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, non-traditional debt and/or 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 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. 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.
As
of May 10, 2018, the Company and its partners have executed transactions with 28 different parties under its specialty finance
strategy, funding an aggregate $405 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.
The
Company is headquartered in Dallas, Texas.
Basis
of Presentation and Principles of Consolidation
The
Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the U.S. (“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, 2018. 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, 2017, filed with the SEC on March 29, 2018.
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, impairment of financing receivables and long-lived assets,
valuation of warrants, 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, 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.
Recent Accounting Pronouncements
In
January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 was further amended in February 2018
by ASU 2018-03, “Technical Corrections and Improvements to Financial instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities,” and in March 2018 by ASU 2018-04, “Investments - Debt
Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No. 117” and SEC Release No. 33-9273 (SEC Update) to clarify certain guidance for the recognition, measurement, presentation
and disclosure 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. Under prior GAAP, changes in fair value of available-for-sale equity securities were recorded in other comprehensive
income. The Company adopted ASU 2016-01 as of January 1, 2018. As of that date, the Company reclassified the accumulated net unrealized
appreciation related to our investments in equity securities as of December 31, 2017 (approximately $0.2 million) from accumulated
other comprehensive income to retained earnings and does not expect the adoption of ASU 2016-01 to have a material impact on the
Company’s future reported net earnings.
Between
May 2014 and May 2016, the FASB issued three ASUs changing the requirements for recognizing and reporting revenue (together, herein
referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”),
(ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) and
(iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2014-09 provides guidance
for revenue recognition 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. ASU 2016-08 is intended to improve the operability
and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical
expedients and improvements on the previously narrow scope of ASU 2014-09.
In
August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
(“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods
within, beginning after December 15, 2017. All subsequent ASUs related to ASU 2014-09, including ASU 2016-08 and ASU 2016-12,
assumed the deferred effective date enforced by ASU 2015-14. A reporting entity may apply the amendments in the Revenue ASUs using
either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal
year of adoption or full retrospective approach.
The
Revenue ASUs became effective for the Company on January 1, 2018. The Company has been evaluating the new guidance and believes
the Revenue ASUs will not have a material impact on its consolidated financial statements upon adoption since the primary source
of revenue for the Company is generated through financing arrangements, which are excluded from the Revenue ASUs.
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 losses on its portfolio under the new CECL model.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)” (“ASU 2016-15”), 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. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15
did not have a material impact on the Company’s consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718)” (“ASU 2017-09”),
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 adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a
material impact on the Company’s consolidated financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); and Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features,
and (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” This guidance addresses the complexity
of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked
instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity
offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants
and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion
option. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the new guidance to determine
the impact on its consolidated financial statements upon adoption in fiscal 2019.
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
|
|
|
|
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income attributable to SWK Holdings Corporation stockholders
|
|
$
|
3,644
|
|
|
$
|
5,236
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
13,053
|
|
|
|
13,144
|
|
Effect
of dilutive securities
|
|
|
4
|
|
|
|
3
|
|
Weighted-average
diluted shares
|
|
|
13,057
|
|
|
|
13,147
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share attributable to SWK Holdings Corporation stockholders
|
|
$
|
0.28
|
|
|
$
|
0.40
|
|
Diluted
income per share attributable to SWK Holdings Corporation stockholders
|
|
$
|
0.28
|
|
|
$
