| SWK Holdings Corporation and Summary of Significant Accounting Policies | 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 CompanyÂ’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 CompanyÂ’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 CompanyÂ’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.
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 December 31, 2015, the Company and its partners has executed transactions with 18 different parties under its new
specialty finance strategy, funding $240.0 million in various financial products across the life science sector. The
CompanyÂ’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
and an unconsolidated equity investment in a company which retains the marketing authorization rights to a
pharmaceutical product. The
Company is headquartered in Dallas, Texas. Basis
of Presentation and Principles of Consolidation The
CompanyÂ’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 CompanyÂ’s ownership may be less than 50%. 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 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 CompanyÂ’s consolidated financial statements, it would have no
effect on its operations and/or total stockholdersÂ’ equity attributable to the Company. On
October 7, 2015, the Company effected a 1-for-100 reverse stock split of its common stock, immediately followed by a 10-for-1
forward stock split of its common stock. For holders of greater than 100 shares prior to October 7, 2015, the net effect was a
1-for-10 reverse split. The number of shares of common stock underlying the CompanyÂ’s options and warrants to acquire shares
of common stock were adjusted accordingly. All applicable share data, per share amounts and related information in the consolidated
financial statements and notes thereto have been adjusted retroactively to give effect to the stock splits. See further discussion
of stock splits in Note 8. Variable
Interest Entities An
entity is referred to as a VIE if it possesses one of the following criteria: (i) it is thinly capitalized, (ii) the residual
equity holders do not control the entity, (iii) the equity holders are shielded from the economic losses, (iv) the equity holders
do not participate fully in the entityÂ’s residual economics, or (v) the entity was established with non-substantive voting
interests. The Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the
activities of the VIE and the right to receive benefits or the obligation to absorb losses of the entity that could be potentially
significant to the VIE. Along with the VIEs that are consolidated in accordance with these guidelines, the Company also holds
variable interests in other VIEs that are not consolidated because it is not the primary beneficiary. The Company continually
monitors both consolidated and unconsolidated VIEs to determine if any events have occurred that could cause the primary beneficiary
to change. See Note 4 for further discussion of VIEs. Use
of Estimates The
preparation of the CompanyÂ’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, useful lives of property and equipment, 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 CompanyÂ’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 CompanyÂ’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 CompanyÂ’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. Reclassification Certain
amounts have been reclassified in the presentation of the consolidated financial statements as of December 31, 2014, and for the
year ended December 31, 2014, to be consistent with the presentation in the consolidated financial statements as of, and for the
year ended, December 31, 2015. This reclassification had no impact on previously reported net income, cash flow from operations
or changes in stockholdersÂ’ equity. Equity
Method Investment The
Company accounts for portfolio companies whose results are not consolidated, but over which it exercises significant influence,
under the equity method of accounting. Whether or not the Company exercises significant influence with respect to a partner company
depends on an evaluation of several factors including, among others, representation of the Company on the partner companyÂ’s
board of directors and the CompanyÂ’s ownership level. Under the equity method of accounting, the Company does not reflect
a partner companyÂ’s financial statements within the CompanyÂ’s consolidated financial statements; however, the CompanyÂ’s
share of the income or loss of such partner company is reflected in the consolidated statements of operations. The Company includes
the carrying value of equity method partner companies as part of the investment in unconsolidated entities on the consolidated
balance sheets. When
the CompanyÂ’s carrying value in an equity method partner company is reduced to zero, the Company records no further losses
in its consolidated statements of operations unless the Company has an outstanding guarantee obligation or has committed additional
funding to such equity method partner company. When such equity method partner company subsequently reports income, the Company
will not record its share of such income until it exceeds the amount of the CompanyÂ’s share of losses not previously recognized. Finance
Receivables The
Company extends credit to customers through a variety of financing arrangements, including revenue interest term loans. The amounts
outstanding on loans are referred to as finance receivables and are included in Finance Receivables on the consolidated balance
