    2,965    2,767        198 
Warrant assets   3,650    3,650            3,650 
                          
Financial Liabilities                         
Contingent consideration payable  $10,670   $10,670   $   $   $10,670 

15
 

As of December 31, 2020 (in thousands):

 

   Carrying
Value
   Fair Value   Level 1   Level 2   Level 3 
Financial Assets                         
Cash and cash equivalents  $3,008   $3,008   $3,008   $   $ 
Finance receivables   204,491    204,491            204,491 
Marketable investments   1,451    1,451    1,210        241 
Warrant assets   2,972    2,972            2,972 
                          
Financial Liabilities                         
Contingent consideration payable  $16,900   $16,900   $   $   $16,900 

 

Note 9. Revenue Recognition

 

The Company’s Pharmaceutical Development segment recognizes revenues received from contracts with its customers by revenue source, as the Company believes it best depicts the nature, amount, timing and uncertainty of our revenue and cash flow. The Company’s Finance Receivables segment does not have any revenues received from contracts with customers.

 

The following table provides the contract revenue recognized by revenue source for the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Pharmaceutical Development Segment                    
License Agreement  $176   $2,768   $10,786   $2,992 
Pharmaceutical Development and other   11    10    556    84 
Total contract revenue  $187   $2,778   $11,342   $3,076 

 

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

 

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

 

   September 30,
2021
   December 31,
2020
 
Pharmaceutical Development Segment          
Deferred revenue  $226   $350 
Total contract liabilities  $226   $350 

 

During the nine months ended September 30, 2021, the Company recognized $0.3 million of 2020 deferred revenue from satisfaction of performance obligations. The Company did not have any contract assets nor did it have any contract liabilities related to the License Agreement as of September 30, 2021 or December 31, 2020.

16
 

Note 10. Segment Information

 

Selected financial and descriptive information is required to be provided about reportable operating segments, considering a “management approach” concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the Company for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the Company’s internal organization, focusing on financial information that the Company’s chief executive officer uses to make decisions about the Company’s operating matters.

As described in Note 1, the Company has determined it has two reportable segments: Finance Receivables and Pharmaceutical Development, and each are individually managed and provide separate services. Revenues by segment represent revenues earned on the services offered within each segment.

Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income. Management uses this measure of income (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 following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands):

   Three Months Ended September 30, 2021 
   Finance
Receivables
   Pharmaceutical
Development and
Other
   Holding
Company and
Other
   Consolidated 
Revenue  $9,373   $187   $   $9,560 
Interest expense   53            53 
Manufacturing, research and development       2,487        2,487 
Depreciation and amortization       810    2    812 
General and administrative   90    999    2,491    3,580 
Other income, net   128            128 
Income tax expense           513    513 
Consolidated net income (loss)   9,358    (4,109)   (3,006)   2,243 

 

   Three Months Ended September 30, 2020 
   Finance
Receivables
   Pharmaceutical
Development and
Other
   Holding
Company and
Other
   Consolidated 
Revenue  $7,869   $2,778   $   $10,647 
Interest expense   101            101 
Manufacturing, research and development       1,182        1,182 
Depreciation and amortization       2,678    3    2,681 
Change in fair value of acquisition-related contingent consideration       174        174 
General and administrative   127    1,044    1,356    2,527 
Other (expense) income, net   (192)       101    (91)
Income tax benefit           (451)   (451)
Consolidated net income (loss)   7,449    (2,300)   (807)   4,342 

17
 

   Nine Months Ended September 30, 2021 
   Finance
Receivables
   Pharmaceutical
Development and
Other
   Holding
Company and
Other
   Consolidated 
Revenue  $29,857   $10,846   $   $40,703 
Other revenue       496        496 
Interest expense   292            292 
Manufacturing, research and development       5,577        5,577 
Depreciation and amortization       3,300    5    3,305 
Change in fair value of acquisition-related contingent consideration       (147)       (147)
General and administrative   2,034    3,088    4,703    9,825 
Other income, net   2,235            2,235 
Income tax expense           4,980    4,980 
Consolidated net income (loss)   29,766    (476)   (9,688)   19,602 

 

