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.
The Company’s strategy is to be a leading healthcare capital provider by offering sophisticated, customized financing
solutions to a broad range of life science companies, institutions and inventors. The Company is primarily focused on monetizing
cash flow streams derived from commercial-stage products and related intellectual property through royalty purchases and financings,
as well as through the creation of synthetic revenue interests in commercialized products. The Company has been deploying its
assets to earn interest, fees, and other income pursuant to this strategy, and the Company continues to identify and review financing
and similar opportunities on an ongoing basis. In addition, through the Company’s wholly-owned subsidiary, SWK Advisors
LLC, the Company provides non-discretionary investment advisory services to institutional clients in separately managed accounts
to similarly invest in life science finance. SWK Advisors LLC is registered as an investment advisor with the Texas State Securities
Board. The Company intends to fund transactions through its own working capital, as well as by building its asset management business
by raising additional third party capital to be invested alongside the Company’s capital.
The
Company fills a niche that it believes is underserved in the sub-$50 million transaction size. Since many of its competitors that
provide longer term, royalty-related financing options have much greater financial resources than the Company, they tend to not
focus on transaction sizes below $50 million as it is generally inefficient for them to do so. In addition, the Company does not
believe that a sufficient number of other companies offer similar types of long-term financing options to fill the demand of the
sub-$50 million market. As such, the Company believes it faces less competition from such longer term, royalty investors in transactions
that are less than $50 million.
The
Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an
important and substantial asset. The Company believes that the foregoing business strategies can create value for its
stockholders, and produce prospective taxable income (or the ability to generate capital gains) that might permit the Company
to utilize the NOLs. However, at this time, under current law, we do not anticipate that our life science business strategy
will generate sufficient income to permit us to utilize all of our NOLs prior to their respective expiration dates. As such,
it is possible that we might pursue additional strategies that we believe might result in our ability to utilize more of our
NOLs. The Company is unable to assure investors that it will find suitable financing opportunities or that it will be able to
utilize its existing NOLs.
As
of August 10, 2017, the Company and its partners have executed transactions with 26 different parties under its specialty
finance strategy, funding $371 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,
purchased royalties generated by sales of life science products and related intellectual property.
The
Company is headquartered in Dallas, Texas.
Basis
of Presentation and Principles of Consolidation
The
Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”). The unaudited condensed 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 (a) the Company, as the general partner or managing member, exercises effective control,
even though the Company’s ownership may be less than 50 percent, (b) the related governing agreements provide the
Company with broad powers, and (c) the other parties do not participate in the management of the entities and do not have the
substantial 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 unaudited condensed
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, 2017. 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, 2016, filed with the SEC on March 17, 2017.
Use
of Estimates
The
preparation of the Company’s unaudited condensed 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 unaudited
condensed 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, impairment of financing
receivables and long-lived assets, valuation of warrants, income taxes and contingencies, 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, 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 unaudited
condensed 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.
Recent
Accounting Pronouncements
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities.” This guidance changes how entities measure equity investments that do not result in consolidation and are
not accounted for under the equity method. Entities will be required to measure these investments at fair value at the end of
each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity
investments that do not have readily determinable fair values; however, the exception requires the entity to consider relevant
transactions that can be reasonably known to identify any observable price changes that would impact the fair value. This guidance
also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for annual periods
beginning after December 15, 2017 and is applicable to the Company in fiscal 2018. The Company has been evaluating the new guidance
and believes ASU 2016-01 will not have a material impact on its consolidated financial statements upon adoption in fiscal 2018.
In
March 2016, the FASB issued ASU No. 2016-07, “Equity Method and Joint Ventures (Topic 323).” This guidance simplifies
the accounting for equity method investments by eliminating the requirement in Topic 323 that requires an entity to retroactively
adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the
level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the
additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity
method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for
fiscal years and interim periods within those years beginning after December 15, 2016. ASU 2016-07 did not have a material impact
on the Company’s unaudited condensed consolidated financial statements upon adoption.
