| 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. In August 2019, the Company
commenced a complementary strategy of building a pharmaceutical development, manufacturing and intellectual property licensing
business. The Company’s operations comprise two reportable segments: “Finance Receivables” and “Pharmaceutical
Development.” The Company allocates capital to each segment in order to generate income through the sales of life science
products by third parties. The Company is headquartered in Dallas, Texas, and as of September 30, 2019, the Company had 31 employees. The Company has net operating
loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important and substantial asset.
However, at this time, under current law, the Company does not anticipate that the Finance Receivables or Pharmaceutical Development
segments will generate sufficient income to permit the Company to utilize all of its NOLs prior to their respective expiration
dates. As such, it is possible that the Company might pursue additional strategies that it believes might result in the ability
to utilize more of the NOLs. Finance Receivables Segment The Company’s Finance
Receivables segment 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. This segment 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 and its revolving credit facility, 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. As of November 14,
2019, and since inception of the strategy, the Company and its partners have executed transactions with 35 different parties under
its specialty finance strategy, funding an aggregate $523.2 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. Pharmaceutical Development Segment On August 26, 2019, the
Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”).
SWK Products Holdings LLC (“SWK Products”), a wholly-owned subsidiary of the Company, entered into a merger agreement
pursuant to which Enteris became a wholly-owned subsidiary of SWK Products. SWK Products paid $21.5 million to the former owner
of Enteris (“Seller”) at closing, and according to the terms and conditions of the merger agreement, Enteris and Seller
will share in the economics of certain Enteris assets per the following:
• Milestone and royalty proceeds of the Non-Exclusive
License Agreement (“Cara License”) between Enteris and Cara Therapeutics, Inc. (“Cara”):
◦ Seller received 100 percent of the $8.0 million upfront amount paid upon
execution of the Cara License;
◦ Seller will receive 40 percent of the first milestone payment, with Enteris
to receive 60 percent of such payment;
◦ Seller will receive 75 percent of any remaining
milestone and royalty payments until Seller receives an aggregate $32.75 million, excluding the first milestone payment, with
Enteris entitled to the remaining 25 percent; and
◦ All proceeds thereafter will be split evenly between Enteris and Seller.
• Certain profits arising from milestones and royalties
associated with the out-licensing of three of Enteris’ wholly-owned pharmaceutical development candidates, likely from
the out-license of such products to third party pharmaceutical companies:
◦ For Ovarest and Tobrate, after Enteris recovers
100 percent of all investment in such products, Seller will receive 60 percent of the first $5.0 million of the profit from
each product until Seller receives an aggregate of $3.0 million for each product, and thereafter Enteris will receive 70 percent
of any remaining profits, per product; and
◦ For the octreotide pharmaceutical development product
candidate, after Enteris recovers 300 percent of all investment in the octreotide product candidate, Seller will be entitled
to receive 10 percent of any remaining profits from that product, with Enteris receiving the remaining 90 percent. Any amount of contingent
consideration paid to the Seller pursuant to the Cara License, and the Ovarest, Tobrate and the octreotide pharmaceutical development
product candidate profit splits, will be paid out of payments received from third parties for each respective program. Enteris is a clinical
stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug delivery technologies,
the Peptelligence ® ® ® ® The Company’s
strategy is to utilize the Peptelligence ® ® Peptelligence ® The Company’s internal
product pipeline consists of Ovarest ® 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, 2019. 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, 2018, filed with the SEC on March 28, 2019. Reclassification Certain prior year amounts
have been reclassified to conform to current year presentation. The amounts for prior periods have been reclassified to be consistent
with current year presentation and have no impact on previously reported total assets, total stockholders’ equity or net income
(loss). Use of Estimates The preparation of the
Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination
of revenue recognition; stock-based compensation; valuation of accounts receivable; impairment of financing receivables; long-lived
assets; property, plant and equipment; intangible assets; goodwill; valuation of warrants; contingent consideration; income taxes;
and contingencies and litigation, among others. Some of these judgments can be subjective and complex, and consequently, actual
results may differ from these estimates. The Company’s estimates often are based on complex judgments, probabilities and
assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate
or assumption made by the Company, there may also be other estimates or assumptions that are reasonable. The Company regularly