   Nine Months Ended September 30, 2020 
   Finance
Receivables
   Pharmaceutical
Development and
Other
   Holding
Company and
Other
   Consolidated 
Revenue  $22,737   $3,076   $1   $25,814 
Other revenue   9            9 
Provision for credit losses and impairment   163            163 
Interest expense   365            365 
Manufacturing, research and development       3,311        3,311 
Depreciation and amortization       9,621    8    9,629 
Change in fair value of acquisition-related contingent consideration       1,964        1,964 
General and administrative   1,429    3,167    3,619    8,215 
Other (expense) income, net   (1,893)       76    (1,817)
Income tax benefit           (199)   (199)
Consolidated net income (loss)   18,897    (14,987)   (3,351)   558 

 

Included in Holding Company and Other are the expenses of the parent holding company and certain other enterprise-wide overhead costs, including public company costs and non-Enteris corporate employees, which have been included for purposes of reconciling to the consolidated amounts.

 

Note 11. Subsequent Events

 

Thermedx LLC

 

On October 22, 2021, SWK Funding received $0.5 million for the payoff of the Thermedx LLC term loan. The proceeds included accrued interest and interest paid-in-kind.

 

Misonix, Inc.

 

On October 29, 2021, Misonix, Inc. (“Misonix”) was acquired by Bioventus, Inc. (“Bioventus”). Upon closing of the transaction, SWK Funding received $31.6 million for the payoff of the Misonix term loan. The proceeds included accrued interest, prepayment and exit fees. The Company also tendered its Misonix common stock and received $1.9 million in cash and 71,361 shares of Bioventus common stock valued at $1.2 million at the date of transaction.

18
 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, and the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2020 (“Annual Report”), as well as our unaudited condensed consolidated financial statements and the accompanying notes included in this report.

 

COVID-19 Considerations

 

We are subject to risks related to public health crises such as the global pandemic associated with COVID-19. Our Pharmaceutical Development segment has seen a reduction in its productivity as well as delays in receiving some of its needed supplies as a direct result of the pandemic and the impact on key vendors. This slow-down is likely to continue in the near term until such time as certain restrictions that have been imposed on us and our suppliers are lifted. Such events may result in business disruption and reduced revenues, any of which could materially affect our business, financial condition and results of operations.

 

Please refer to Part II, Item 1A, Risk Factors, as well as the Risk Factors in our Annual Report, for additional information on risk factors related to the pandemic or other risks that could impact our business and results of operations.

 

Strategic Plan to Focus on Core Specialty Finance Business

 

On May 17, 2021, we issued a press release announcing the formation by our Board of Directors (“Board”) of a Strategic Review Committee (“SRC”) to identify, review and explore strategic alternatives with a view to enhancing stockholder value. With its advisors, the SRC completed a comprehensive review of strategic alternatives for each segment of the Company. On November 1, 2021, we issued a press release announcing that the Board approved a streamlined go-forward business plan and has begun implementing several new measures in light of our current governance structure. The goal of these measures is to improve our strategic focus, growth profile, and capital allocation. The Board believes these measures will allow us to generate long-term value for stockholders.

 

Environmental, Social and Governance

 

As overseers of risk and stewards of long-term enterprise value, our management and Board play a vital role in assessing, identifying and understanding the potential impact and related risks of environmental, social and governance (“ESG”) issues on the organization’s operating model. Our Board and management are committed to identifying those ESG issues most likely to impact business operations and growth by focusing our investment strategy around supporting innovative, growth-oriented companies in the life sciences industry that maximize both social and investment value.

 

Among the ESG issues we support within the Company, we are committed to recruiting, motivating and developing a diversity of talent. We promote and foster a company culture where every voice is welcome, heard and respected, regardless of age, gender, race, religion, sexual orientation, physical conditions, cultural background or country of origin.

 

The nature of our business supports environmental sustainability by being mindful of products we and our partners use in our businesses. We promote recycling to reduce landfill, and we offer our employees a hybrid work model, which allows employees the flexibility to work remotely, thereby reducing the carbon output from commuting in cars or buses.

 

Overview

We have organized our operations into two segments: Finance Receivables and Pharmaceutical Development. These segments reflect the way the Company evaluates it business performance and manages its operations. Please refer to Item 1. Financial Statements, Note 10 of the notes to the unaudited condensed consolidated financial statements for further information regarding segment information.

Finance Receivables Segment

In our Finance Receivables segment, 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 (together “life science”) by tailoring financial solutions to the needs of our business partners.