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity
to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires an entity to disclose
sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue
and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:
|
·
|
Contracts with
customers
– including revenue and impairments recognized, disaggregation of revenue and information about contract
balances and performance obligations (including the transaction price allocated to the remaining performance obligations.
|
|
·
|
Significant judgments
and changes in judgments
– determining the timing of satisfaction of performance obligations (over time or at a
point in time), and determining the transaction price and amounts allocated to performance obligations.
|
|
·
|
Certain assets
– assets recognized from the costs to obtain or fulfill a contract.
|
In
May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) — Narrow-Scope Improvements
and Practical Expedients,” which clarified guidance on assessing collectability, presenting sales tax, measuring noncash
consideration, and certain transition matters. The new guidance will be effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption would have been permitted for fiscal years beginning
after December 15, 2016. The Company has been evaluating the impact of ASU 2014-09 and related ASUs, and aside from enhanced disclosures
surrounding revenue recognized from contracts with customers, the Company does not believe they will have a material impact on
the Company’s consolidated financial statements. The Company currently intends to use the modified prospective approach
upon adoption.
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).” The amendments
of ASU 2016-09 were issued as part of the FASB’s simplification initiative focused on improving areas of GAAP for which
cost and complexity may be reduced while maintaining or improving the usefulness of information disclosed within the financial
statements. The amendments focused on simplification specifically with regard to share-based payment transactions, including income
tax consequences, classification of awards as equity or liabilities and classification on the statement of cash flows.
Effective
as of January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess
tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which
they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed
by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. The change was
applied on a modified retrospective basis; no prior periods were restated as a result of this change in accounting policy.
ASU
2016-09 also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the
associated tax benefit can be recognized as an increase in paid-in capital. Approximately $1.9 million of net operating losses
have been attributed to tax deduction for stock based compensation in excess of the related book expense. Under ASU 2016-09, these
previously unrecognized deferred tax assets were recognized on a modified retrospective basis as of January 1, 2017, the start
of the year in which the Company adopted ASU 2016-09. The net operating losses recognized as of January 1, 2017, as described
above, have been offset by a valuation allowance. As a result, there was no tax-related cumulative-effect to retained earnings.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The new 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 the new 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. The 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.
The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).
A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized
before the effective date. The Company is currently evaluating the new guidance but believes it is likely to incur more upfront
loan losses under the new credit loss model.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which amends ASC 230 to add or
clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued this
guidance with the intent of reducing diversity in practice with respect to classification of eight types of cash receipts and
payments: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero coupon bonds, (3) contingent consideration
payments after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement
of corporate-owned life insurance policies and bank-owned life insurance policies, (6) distributions received from equity method
investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application
of the predominance principle. For the Company, the guidance is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. Early adoption will be permitted for all entities and must be applied retrospectively
to all periods presented; however, it may be applied prospectively if retrospective application would be impracticable. The Company
believes ASU 2016-15 will not have a material impact on the Company’s consolidated financial statements upon adoption.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718),” to provide guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting
required by Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within
those annual periods, beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the
adoption date. The Company believes ASU 2017-09 will not have a material impact on the Company’s consolidated financial
statements upon adoption in fiscal 2018.
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 income per share for the following periods (in thousands, except per
share amounts):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to SWK Holdings Corporation Stockholders
|
|
$
|
3,409
|
|
|
$
|
(1,046
|
)
|
|
$
|
8,645
|
|
|
$
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
13,038
|
|
|
|
13,126
|
|
|
|
13,035
|
|
|
|
13,123
|
|
Effect of dilutive securities
|
|
|
4
|
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares
|
|
|
13,042
|
|
|
|
13,126
|
|
|
|
13,038
|
|
|
|
13,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share attributable to SWK Holdings Corporation Stockholders
|
|
$
|
0.26
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.66
|
|
|
$
|
0.16
|
|
Diluted income (loss) per share attributable to SWK Holdings Corporation Stockholders
|
|
$
|
0.26
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.66
|
|
|
$
|
0.16
|
|
For
the three months ended June 30, 2017 and 2016, outstanding stock options and warrants to purchase shares of common stock
in an aggregate of approximately 287,000 and 388,000, respectively, have been excluded from the calculation of diluted income
(loss) per share as all such securities were anti-dilutive. For the six months ended June 30, 2017 and 2016, outstanding
stock options and warrants to purchase shares of common stock in an aggregate of approximately 343,000, and 369,000, respectively,
have been excluded from the calculation of diluted income per share as all such securities were anti-dilutive.