|
0.40
|
|
For
the three months ended March 31, 2018 and 2017, outstanding stock options and warrants to purchase shares of common stock
in an aggregate of approximately 286,000 and 399,000, 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):
|
|
March
31,
|
|
|
December
31,
|
|
Portfolio
|
|
2018
|
|
|
2017
|
|
Term loans
|
|
$
|
147,715
|
|
|
$
|
118,533
|
|
Royalty
purchases
|
|
|
20,966
|
|
|
|
35,121
|
|
Total
before allowance for credit losses
|
|
|
168,681
|
|
|
|
153,654
|
|
Allowance
for credit losses
|
|
|
(2,838
|
)
|
|
|
(1,659
|
)
|
Total
carrying value
|
|
$
|
165,843
|
|
|
$
|
151,995
|
|
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):
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Nonaccrual
|
|
|
Performing
|
|
|
Total
|
|
|
Nonaccrual
|
|
|
Performing
|
|
|
Total
|
|
Term
loans
|
|
$
|
18,919
|
|
|
$
|
128,796
|
|
|
$
|
147,715
|
|
|
$
|
11,402
|
|
|
$
|
107,131
|
|
|
$
|
118,533
|
|
Royalty
purchases, net of credit loss allowance
|
|
|
—
|
|
|
|
18,128
|
|
|
|
18,128
|
|
|
|
—
|
|
|
|
33,462
|
|
|
|
33,462
|
|
Total
carrying value
|
|
$
|
18,919
|
|
|
|
146,924
|
|
|
$
|
165,843
|
|
|
$
|
11,402
|
|
|
$
|
140,593
|
|
|
$
|
151,995
|
|
As
of March 31, 2018, the Company had three term loans associated with three portfolio companies in nonaccrual status with
a carrying value, net of credit loss allowance, of $18.9 million. As of December 31, 2017, the Company had two term loans
associated with two portfolio companies in nonaccrual status with a carrying value, net of credit loss allowance, of $11.4
million. The Company collected $0.6 million on one nonaccrual loan during the three months ended March 31, 2018. No cash
on nonaccrual loans was collected during the year ended December 31, 2017. Of the three nonaccrual term loans as of
March 31, 2018, only one loan is deemed to be impaired. (Please see
ABT Molecular Imaging, Inc., B&D Dental
Corporation,
and Hooper Holmes, Inc.
below for further details regarding nonaccrual term loans.)
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. Under 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 workout
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. ABT is currently evaluating strategic options.
Since
2016, the Company has entered into additional amendments to the first lien term loan to provide for an additional $8.3 million
of liquidity under the first lien credit agreement.
The
Company recorded an impairment loss of $7.6 million as of December 31, 2017. The collateral for the loan has been individually
reviewed, and the Company believes that its current collateral position is greater than the recorded investment in the loan as
of March 31, 2018. 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 Corporation (“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 $60,000. Subsequently, the terms of the loan
have been amended, and the Company has funded additional amounts to B&D. As of March 31, 2018, the total amount funded
was $8.1 million. B&D is currently evaluating strategic options.
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 and fourth quarters of 2016, the Company executed two additional amendments
to the loan to advance an additional $0.5 million in order to directly pay critical vendors and protect the value of the collateral.
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 March 31, 2018. The Company considered several factors in this determination, including
an independent third-party valuation and developments in B&D’s business and industry.
Hooper Holmes, Inc. (“Hooper”)
On
May 12, 2017, the Company provided a $6.5 million term loan to Hooper to support its merger with Provant Health Solutions, LLC.
On August 8, 2017, the Company provided an additional $2.0 million term loan with terms similar to the original term loan. The
$2.0 million August term loan was scheduled to mature on February 1, 2018. In late January, Hooper informed the Company
of tight liquidity and that it would be strained if it repaid the full $2.0 million; thus, the Company agreed to extend the maturity
for twelve weeks to April 30, 2018 in exchange for a partial repayment of $0.3 million on February 1, 2018 and an additional $0.3
million on March 15, 2018. However, in mid- March, Hooper informed the Company that it would be unable to repay the $0.3 million
that was due on March 15, 2018. The Company is currently working with Hooper on strategic options, including requiring Hooper
to retain financial advisors to evaluate strategic options. The Company has placed Hooper
on nonaccrual but believes its collateral position is greater than the unpaid balance; thus, an allowance has not been recorded
as of March 31, 2018.
Royalty
Purchases
Cambia®
On
July 31, 2014, the Company purchased a 25 percent royalty on sales of Cambia® from royalty holder, APR Applied Pharma Research
S.A. (“APR”), for $4.0 million. On December 2, 2015, the Company purchased a second 25 percent royalty on sales of Cambia®
for $4.5 million. In the U.S., Cambia® is marketed by DepoMed, Inc. (“DepoMed”) while the product is marketed by
Aralez Pharmaceuticals, Inc. As disclosed by DepoMed, Cambia® prescription trends decelerated in 2017, and while they have
begun to stabilize, they are not growing in line with the Company’s original forecast. During the three months ended March 31,
2018, the Company reduced its expectations for future royalty receipts and recognized an allowance for credit loss on the royalty
purchase of $1.2 million.