 

Our investment objective is to maximize our portfolio total return and thus increase our net income and book value by generating income from three sources: (1) primarily owning or financing through debt investments, royalties or revenue interests 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, and (3) to a lesser extent, realizing capital appreciation from equity-related investments in the life science sector.

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We primarily provide capital in exchange for an interest in an existing revenue stream, which can take several forms, but is most commonly either a royalty derived from the sales of a life science product from the marketing efforts of a third party or from the marketing efforts of a partner company. Our structured debt investments may include warrants or other features, giving us the potential to realize enhanced returns on a portion of our portfolio.

 

Pharmaceutical Development Segment

 

On August 26, 2019, we commenced our Pharmaceutical Development segment with the acquisition of Enteris, which became our wholly-owned subsidiary. Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence® platform. Since its founding in 2013, Enteris has advanced multiple internal and external programs leveraging Peptelligence®, which enables the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules, in an enteric-coated tablet formulation.

 

Our strategy is to utilize the Peptelligence® platform to create a portfolio of milestone and royalty income, and thus increase our net income and book value, by out-licensing our technology in two ways. First, we intend to out-license our technology to pharmaceutical companies to create novel and important oral therapeutic treatments for a wide variety of indications. Second, we intend to out-license to pharmaceutical companies our internally developed reformulations of approved, off-patent injectable therapeutic treatments where Peptelligence® enables oral delivery, resulting in meaningful improvements for patients and caregivers. We also generate income by providing customers pharmaceutical development, formulation and manufacturing with the ultimate goal of generating new out-license agreements of our technology.

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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 and nine months ended September 30, 2021 (in thousands, except rate, share and per share data).

Royalty Purchases and Other Financings   Licensed
Technology
  Footnote   Funded
Amount
    GAAP
Balance
    Contract
Rate
  Revenue
Recognized
 
YTD     Q3  
Beleodaq®   Oncology treatment       $ 7,600     $ 5,059     N/A   $ 1,274     $ 456  
Besivance®   Ophthalmic antibiotic   (3)   6,000         N/A   (26   (25
Best ABT, Inc.   Oncology diagnosis   (1), (2)   5,784     3,472     N/A        
Coflex®/Kybella®/Zalviso®   Spinal stenosis/Submental fullness       4,350     4,160     N/A   465     155  
Cambia®   NSAID migraine treatment   (1)   8,500     2,637     N/A   (9   (56
Forfivo XL®   Depressive disorder treatment       6,000     1,490     N/A   982     307  
Ideal Implant, Inc.   Aesthetics       3,000     3,097     N/A   203     203  
Iluvien®   Diabetic macular edema       16,501     16,205     N/A   1,813     641  
Narcan®   Opioid overdose treatment       17,500     539     N/A   2,423     1,030  
Ostomy products royalty   Ostomy products       3,900     4,443     N/A   450     156  
Secured Royalty Financing (Marketable Investment)   Women’s health   (1), (2)   3,000     198     11.5%        
Tissue Regeneration Therapeutics   Umbilical cord banking   (2)   3,250     3,491     N/A        
Veru, Inc.   Synthetic Royalty   (4)   5,166     5,165     N/A   5,914     1,411  
                                             

            Maturity
Date
      GAAP
Balance
    Contract
Rate
   

Revenue

Recognized

 
Term Loans   Type   Footnote     Principal         YTD     Q3  
4Web, Inc.   First Lien       06/03/23   $ 24,929     $ 25,358     12.8 %   $ 2,700     $ 983  
Acerus Pharmaceuticals, Inc.   First Lien       10/11/23   6,550     6,519     12.0 %   968     298  
B&D Dental Corporation   First Lien   (2), (5)   12/10/18   8,365     8,334     14.0 %        
BIOLASE, Inc.   First Lien       11/09/23   14,300     14,428     12.3 %   1,645     558  
CeloNova BioSciences, Inc.   First Lien   (6)   12/31/21   2,054     2,058     12.5 %   360     93  
DxTerity Diagnostics, Inc.   First Lien   (7)   11/30/21   2,474     3,217     13.3 %   1,624     340  
Epica International, Inc.   First Lien       07/23/23   12,000     12,336     13.5 %   1,202     403  
eTon Pharmaceuticals, Inc.   First Lien       11/13/24   7,000     6,862     12.0 %   761     257  
Flowonix Medical, Inc.   First Lien       12/23/25   10,000     9,954     11.0 %   961     331  
Harrow Health, Inc.   First Lien   (3)   07/19/23           9.0% - 12.0 %   1,112      
Keystone Dental, Inc.   First Lien       11/14/22   15,000     15,455     11.5 %   1,401     473  
Misonix, Inc.   First Lien   (8)   06/30/23   30,096     30,089     10.0% - 12.3 %   2,384     805  
Sincerus Pharmaceuticals, Inc.   First Lien       03/19/26   9,750     9,765     13.0 %   681     360  
Tenex Health, Inc.   First Lien   (3)   06/30/21           13.0 %   349      
Thermedx, LLC   Sub Note   (9)   05/20/29   466     466     11.8 %   40     14  
Trio Healthcare Ltd.   First Lien       07/01/26   5,100     5,033     12.5 %   180     180  