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.
The
carrying value of finance receivables are as follows (in thousands):
Portfolio
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Term Loans
|
|
$
|
104,847
|
|
|
$
|
91,841
|
|
Royalty Purchases
|
|
|
36,022
|
|
|
|
36,184
|
|
Total before allowance for credit losses
|
|
|
140,869
|
|
|
|
128,025
|
|
Allowance for credit losses
|
|
|
(1,659
|
)
|
|
|
(1,659
|
)
|
Total carrying value
|
|
$
|
139,210
|
|
|
$
|
126,366
|
|
Credit Quality of Finance
Receivables
The
Company originates finance receivables to companies primarily in the life sciences sector. This concentration of credit exposes
the Company to a higher degree of risk associated with this sector.
On
a quarterly basis, the Company evaluates the carrying value of each finance receivable for impairment. A term loan is considered
to be impaired when, based on current information and events, it is determined that the Company will not be able to collect the
amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency
information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The Company would
generally place term loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain
and they are 90 days past due for interest or principal, unless the term loan is both well-secured and in the process of collection.
When placed on nonaccrual, the Company would reverse any accrued unpaid interest receivable against interest income and amortization
of any net deferred fees is suspended. Generally, the Company would return a term loan to accrual status when all delinquent interest
and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is
no longer doubtful. In certain circumstances, the Company may place a finance receivable on nonaccrual status but conclude it
is not impaired. The Company may retain independent third-party valuations on such nonaccrual positions to support impairment
decisions.
Receivables
associated with royalty stream purchases would be considered to be impaired when it is probable that the Company will be unable
to collect the book value of the remaining investment based upon adverse changes in the estimated underlying royalty stream.
When
the Company identifies a finance receivable as impaired, it measures the impairment based on the present value of expected future
cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less
estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the
Company would recognize impairment with a charge to the allowance for credit losses. When the value of the impaired receivable
is calculated by discounting expected cash flows, interest income would be recognized using the receivable’s effective interest
rate over the remaining life of the receivable.
The
Company individually develops the allowance for credit losses for any identified impaired loans. In developing the allowance for
credit losses, the Company considers, among other things, the following credit quality indicators:
|
§
|
business characteristics
and financial conditions of obligors;
|
|
§
|
current economic conditions
and trends;
|
|
§
|
actual charge-off
experience;
|
|
§
|
current delinquency
levels;
|
|
§
|
value of underlying
collateral and guarantees;
|
|
§
|
regulatory environment;
and
|
|
§
|
any other relevant
factors predicting investment recovery.
|
The following
table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in thousands):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Nonaccrual
|
|
|
Performing
|
|
|
Total
|
|
|
Nonaccrual
|
|
|
Performing
|
|
|
Total
|
|
Term Loans
|
|
$
|
19,040
|
|
|
|
85,807
|
|
|
$
|
104,847
|
|
|
$
|
19,040
|
|
|
$
|
72,801
|
|
|
$
|
91,841
|
|
Royalty Purchases
|
|
|
—
|
|
|
|
34,363
|
|
|
|
34,363
|
|
|
|
—
|
|
|
|
34,525
|
|
|
|
34,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value
|
|
$
|
19,040
|
|
|
|
120,170
|
|
|
$
|
139,210
|
|
|
$
|
19,040
|
|
|
$
|
107,326
|
|
|
$
|
126,366
|
|
As
of June 30, 2017 and December 31, 2016, the Company had two term loans associated with two portfolio companies in nonaccrual status
with a carrying value, net of credit loss allowance, of $19.0 million. No cash on nonaccrual loans was collected during the six
months ended June 30, 2017. Of the two nonaccrual term loans as of June 30, 2017, neither are deemed to be impaired. (Please
see
ABT Molecular Imaging, Inc.
and
B&D Dental
below for further details regarding nonaccrual term loans.)
ABT Molecular Imaging, Inc. (“ABT”)
On
October 10, 2014, the Company entered into a credit agreement pursuant to which the Company provided ABT a second lien term loan
in the principal amount of $10.0 million. The loan matures on October 8, 2021. The synthetic royalty payment due to the Company
on December 15, 2015 was blocked by ABT’s first lien lender pursuant to the terms of the intercreditor agreement by and
between the Company and the first lien lender as a result of a forbearance agreement entered into between ABT and the first lien
lender. Per the terms of the forbearance agreement, the first lien lender deferred principal payments until maturity of the first
lien in March 2016 and ABT raised additional equity capital.