Note 4. Marketable
Investments
Investments
in marketable investments at March 31, 2018 and December 31, 2017 consist of the following (in thousands):
|
|
March
31,
2018
|
|
|
December
31,
2017
|
|
Corporate
debt securities
|
|
$
|
581
|
|
|
$
|
600
|
|
Equity
securities
|
|
|
1,132
|
|
|
|
1,256
|
|
Total
|
|
$
|
1,713
|
|
|
$
|
1,856
|
|
The
amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale
debt securities as of March 31, 2018 and December 31, 2017, are as follows (in thousands):
March
31, 2018
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
Corporate
debt securities
|
|
$
|
581
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
581
|
|
Total
|
|
$
|
581
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
581
|
|
December
31, 2017
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
Corporate
debt securities
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
600
|
|
Total
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
600
|
|
The
following table presents the proceeds from sale of equity securities, realized gain on sale of equity securities, and
unrealized net loss on equity securities as prescribed by ASC 321, “Investment - Equity Securities.” ASU 2016-01,
“Recognition and Measurement of Financial Assets and Financial Liabilities,” was adopted on January 1, 2018, at
which time a cumulative effect adjustment of $213,000 was recorded to reclassify the amount of accumulated unrealized gains
related to equity securities from accumulated other comprehensive income to retained earnings.
(in
thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Proceeds
from sale of equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
Realized
gain on sale of equity securities
|
|
|
—
|
|
|
|
243
|
|
Unrealized
net loss on equity securities reflected in the Consolidated Statement of Operations
|
|
|
(124
|
)
|
|
|
—
|
|
Securities
with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous
loss position, as of March 31, 2018 and December 31, 2017 were as follows (in thousands):
March
31, 2018
|
|
Less
than Twelve Months
|
|
|
Twelve
Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Equity
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
41
|
|
|
|
(72
|
)
|
|
|
41
|
|
|
|
(72
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41
|
|
|
$
|
(72
|
)
|
|
$
|
41
|
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
Less
than Twelve Months
|
|
|
Twelve
Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Equity
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
|
|
(117
|
)
|
|
|
33
|
|
|
|
(117
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
(117
|
)
|
|
$
|
33
|
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Securities
The
Company’s equity securities include 661,076 shares of Cancer Genetics common stock and 77,922 shares of Hooper common stock.
During the three months ended March 31, 2017, the Company sold 75,000 shares of Cancer Genetics common stock, which resulted
in a realized gain of $0.2 million. As of March 31, 2018, the Cancer Genetics and Hooper equity securities are reflected
at fair value of $1.1 million and $41,000 respectively.
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 three months
ended March 31, 2018 was $19,500, which was credited to the notes’ carrying value. As of March 31, 2018, the notes
are reflected at their estimated fair value of $0.6 million.
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 maintained voting and
managerial control of SWK HP and therefore included 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 Holdings 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 through the date of sale
and has not received any further material distributions.
Unconsolidated VIE
For
the three months ended March 31, 2018, the Company did not recognize any income related to this entity accounted for under the
equity method, nor did the Company receive any cash distributions.
For
the three months ended March 31, 2017, the Company recognized $10.2 million of equity method gains, of which $5.0 million was
attributable to the non-controlling interest in SWK HP. In addition, SWK HP received cash distributions totaling $17.2 million
during the three months ended March 31, 2017, of which $8.8 million was subsequently paid to holders of the non-controlling interests
in SWK HP. There has been no change in the carrying amount of the Company’s investment in Holmdel since December 31, 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 100,000 shares of the Company’s common stock at a strike price
of $13.88 per share. 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 per share.
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 consolidated balance sheets. The Company recorded a nominal gain for the three months ended March 31, 2018.