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       No of   GAAP   Change in Fair Value 
Common Stock  Footnote   Shares   Balance   YTD   Q3 
Misonix, Inc. Common Stock   (8)    109,353   $2,767   $1,557   $342 
Sincerus Pharmaceuticals, Inc.        26,575             

 

     Number of    Exercise Price      GAAP     Change in Fair Value  
Warrants to Purchase Stock   Shares   per Share     Balance     YTD     Q3  
4Web, Inc.   TBD     TBD     $ —      $ —      $ —   
Acerus Pharmaceuticals, Inc.   7,764,004     0.05 CAD     196      (18)     (62)  
B&D Dental Corporation   225     0.01     —      —      —   
BIOLASE, Inc.   550,977     0.39     322      94      (35)  
CeloNova BioSciences, Inc.   TBD     0.01     —      —      —   
DxTerity Diagnostics, Inc.   2,019,231     2.08     —      —      —   
Epica International, Inc.   TBD     TBD     —      —      —   
eTon Pharmaceuticals, Inc.   51,239     5.86     126      (175)     (55)  
eTon Pharmaceuticals, Inc.   18,141     6.62     45      (63)     (19)  
EyePoint Pharmaceuticals, Inc.   40,910     11.00     224      99      35   
EyePoint Pharmaceuticals, Inc.   7,773     19.30     34      15       
Flowonix Medical, Inc.   155,561     3.86     —      —      —   
Harrow Health, Inc.   373,847     2.08     2,703      726      (83)  

 

       Income Recognized 
   Assets   YTD   Q3 2021 
Total finance receivables  $196,141   $29,857   $9,373 
Total marketable investments   2,965    N/A    N/A 
Cost method investment   3,491    N/A    N/A 
Fair value of warrant assets   3,650    N/A    N/A 
Total assets/revenues  $206,247   $29,857   $9,373 

 

(1) Investment considered impaired.
(2) Investment on nonaccrual.
(3) The loan/royalty was paid off during 2021.
(4) The return premium pursuant to the credit agreement was reached, and the residual royalty agreement commenced during the third quarter.
(5) B&D is evaluating strategic alternatives for the business. The first lien loan is currently in default.
(6) Maturity date was amended to December 31, 2021 in July 2021.
(7) Maturity date was amended to November 30, 2021 in June 2021.
(8) On October 29, 2021, Misonix was acquired by Bioventus. Upon closing of the transaction, the Misonix term loan was paid off. We also tendered our Misonix common stock and received $1.9 million in cash and 71,361 shares of Bioventus common stock.
(9) The loan was paid off on October 22, 2021.

 

Unless otherwise specified, our senior secured debt assets generally are repaid by a revenue interest that is charged on a company’s quarterly net sales and royalties. 

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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 nine months ended September 30, 2021, compared to those discussed in our Annual Report.