In
February 2016, ABT violated the terms of the forbearance agreement with the first lien lender. In order to control the work out
of the default under the first lien loan and prevent the equity sponsors from taking control of the first lien term loan, the
Company purchased from an unrelated party the first lien term loan at par for a purchase price of $0.7 million. Since then the
equity sponsors funded cash shortfalls into the second quarter of 2016. The Company continues to work with ABT’s equity
sponsors to resolve the existing defaults including raising external third-party capital and pursuing strategic opportunities.
Since
June 7, 2016, the Company entered into additional amendments to the first lien term loan, which provided for an additional $5.0
million of liquidity under the first lien credit agreement. ABT has drawn down $5.0 million as of August 10, 2017. The
Company is currently working with ABT and its advisors to complete a strategic transaction; the outcome of such process is uncertain.
The
collateral for the loan has been individually reviewed, and the Company believes that the fair market value of the loan, less
costs to sell, was greater than the recorded investments in the loans as of June 30, 2017. Based on the impairment analysis, the
Company has determined that recording a provision for credit losses as of June 30, 2017 is not required. The Company considered
several factors in this determination, including an independent third-party valuation and developments in ABT’s business
and industry.
B&D Dental (“B&D”)
On
December 10, 2013, the Company entered into a five-year credit agreement to provide B&D a senior secured term loan with a
principal amount of $6.0 million funded upon close, net of an arrangement fee of $60 thousand. Subsequently, the terms of the
loan have been amended, and the Company has funded additional amounts to B&D. As of June 30, 2017, the total amount funded
was $8.1 million.
B&D
is currently in default under the terms of the credit agreement, and as a result, the Company classified the loan to nonaccrual
status as of September 30, 2015. During the first quarter of 2017, the Company executed an additional amendment to the loan to
advance an additional $0.1 million to finance the purchase of certain equipment to support its manufacturing operations and to
protect the value of the collateral. The Company expects B&D to pay interest and principal on the equipment purchase advance
and continues to work with B&D to improve its operational performance and pursue strategic alternatives. The Company believes
its collateral position is greater than the unpaid balance; thus, accrued interest has not been reversed nor has an allowance
been recorded as of June 30, 2017. The Company considered several factors in this determination, including the valuation
of B&D and developments in B&D’s business and industry.
Note 4. Marketable
Investments
Investment
in securities at June 30, 2017 and December 31, 2016 consist of the following (in thousands):
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Corporate debt securities
|
|
$
|
1,510
|
|
|
$
|
1,564
|
|
Equity securities
|
|
|
2,667
|
|
|
|
1,057
|
|
Total
|
|
$
|
4,177
|
|
|
$
|
2,621
|
|
The
amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale
securities as of June 30, 2017 and December 31, 2016, are as follows (in thousands):
June 30, 2017
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair Value
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
1,510
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,510
|
|
Equity securities
|
|
|
1,043
|
|
|
|
1,718
|
|
|
|
(94
|
)
|
|
|
2,667
|
|
|
|
$
|
2,553
|
|
|
$
|
1,718
|
|
|
$
|
(94
|
)
|
|
$
|
4,177
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair Value
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
1,564
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,564
|
|
Equity securities
|
|
|
1,144
|
|
|
|
—
|
|
|
|
(87
|
)
|
|
|
1,057
|
|
|
|
$
|
2,708
|
|
|
$
|
—
|
|
|
$
|
(87
|
)
|
|
$
|
2,621
|
|
Equity
Securities
The
Company’s equity securities include 661,076 shares of Cancer Genetics common stock and 77,922 shares of Hooper Holmes common
stock. During the six months ended June 30, 2017, the Company sold 75,000 shares of Cancer Genetics common stock, which resulted
in a realized gain of $0.2 million. As of June 30, 2017, the Cancer Genetics and Hooper Holmes equity securities are reflected
at fair value of $2.6 million and $0.1 million, respectively, as available-for-sale securities.