sheets. It is the CompanyÂ’s expectation that the loans originated will be held for the foreseeable future or until
maturity. In certain situations, for example to manage concentrations and/or credit risk, some or all of certain exposures may
be sold. Loans for which the Company has the intent and ability to hold for the foreseeable future or until maturity are classified
as held for investment (“HFI”). If the Company no longer has the intent or ability to hold loans for the foreseeable
future, then the loans are transferred to held for sale (“HFS”). Loans entered into with the intent to resell are classified
as HFS. If
it is determined that a loan should be transferred from HFI to HFS, then the balance is transferred at the lower of cost or fair
value. At the time of transfer, a write-down of the loan is recorded as a write-off when the carrying amount exceeds fair value
and the difference relates to credit quality. Otherwise the write-down is recorded as a reduction in interest and other income,
and any loan loss reserve is reversed. Once classified as HFS, the amount by which the carrying value exceeds fair value is recorded
as a valuation allowance and is reflected as a reduction to interest and other income. If
it is determined that a loan should be transferred from HFS to HFI, the loan is transferred at the lower of cost or fair value
on the transfer date, which coincides with the date of change in managementÂ’s intent. The difference between the carrying
value of the loan and the fair value, if lower, is reflected as a loan discount at the transfer date, which reduces its carrying
value. Subsequent to the transfer, the discount is accreted into earnings as an increase to finance revenue interest income over
the life of the loan using the effective interest method. Finance
receivables are stated at their principal amounts inclusive of deferred loan origination fees. Interest income is credited
as earned based on the effective interest rate method except when a finance receivable becomes past due 90 days or more and doubt
exists as to the ultimate collection of interest or principal; in those cases the recognition of income is discontinued and any
outstanding receivable for interest due is reversed. Allowance
for Credit Losses on Finance Receivables The
allowance for credit losses is intended to provide for credit losses inherent in the financing receivables portfolio and is periodically
reviewed for adequacy considering credit quality indicators, including expected and historical losses and levels of and trends
in past due loans, non-performing assets and impaired loans, collateral values and economic conditions. The allowance for credit
losses is determined based on specific allowances for loans that are impaired, based upon the value of underlying collateral or
projected cash flows. Changes to the Allowance for Credit Losses are recorded in the Provision for Loan Credit Losses. Marketable
Investments The
CompanyÂ’s marketable investment portfolio includes two equity securities and one debt security as of December 31, 2015,
and one equity security and one debt security as of December 31, 2014. The debt security is classified as an available-for-sale
security, which is reported at fair value with unrealized gains or losses recorded in accumulated other comprehensive income,
net of applicable income taxes. In any case where fair value might fall below amortized cost, the Company would consider whether
that security is other-than-temporarily impaired using all available information about the collectability of the security. The
Company would not consider that an other-than temporary impairment for a debt security has occurred if (1) the Company does not
intend to sell the debt security, (2) it is not more likely than not that the Company will be required to sell the debt security
before recovery of its amortized cost basis and (3) the present value of estimated cash flows will fully cover the amortized cost
of the security. The Company would consider that an other-than-temporary impairment has occurred if any of the above mentioned
three conditions are not met. For
a debt security for which an other-than-temporary impairment is considered to have occurred, the Company would recognize the entire
difference between the amortized cost and the fair value in earnings if the Company intends to sell the debt security or it is
more likely than not that the Company will be able to sell the debt security before recovery of its amortized cost basis. If the
Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell
the debt security before recovery of its amortized cost basis, the Company would separate the difference between the amortized
cost and the fair value of the debt security into the credit loss component and the non-credit loss component. The credit loss
component would be recognized in earnings and the non-credit loss component would be recognized in other comprehensive income,
net of applicable income taxes. Derivatives All
derivatives held by the Company are recognized in the consolidated balance sheets at fair value. The accounting treatment for
subsequent changes in the fair value depends on their use, and whether they qualify as effective “hedges” for accounting
purposes. Derivatives that are not hedges must be adjusted to fair value through the consolidated statements of operations. If
a derivative is a hedge, then depending on its nature, changes in its fair value will be either offset against change in the fair
value of hedged assets or liabilities through the consolidated statements of operations, or recorded in other comprehensive income.