 

Recent Accounting Pronouncements

 

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

 

Comparison of the Three Months Ended September 30, 2021 and 2020 (in millions)

 

   Three Months Ended
September 30,
    
   2021   2020   Change 
Revenues  $9.6   $10.6   $(1.0)
Interest expense   0.1    0.1     
Pharmaceutical manufacturing, research and development expense   2.5    1.2    1.3 
Change in fair value of acquisition-related contingent consideration       0.2    (0.2)
Depreciation and amortization expense   0.8    2.7    (1.9)
General and administrative expense   3.6    2.5    1.1 
Other income (expense), net   0.1    (0.1)   0.2 
Income tax expense (benefit)   0.5    (0.5)   1.0 
Consolidated net income   2.2    4.3    (2.1)

 

Revenues

 

Revenues decreased to $9.6 million for the three months ended September 30, 2021 from $10.6 million for the three months ended September 30, 2020. The decrease was primarily the result of a $2.6 million decrease in revenues from our Pharmaceutical Development segment, partially offset by a $1.5 million increase in interest and fees earned on our finance receivables. The decrease in Pharmaceutical Development segment revenue was primarily the result of $2.5 million of non-recurring milestone revenue received in 2020 related to Enteris’ license agreement with Cara. The $1.5 million increase in revenue attributable to our Finance Receivables segment primarily consists of a $1.4 million net increase in royalty income and a $1.1 million increase in fees and interest earned on our finance receivables due to funding new and existing loans. The increase in revenue was partially offset by a $1.0 million decrease in interest and fees earned on finance receivables that were paid off or paid down since the third quarter of 2020.

 

Interest Expense

 

Interest expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense for both the three months ended September 30, 2021 and 2020 was $0.1 million, respectively.

 

Pharmaceutical Manufacturing, Research and Development Expense

 

Pharmaceutical manufacturing, research and development expense increased from $1.2 million for the three months ended 2020 to $2.5 million for the three months ended September 30, 2021. The $1.3 million increase was primarily due to an increase in manufacturing materials for pipeline projects and clinical trials.

 

Change in Fair Value of Acquisition-Related Contingent Consideration

 

We did not recognize any change in fair value of acquisition-related contingent consideration during the three months ended September 30, 2021, and a $0.2 million remeasurement adjustment was made during the three months ended September 30, 2020. Please refer to Part I, Item I, Financial Statements, Note 7 of the notes to the unaudited condensed consolidated financial statements for further information regarding acquisition-related contingent consideration.

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Depreciation and Amortization

 

The $1.9 million decrease in depreciation and amortization expense for the three months ended September 30, 2021 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 $3.6 million for the three months ended September 30, 2021 from $2.5 million for the three months ended 2020. The $1.1 million increase was primarily due to a $1.0 million increase in expenses incurred in connection with the SRC’s efforts to identify, review and explore strategic alternatives for the Company; such expenses primarily consist of legal and financial consulting fees, as well as Board compensation.

 

Other Income (expense), Net

 

Other income (expense), net for three months ended September 30, 2021 reflected a net fair market value loss of $0.2 million on our warrant derivatives and a net fair market value gain of $0.3 million on our Misonix common stock. Other income (expense), net for the three months ended September 30, 2020 reflected a net fair market value gain of $0.1 million on our warrant derivatives and a net fair market value loss of $0.2 million on our Misonix common stock.

 

Income Tax Expense (Benefit)

 

During the three months ended September 30, 2021 and 2020, we recognized income tax expense of $0.5 million and income tax benefit of $0.5 million, respectively. The $1.0 million increase in income tax expense is a result of higher taxable income for the three months ended September 30, 2021 when compared to the same period of the prior year. 

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Comparison of the Nine Months Ended September 30, 2021 and 2020 (in millions)

 

   Nine Months Ended
September 30,
    
   2021   2020   Change 
Revenues  $41.2   $25.8   $15.4 
Provision for credit losses and impairment expenses       0.2    (0.2)
Interest expense   0.3    0.4    (0.1)
Pharmaceutical manufacturing, research and development expense   5.6    3.3    2.3 
Change in fair value of acquisition-related contingent consideration   (0.1)   2.0    (2.1)
Depreciation and amortization expense   3.3    9.6    (6.3)
General and administrative expense   9.8    8.2    1.6 
Other income (expense), net   2.2    (1.8)   4.0 
Income tax expense (benefit)   5.0    (0.2)   5.2 
Consolidated net income   19.6    0.6    19.0 

 

Revenues

 

We generated revenues of $41.2 million and $25.8 million for the nine months ended September 30, 2021 and 2020, respectively. The $15.4 million increase consisted primarily of a $6.9 million increase in interest and fees earned on our finance receivables and a $8.2 million increase in revenues from our Pharmaceutical Development segment. The increase in Pharmaceutical Development segment revenue included milestone revenue related to Enteris’ license agreement with Cara. The $6.9 million increase in revenue attributable to our Finance Receivables segment was the result of a $5.1 million net increase in royalty income and a $2.8 million increase in fees and interest earned on our finance receivables due to funding new and existing loans. The increase in revenue was partially offset by a $1.0 million decrease in interest and fees earned on finance receivables that were paid off or paid down since the third quarter of 2020.