The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions:
|
|
March
31,
2018
|
|
|
December
31,
2017
|
|
Dividend rate
|
|
|
—
|
|
|
|
—
|
|
Risk-free rate
|
|
|
2.3
|
%
|
|
|
2.0
|
%
|
Expected life (years)
|
|
|
2.4
|
|
|
|
2.7
|
|
Expected volatility
|
|
|
19.4
|
%
|
|
|
21.9
|
%
|
The
changes on the value of the warrant liability during the three months ended March 31, 2018 were as follows (in thousands):
Fair value – December
31, 2017
|
|
$
|
91
|
|
Issuances
|
|
|
—
|
|
Changes
in fair value
|
|
|
(26
|
)
|
Fair value –
March 31, 2018
|
|
$
|
65
|
|
Note
7. Stockholders’ Equity
Stock
Compensation Plans
During
the three months ended March 31, 2018 and 2017, the Board approved compensation for Board services by granting 5,768 and
5,928 shares, respectively, of common stock as compensation for the non-employee directors. During both the three months ended
March 31, 2018 and 2017, the Company recorded approximately $62,000 in Board compensation expense. The aggregate stock-based
compensation expense, including the quarterly Board grants, recognized by the Company for both of the three months ended March 31,
2018 and 2017 was $0.1 million.
Non-controlling
Interests
As
discussed in Note 5, SWK HP had a limited partnership interest in Holmdel. There has been no change to the carrying amount of
the non-controlling interest since December 31, 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 three months ended March 31, 2018.
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.
Equity
Securities
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 March 31, 2018
(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
|
|
$
|
1,519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,519
|
|
Marketable
investments
|
|
|
1,713
|
|
|
|
1,132
|
|
|
|
—
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65
|
|
The following
table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 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
|
|
$
|
987
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
987
|
|
Marketable
investments
|
|
|
1,856
|
|
|
|
1,256
|
|
|
|
—
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91
|
|
The
changes on the value of the warrant assets during the three months ended March 31, 2018 were as follows (in thousands):
Fair value – December
31, 2017
|
|
$
|
987
|
|
Issued
|
|
|
258
|
|
Canceled
|
|
|
—
|
|
Change
in fair value
|
|
|
274
|
|
Fair value –
March 31, 2018
|
|
$
|
1,519
|
|
The
Company holds warrants issued to the Company in conjunction with certain term loan investments. These warrants meet the definition
of a derivative and are included in the unaudited condensed consolidated balance sheets. The fair values for warrants outstanding,
which do not have a readily determinable value, are measured using the Black-Scholes option pricing model. The following ranges
of assumptions were used in the models to determine fair value:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Dividend
rate range
|
|
|
—
|
|
|
|
—
|
|
Risk-free rate
range
|
|
|
2.3%
to 2.7%
|
|
|
|
2.0%
to 2.3%
|
|
Expected life
(years) range
|
|
|
2.4
to 7.0
|
|
|
|
2.6
to 6.6
|
|
Expected volatility
range
|
|
|
55.6%
to 94.9%
|
|
|
|
72.5%
to 95.7%
|
|
The
following table presents the financial assets measured at fair value on a nonrecurring basis as of March 31, 2018 and December 31,
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)
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
12,574
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,574
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,087
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,087
|
|
There
were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2018 and December 31, 2017.
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 March 31, 2018 (in thousands):
|
|
Carry
Value
|
|
|
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,451
|
|
|
$
|
21,451
|
|
|
$
|
21,451
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance
receivables
|
|
|
165,843
|
|
|
|
165,843
|
|
|
|
—
|
|
|
|
—
|
|
|
|
165,843
|
|
Marketable
investments
|
|
|
1,713
|
|
|
|
1,713
|
|
|
|
1,132
|
|
|
|
—
|
|
|
|
581
|
|
Warrant
assets
|
|
|
1,519
|
|
|
|
1,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
$
|
65
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65
|
|
As of December 31,
2017 (in thousands):
|
|
Carry
Value
|
|
|
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
30,557
|
|
|
$
|
30,557
|
|
|
$
|
30,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables
|
|
|
151,995
|
|
|
|
151,995
|
|
|
|
—
|
|
|
|
—
|
|
|
|
151,995
|
|
Marketable investments
|
|
|
1,856
|
|
|
|
1,856
|
|
|
|
1,256
|
|
|
|
—
|
|
|
|
600
|
|
Warrant assets
|
|
|
987
|
|
|
|
987
|
|
|
|
—
|
|
|
|
—
|
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
91
|
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91
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Note 9. Subsequent
Events
OraMetrix,
Inc.
On
May 1, 2018, OraMetrix, Inc. retired its credit facility with SWK Funding LLC, a wholly-owned subsidiary of the Company (“SWK
Funding”), in conjunction with its sale to Dentsply Sirona Inc. SWK Funding received an aggregate of approximately $9.2
million at pay-off, including payment of accrued interest and exit fees.