Debt Securities
On
July 9, 2013, the Company entered into a note purchase agreement to purchase, at par, $3.0 million of a total of $100.0 million
aggregate principal amount of senior secured notes due in November 2026. The agreement allows the first interest payment
date to include paid-in-kind notes for any cash shortfall, of which the Company received $0.1 million on November 15, 2013. The
notes are secured only by certain royalty and milestone payments associated with the sales of pharmaceutical products.
The
senior secured notes have been placed on non-accrual status as of June 30, 2016. Total cash collected during the six months ended
June 30, 2017 was $54,000, which was credited to the notes’ carrying value. As of June 30, 2017, the notes are reflected
at their estimated fair value of $1.5 million and classified as available-for-sale securities.
Note 5. Variable
Interest Entities
The
Company consolidates the activities of VIEs of which it is the primary beneficiary. The primary beneficiary of a VIE is the variable
interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that
most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive
benefits from the VIE that could potentially be significant to the VIE. In order to determine whether the Company owns a variable
interest in a VIE, the Company performs qualitative analysis of the entity’s design, organizational structure, primary decision
makers and relevant agreements.
Consolidated VIE
SWK
HP Holdings LP (“SWK HP”) was formed in December 2012 to acquire a limited partnership interest in Holmdel Pharmaceuticals
LP (“Holmdel”). Holmdel acquired the U.S. marketing authorization rights to a beta blocker pharmaceutical
product indicated for the treatment of hypertension for a total purchase price of $13.0 million. The Company, through its wholly
owned subsidiary SWK Holdings GP LLC (“SWK Holdings GP”) acquired a direct general partnership interest in SWK HP,
which in turn acquired a limited partnership interest in Holmdel. The total investment in SWK HP of $13.0 million included $6.0
million provided by SWK Holdings GP and $7.0 million provided by non-controlling interests. Subject to customary limited
partner protections afforded the investors by the terms of the limited partnership agreement, the Company maintains voting and
managerial control of SWK HP and therefore includes it in its consolidated financial statements.
SWK
HP had significant influence over the decisions made by Holmdel. SWK HP received quarterly distributions of cash flow generated
by InnoPran XL according to a tiered scale that was subject to certain cash on cash returns received by SWK HP. SWK HP achieved
the 2x cash on cash return threshold with the November 2016 distribution as such its economic ownership in Holmdel approximated
49 percent.
On
February 23, 2017, Holmdel sold the U.S. marketing authorization rights to InnoPran XL to ANI Pharmaceuticals, Inc. SWK Holdings
GP received net proceeds from the transaction of approximately $8.0 million. The approximate $8.0 million of proceeds includes
a 5 percent incentive fee earned from SWK HP, and SWK Holding GP’s share of the sale proceeds. As part of the transaction,
SWK HP and all involved parties executed mutual releases and terminations of all license and supply agreements. SWK Holdings GP
received an additional distribution regarding InnoPran XL sales covering the period from January 1, 2017 until the sale and does
not anticipate receiving any further material distributions in the future.
Unconsolidated
VIEs
For
the three and six months ended June 30, 2017, the Company recognized $0.3 million and $10.5 million, respectively, of equity method
gains. The amount of equity method gains attributable to the non-controlling interest in SWK HP were $0.2 million and $5.2 million,
respectively. For the three and six months ended June 30, 2016, the Company recognized $2.1 million and $3.8 million, respectively,
of equity method gains. The amount of equity method gains attributable to the non-controlling interest in SWK HP were $1.1 million
and $1.9 million, respectively.
In
addition, SWK HP received cash distributions totaling $17.5 million during the six months ended June 30, 2017, of which $9.0 million
was subsequently paid to holders of the non-controlling interests in SWK HP. Changes in the carrying amount of the Company’s
investment in Holmdel for the six months ended June 30, 2017, are as follows (in thousands):
Balance at December 31, 2016
|
|
$
|
6,985
|
|
Add: Income from investments in unconsolidated entities
|
|
|
10,539
|
|
Less: Cash distribution from investments in unconsolidated entities
|
|
|
(17,524
|
)
|
Balance at June 30, 2017
|
|
$
|
—
|
|
Note 6. Related
Party Transactions
On
September 6, 2013, in connection with entering into a credit facility, the Company issued warrants to an affiliate of a stockholder,
Carlson Capital, L.P. (the “Stockholder”), for 100 thousand shares of the Company’s common stock at a strike
price of $13.88. The warrants have a price anti-dilution mechanism that was triggered by the price that shares were sold by the
Company in a rights offering in 2014, and as a result, the strike price of the warrants was reduced to $13.48.