 

Provision for Credit Losses and Impairment Expense

 

We did not recognize any credit loss provision or impairment expense during the nine months ended September 30, 2021. We recognized impairment expense of $0.2 million on our available-for-sale debt security during the nine months ended September 30, 2020.

 

Interest Expense

 

Interest expense consists of interest accrued on our revolving line of credit, unused line of credit and maintenance fees, as well as amortization of debt issuance costs. Interest expense for the nine months ended September 30, 2021 and 2020 was $0.3 million and $0.4 million, respectively.

 

Pharmaceutical Manufacturing, Research and Development Expense

 

Pharmaceutical manufacturing, research and development expense increased from $3.3 million for the nine months ended September 30, 2020 to $5.6 million for nine months ended September 30, 2021. The $2.3 million increase was primarily due to an increase in manufacturing materials for pipeline projects and clinical trials.

 

Change in Fair Value of Acquisition-Related Contingent Consideration

 

We recognized a $0.1 million change in fair value of acquisition-related contingent consideration during the nine months ended September 30, 2021, and a $2.0 million remeasurement adjustment was made during the three months ended September 30, 2020. Please refer to Part I, Item I, Financial Statements, Note 7 of the notes to the unaudited condensed consolidated financial statements for further information regarding acquisition-related contingent consideration.

 

Depreciation and Amortization

 

The $6.3 million decrease in depreciation and amortization expense for the nine months ended September 30, 2021 primarily consists of a decrease in amortization expense related to the intangible assets of Enteris. Amortization expense is aligned with the expected future cash flows of the intangible assets.

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General and Administrative

 

General and administrative expenses consist primarily of compensation, stock-based compensation and related costs for management, staff and Board, legal and audit expenses, and corporate governance expenses. General and administrative expenses increased to $9.8 million for the nine months ended September 30, 2021 from $8.2 million for the nine months ended September 30, 2020. The $1.6 million increase was primarily due to a $1.4 million increase in expenses incurred in connection with the SRC’s efforts to identify, review and explore strategic alternatives for the Company; such expenses primarily consist of legal and financial consulting fees, as well as Board compensation. The increase also included a $0.2 million increase in salaries and benefits expense, as well as a $0.3 million increase in overall office, insurance and rent expense. The increase was partially offset by a $0.2 million decrease in other professional fees.

 

Other Income (Expense), Net

 

Other income, net for nine months ended September 30, 2021 reflected a net fair market value gain of $0.7 million on our warrant derivatives and a net fair market value gain of $1.6 million on our Misonix common stock. Other expense, net for the nine months ended September 30, 2020 reflected a net fair market value loss of $1.2 million on our warrant derivatives and a net fair market value loss of $0.7 million on our Misonix common stock.

 

Income Tax Expense

 

During the nine months ended September 30, 2021 and 2020, we recognized income tax expense of $5.0 million and tax benefit of $0.2 million, respectively. The $5.2 million increase in income tax expense is a result of higher taxable income for the nine months ended September 30, 2021 when compared to the same period of the prior year.

 

Liquidity and Capital Resources 

As of September 30, 2021, we had $18.6 million in cash and cash equivalents, compared to $3.0 million in cash and cash equivalents as of December 31, 2020. The primary driver of the $15.6 million increase in our cash balance was $58.3 million of interest, fees, principal and royalty payments received on our finance receivables and a net $5.0 million of payments generated by our Pharmaceutical Development segment (the net $5.0 million includes a $10.0 million payment related to the completion of a milestone under the License Agreement less $6.1 million paid to the seller of Enteris, pursuant to the provisions of the merger agreement). The increase was partially offset by $19.8 million of investment funding, net of deferred fees and origination expenses; $16.0 million of accounts payable, payroll and benefits expense, including $3.2 million for Enteris’ internal pipeline projects; and $11.8 million of net borrowings and repayments on our credit facility.