The Company had no derivatives designated as hedges as of December 31, 2015 and 2014. The Company holds warrants issued to
the Company in conjunction with term loan investments discussed in Note 2. These warrants meet the definition of a derivative
and are included in warrant assets in the consolidated balance sheets. The Company issued a warrant on its own common stock in
conjunction with its credit agreement discussed in Note 6. This warrant meets the definition of a derivative and is reflected
as a warrant liability at fair value in the consolidated balance sheets. Revenue
Recognition The
Company records interest income on an accrual basis based on the effective interest rate method to the extent that it expects
to collect such amounts. The Company recognizes investment management fees as earned over the period the services are rendered. In
general, the majority of investment management fees earned are charged either monthly or quarterly. Incentive fees,
if any, are recognized when earned at the end of the relevant performance period, pursuant to the underlying contract. Other
administrative service revenues are recognized when contractual obligations are fulfilled or as services are provided. Cash
and Cash Equivalents The
Company considers all highly liquid investments with an original maturity date of three months or less at the date of purchase
to be cash equivalents. There were no such investments at December 31, 2015 or 2014, as all of our cash was held in checking
or savings accounts. As of December 31, 2015, cash equivalents were deposited in financial institutions and consisted
of immediately available fund balances. The Company maintains its cash deposits and cash equivalents with well-known
and stable financial institutions. Accounts
Receivable Accounts
receivable for management fees are recorded at the aggregate unpaid amount less any allowance for doubtful accounts. The Company
determines an account receivableÂ’s delinquency status based on its contractual terms. Interest is not charged on outstanding
balances. Accounts are written-off only when all methods of recovery have been exhausted. As of December 31, 2015 and 2014,
the allowance for doubtful accounts was zero. Certain
Risks and Concentrations Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable, finance receivables and marketable investments. The Company invests its excess cash with major
U.S. banks and financial institutions. The Company has not experienced any losses on its cash and cash equivalents. The
Company performs ongoing credit evaluations of its customers and generally requires collateral. For the year ended
December 31, 2015, two partner companies accounted for 44 percent of total revenue. For the year ended December 31,
2014, two partner companies accounted for 61 percent of total revenue. The
Company does not expect its current or future credit risk exposures to have a significant impact on its operations. However, there
can be no assurance that its business will not experience any adverse impact from credit risk in the future. Property
and Equipment Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which are three years for computer equipment and software and five years
for furniture and fixtures. Upon retirement or sale, the cost and related accumulated depreciation are removed from the accounts,
and any related gain or loss is reflected in operations. Improvements that extend the life of a specific asset are capitalized,
while normal maintenance and repairs are charged to operations as incurred. Property and equipment, net is included in other assets
in the consolidated balance sheets. Segment
Reporting The
Company operates in one operating segment with a single management team that reports to the chief executive officer, who is its
chief operating decision maker. Accordingly, the Company does not prepare discrete financial information with respect to separate
product line and does not have separately reportable segments. Stock-based
Compensation All
employee and director stock-based compensation is measured at the grant date, based on the estimated fair value of the award,
and is recognized as an expense over the requisite service period. Stock-based compensation expense is reduced for
estimated future forfeitures. These estimates are revised in future periods if actual forfeitures differ from the estimates. Changes
in forfeiture estimates impact compensation expense in the period in which the change in estimate occurs. For
restricted stock, the Company recognizes compensation expense in accordance with the fair value of the CompanyÂ’s stock as
determined on the grant date, amortized over the applicable service period. When vesting of awards is based wholly or in part
upon the future performance of the stock price, such terms result in adjustments to the grant date fair value of the award and
the derivation of a service period. If service is provided over the derived service period, the adjusted fair value of the awards
will be recognized as compensation expense, regardless of whether or not the awards vest. Non-controlling
Interests Non-controlling
interests represent third-party equity ownership in certain of the CompanyÂ’s consolidated subsidiaries, VIEs or investments