Due
to certain provisions within the warrant agreement, the warrants meet the definition of a derivative and do not qualify for a
scope exception, as it is not considered indexed to the Company’s stock. As such, the warrants are reflected as a warrant
liability in the unaudited condensed consolidated balance sheets. The Company recorded a nominal loss for the three and six months
ended June 30, 2017. The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Dividend rate
|
|
|
—
|
|
|
|
—
|
|
Risk-free rate
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
Expected life (years)
|
|
|
3.2
|
|
|
|
3.7
|
|
Expected volatility
|
|
|
33.1
|
%
|
|
|
34.1
|
%
|
The
changes on the value of the warrant liability during the six months ended June 30, 2017 were as follows (in thousands):
Fair value – December 31, 2016
|
|
$
|
189
|
|
Issuances
|
|
|
—
|
|
Changes in fair value
|
|
|
12
|
|
Fair value – June 30, 2017
|
|
$
|
201
|
|
Note
7. Stockholders’ Equity
Stock
Compensation Plans
During
the six months ended June 30, 2017 and 2016, the Board approved compensation for Board services by granting 11,589 and 12,155
shares, respectively, of common stock as compensation for the non-employee directors. During each of the six months ended June
30, 2017 and 2016, the Company recorded approximately $0.1 million in Board compensation expense relating to the quarterly grants.
The aggregate stock-based compensation expense, including the quarterly Board grants, recognized by the Company for each of the
six months ended June 30, 2017 and 2016 was $0.2 million.
Non-controlling
Interests
As
discussed in Note 5, SWK HP had a limited partnership interest in Holmdel. Changes in the carrying amount of the non-controlling
interest in the unaudited condensed consolidated balance sheet for the six months ended June 30, 2017, is as follows (in thousands):
Balance at December 31, 2016
|
|
$
|
3,756
|
|
Add: Income attributable to non-controlling interests
|
|
|
5,204
|
|
Less: Cash distribution to non-controlling interests
|
|
|
(8,960
|
)
|
Balance at June 30, 2017
|
|
$
|
—
|
|
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 six months ended June 30, 2017.
The
fair value of equity method investments is not readily available nor has the Company estimated the fair value of these investments
and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have
a significant adverse effect on the carrying value of any of its equity method investments included in the unaudited condensed
consolidated balance sheets as of June 30, 2017 and December 31, 2016.
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.
Securities
available for sale
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.
Marketable
Investments and Warrants
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 June 30, 2017 (in
thousands):
|
|
Total
Carrying
Value in
Consolidated
Balance
Sheet
|
|
|
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
|
|
$
|
841
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
841
|
|
Marketable investments
|
|
|
4,177
|
|
|
|
2,667
|
|
|
|
—
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
201
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
201
|
|
The
following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31,
2016 (in thousands):
|
|
Total
Carrying
Value in
Consolidated
Balance
Sheet
|
|
|
Quoted prices
in active
markets for
identical
assets
or liabilities
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant assets
|
|
$
|
1,013
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,013
|
|
Marketable investments
|
|
|
2,621
|
|
|
|
1,057
|
|
|
|
—
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189
|
|
The
changes on the value of the warrant assets during the six months ended June 30, 2017 were as follows (in thousands):
Fair value – December 31, 2016
|
|
$
|
1,013
|
|
Issued
|
|
|
635
|
|
Canceled
|
|
|
(205
|
)
|
Change in fair value
|
|
|
(602
|
)
|
Fair value – June 30, 2017
|
|
$
|
841
|
|
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:
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Dividend rate range
|
|
|
—
|
|
|
|
—
|
|
Risk-free rate range
|
|
|
1.9% to 2.2
|
%
|
|
|
1.9% to 2.3
|
%
|
Expected life (years) range
|
|
|
2.3 to 7.0
|
|
|
|
3.6 to 5.3
|
|
Expected volatility range
|
|
|
88.3% to 92.9
|
%
|
|
|
87.4% to 94.1
|
%
|
The following
table presents the financial assets measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016 (in
thousands):
|
|
Total
Carrying
Value in
Consolidated
Balance
Sheet
|
|
|
Quoted prices
in active
markets for
identical
assets
or liabilities
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,092
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,338
|
|
There
were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016.