 

Subsequent to September 30, 2021, we received $35.7 million of interest, fees and principal payments on our finance receivables, including $32.1 million for the payoff of two term loans (please refer to Part I. Financial Information, Item 1. Financial Statements, Note 11 of the notes to the unaudited condensed consolidated financial statements for further details). As of November 8, 2021, we had $56.8 million in cash and cash equivalents.

 

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 September 30, 2021, our finance receivables portfolio contains $196.1 million of finance receivables, $3.0 million of marketable investments, and $3.5 million related to our cost method investment. In the aggregate, we expect these assets to generate positive cash flows in 2021. However, the COVID-19 pandemic has created substantial uncertainty in the global markets and economy; therefore, we will continue to monitor the short and long-term impact this may have on our finance receivables portfolio. In addition, the majority of our finance receivables portfolio are debt instruments that carry floating interest rates with a LIBOR-based interest rate floor. Changes in interest rates, including LIBOR rates, may affect the interest income for debt instruments with floating rates. We believe we are well positioned to benefit should market interest rates rise in the future.

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We expect the Pharmaceutical Development segment to generate positive cash flow above its expenses from proceeds received under its license agreements and customer relationships; however, the timing of the receipt of payments under the license agreements is uncertain and dependent upon the success of our technology licensees’ pharmaceutical development candidates. Also, the COVID-19 pandemic has resulted in disruption and delays to pharmaceutical clinical trials in general and may impact the expected timing of our technology licensees’ ability to achieve milestones upon which we receive income pursuant to our license agreements.

 

Though we expect in the aggregate that the Company will generate positive cash flow in excess of our expenses, given the abrupt decline in global economic activity, and the uncertain recovery from such decline, caused by COVID-19, we cannot predict this with certainty.

 

We entered into a $20.0 million revolving credit facility in June 2018. The credit facility was amended on September 27, 2021 to extend the termination date to September 30, 2022 and to increase the credit facility commitment to $22.0 million. We continue to explore other options with respect to a new credit facility. As of September 30, 2021, approximately $22.0 million was available for borrowing under the credit facility.

 

Off-Balance Sheet Arrangements

 

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

 

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the partner company defaults, and the value of any existing collateral becomes worthless. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Please refer to Item 1. Financial Statements, Note 7 of the notes to the unaudited condensed consolidated financial statements.

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ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

During the nine months ended September 30, 2021, our cash and cash equivalents were deposited in accounts at well capitalized financial institutions. The fair value of our cash and cash equivalents at September 30, 2021 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 LIBOR 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.

During 2018, 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

 

We do not believe that inflation has had a significant impact on our revenues or operations.

 

ITEM 4.      CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting 

There have been no changes during the nine months ended September 30, 2021 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

ITEM 1.      LEGAL PROCEEDINGS 

We are involved in, or have been involved in, arbitrations or various other legal proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these claims and other proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on our results of operations, balance sheets and cash flows due to defense costs, and divert management resources. Currently, we are not involved in any arbitration and/or other legal proceeding that we expect to have a material effect on our business, financial condition, results of operations and cash flows.

 

ITEM 1A.    RISK FACTORS

Information regarding the Company’s risk factors appears in “Part I. – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 31, 2021. 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, 2020.

 

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

 

None. 

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

ITEM 5.      OTHER INFORMATION.

 

None.

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ITEM 6.       EXHIBITS

 

            Filing   Filed
Number    Exhibit Description    Form   Exhibit   Date   Herewith
                     
31.01   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               X
                     
31.02   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               X
                     
32.01   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*               X
                     
32.02   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*               X
                     
101.INS+   XBRL Instance               X
                     
101.SCH+   XBRL Taxonomy Extension Schema               X
                     
101.CAL+   XBRL Taxonomy Extension Calculation               X
                     
101.DEF+   XBRL Taxonomy Extension Definition               X
                     
101.LAB+   XBRL Taxonomy Extension Labels               X
                     
101.PRE+   XBRL Taxonomy Extension Presentation               X
                     

* These certifications accompany this Quarterly Report on Form 10-Q. They are not deemed “filed” with the Securities and Exchange Commission and are not to be incorporated by reference in any filing of SWK Holdings Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. 

 

+ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 12, 2021. 

  SWK Holdings Corporation
     
  By:  /s/ Winston L. Black
    Winston L. Black
    Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Charles M. Jacobson
    Charles M. Jacobson
    Chief Financial Officer
    (Principal Financial Officer)
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