and are presented as a component of equity. See Note 4 for further discussion of non-controlling interests. Income
Taxes Deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is recorded
to reduce deferred tax assets to an amount where realization is more likely than not. If
the Company ultimately determines that the payment of such a liability is not necessary, then the Company reverses the liability
and recognizes a tax benefit during the period in which the determination is made that the liability is no longer necessary. The
Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax benefit in
the statements of operations. Comprehensive
(Loss) Income Comprehensive
(loss) income and its components attributable to the Company and non-controlling interests have been reported, net of tax, in
the consolidated statements of stockholdersÂ’ equity and the consolidated statements of comprehensive (loss) income. Net
Income (Loss) per Share Basic
net income (loss) per share is computed using the weighted average number of outstanding shares of common stock. Diluted net income
(loss) 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 earnings per share for the following (in thousands, except per share
amounts):
Year
Ended
December 31,
2015 2014 (1)
Numerator:
Net
(loss) income attributable to SWK Holdings Corporation stockholders $ (7,370 ) $ 20,765
Denominator:
Weighted-average
shares outstanding 12,986 6,486
Effect
of dilutive securities — 6
Weighted-average
diluted shares 12,986 6,492
Basic (loss) income per share $ (0.57 ) $ 3.20
Diluted (loss) income per share $ (0.57 ) $ 3.20 (1)
Common Stock and share data at December 31, 2014, has been adjusted retroactively to reflect a net 1-for-10 reverse stock split
effective October 7, 2015. As
of December 31, 2015, and 2014, outstanding stock options and warrants to purchase shares of common stock in an aggregate
of approximately 577,000 and 479,000 shares, respectively, have been excluded from the calculation of diluted net (loss)
income per share as these securities were anti-dilutive. Recent
Accounting Pronouncements In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers”. The objective of ASU 2014-09 is to establish a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most
of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that
an entity recognizes 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. In applying the new guidance,
an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to the contractÂ’s performance obligations;
and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts
with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance
is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016
for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified
approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard
may have on its consolidated financial statements nor decided upon the method of adoption. In
June 2014, the FASB issued ASU No. 2014-12, “Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. This
ASU is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. The adoption
of ASU 2014-12 will not have a material impact on the CompanyÂ’s consolidated financial statements. In
February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): “Amendments to the Consolidation Analysis”,
which amended the existing accounting standards for consolidation under both the variable interest model and the voting model.
Under ASU No. 2015-02, companies will need to reevaluate whether an entity meets the criteria to be considered a VIE, whether
companies still meet the definition of primary beneficiaries, and whether an entity needs to be consolidated under the voting
model. ASU No. 2015-02 may be applied using a modified retrospective approach or retrospectively, and is effective for reporting
periods beginning after December 15, 2015. The adoption of ASU 2015-02 will not have a material impact on the CompanyÂ’s consolidated
financial statements. In
April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs”, which requires debt issuance costs be presented in the balance sheet as a direct deduction from
the carrying value of the associated debt liability, and amortization of those costs should be reported as interest expense. This
ASU is effective for financial statements issued for annual and interim periods beginning after December 15, 2015. The new guidance
should be applied on a retrospective basis for each period presented in the balance sheet. The adoption of ASU 2015-03 will not
have a material impact on CompanyÂ’s consolidated financial statements. 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”. 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
Company 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 2019. Early adoption
is permitted. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on
its consolidated financial statements nor decided upon the method of adoption. In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use
(ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is currently
evaluating the impact that the standard will have on the financial statements. |