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 unconsolidated entity.
As
of June 30, 2017 (in thousands):
|
|
Carry Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,435
|
|
|
$
|
36,435
|
|
|
$
|
36,435
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables
|
|
|
139,210
|
|
|
|
139,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
139,210
|
|
Marketable investments
|
|
|
4,177
|
|
|
|
4,177
|
|
|
|
2,667
|
|
|
|
—
|
|
|
|
1,510
|
|
Warrant assets
|
|
|
841
|
|
|
|
841
|
|
|
|
—
|
|
|
|
—
|
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
201
|
|
|
$
|
201
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
201
|
|
As
of December 31, 2016 (in thousands):
|
|
Carry Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,182
|
|
|
$
|
32,182
|
|
|
$
|
32,182
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables
|
|
|
126,366
|
|
|
|
126,366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126,366
|
|
Marketable investments
|
|
|
2, 621
|
|
|
|
2,621
|
|
|
|
1,057
|
|
|
|
—
|
|
|
|
1,564
|
|
Warrant assets
|
|
|
1,013
|
|
|
|
1,013
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
189
|
|
|
$
|
189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189
|
|
Note 9. Subsequent Events
Imprimis Pharmaceuticals, Inc.
On
July 19, 2017, the Company entered into a credit agreement pursuant to which the Company provided to Imprimis Pharmaceuticals,
Inc. (“Imprimis”) a term loan in the maximum principal amount of $16.0 million. The Company funded $9.7 million of
the transaction and syndicated the balance to other parties. The loan matures on July 19, 2022, or if certain revenue requirements
are not met, July 19, 2021.
The
loan bears interest at the greater of (a) three-month LIBOR and (b) 1.5 percent, plus a margin of 10.5 percent, payable in cash,
quarterly in arrears, beginning on August 14, 2017.
In
connection with the loan, the Company also received a warrant to purchase 252,467 shares of Imprimis common stock, with a strike
price of $3.08.
CeloNova
BioSciences, Inc.
On
July 31, 2017, the Company entered into a credit agreement pursuant to which the Company provided to CeloNova BioSciences, Inc.
(“CeloNova”) a term loan in the maximum principal amount of $25.0 million. $15 million of the term loan was funded
at closing, of which the Company funded $7.5 million and a partner funded the balance. CeloNova can draw the second $10 million
tranche during the 15-month period post-closing upon hitting certain capital raising and revenue performance metrics; SWK is obligated
to fund $5 million of the second tranche. The term loan matures on July 31, 2021.
The
loan bears interest at the greater of (a) three-month LIBOR and (b) 2.0 percent, plus a margin of 8.5 percent, payable in cash,
monthly in arrears, plus a monthly accrual of principal of 2.5 percent per annum, beginning on September 1, 2017.
In
connection with the loan, at closing the Company received a 10-year warrant to purchase up to 0.625 percent of CeloNova common
stock, with a strike price of $0.01. The number of shares issuable to the Company increases to 1.0 percent of CeloNova common
stock upon SWK advancing of the second tranche of the term loan. The value of the warrant is subject to reduction in certain circumstances.
Opiant
Pharmaceuticals, Inc.
As
a result of the net sales of Narcan® achieving $25 million in two consecutive quarters as outlined in the royalty
purchase agreement, the Company funded the contingent portion of the purchase price of $3.75 million to
Opiant Pharmaceuticals, Inc. on August 8, 2017.
Hooper Holmes, Inc.
On August 8, 2017,
the Company extended an additional $2.0 million term loan (the “August 2017 Term Loan”) to the existing credit facility
with Hooper Holmes. The August 2017 Term Loan will bear interest at the same rate as the existing credit facility and is due on
February 1, 2018. The August 2017 Term Loan carries a 7 percent exit fee if it is repaid by November 30, 2017, which increases
to 14 percent if repaid thereafter.
In connection with
the August 2017 Term Loan, the Company also received a warrant to purchase 450,000 shares of Hooper Holmes common stock, with
a strike price of $0.80.