evaluates its estimates and assumptions using historical experience and other factors, including the economic environment. As
future events and their effects cannot be determined with precision, the Company’s estimates and assumptions may prove to
be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause changes to those estimates and
assumptions. Market conditions, such as illiquid credit markets, 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. The most significant estimates
and assumptions are used to determine amounts and values of, but are not limited to: revenue recognition related to product and
collaboration revenue; acquisition date fair value and subsequent fair value estimates used to assess impairment of long-lived
assets, including goodwill; licensing agreements; in-process research and development; other intangible assets; contingent consideration;
and income taxes, inclusive of a valuation allowance. Business Combinations We account for business
combinations under the acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities
at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities
assumed is recorded as goodwill. Results of operations related to business combinations are included prospectively beginning with
the date of acquisition and transaction costs related to business combinations are recorded within selling, general and administrative
expenses. Refer to Note 3, Business Combinations Segment Information The Company earns revenues
from its two U.S.-based business segments: as a specialty finance and asset management business offering customized financing
solutions to a broad range of life-sciences companies, and as of August 26, 2019, the Company’s offering of oral therapeutic
formulation solutions built around Enteris’ pharmaceutical Peptelligence ® The financial results
of Enteris are included in the Pharmaceutical Development segment as of the acquisition date. Revenue Recognition The Company’s Pharmaceutical
Development segment enters into collaboration and licensing agreements with strategic partners, under which it may exclusively
license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these
arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; reimbursement
of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net
sales of licensed products. Goodwill and Intangible Assets The Company’s methodology
for allocating the purchase price of an acquisition is based on established valuation techniques that reflect the consideration
of a number of factors, including a valuation performed by a third-party appraiser. Goodwill is measured as the excess of the
cost of an acquired business over the fair value assigned to identifiable assets acquired and liabilities assumed. Goodwill is
considered impaired when the estimated fair value of the reporting unit that was allocated the goodwill is less than its carrying
value. If the estimated fair value of such reporting unit is less than its carrying value, goodwill impairment is recognized based
on that difference, not to exceed the carrying amount of goodwill. A reporting unit is an operating segment or a component of
an operating segment provided that the component constitutes a business for which discrete financial information is available
and management regularly reviews the operating results of that component. Goodwill arising from the Enteris acquisition has been
allocated to the Pharmaceutical Development segment. Finite-lived intangible
assets are amortized over their estimated useful life, which is the period over which the assets are expected to contribute directly
or indirectly to the future cash flows of the Company. Intangible assets should be tested for impairment at the time of a triggering
event, if one were to occur. Finite-lived intangible assets may be impaired when the estimated undiscounted future cash flows
generated from the assets are less than their carrying amounts. Inventory Inventories are stated
at the lower of cost or net realizable value, valued at specifically identified cost which approximates the first-in, first-out
(“FIFO”) method. The components of inventory include raw materials of $0.2 million and are reflected in Other Assets
in the Unaudited Condensed Consolidated Balance Sheets. Property and Equipment, Net Property and equipment
are recorded at cost less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized,
while minor replacements, maintenance, and repairs are charged to expense as incurred. In addition, we capitalize interest on
borrowings during the active construction period of capital projects. Capitalized interest is added to the cost of the assets
and depreciated over the estimated useful lives of the assets. Leased property meeting certain criteria is capitalized and the
present value of the related lease payments is recorded as a liability and included in current liabilities. When property is retired
or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting
gain or loss is reflected in Other Income, Net (within Operating Income) in the Unaudited Condensed Consolidated Statements of
Income (Loss). Depreciation is recorded
over the estimated useful lives of the assets involved using the straight-line method. Leasehold improvements and capitalized
lease assets are amortized to depreciation expense over the estimated useful life of the asset or the respective lease term used
in determining lease classification, whichever is shorter. The range of estimated useful lives is as follows:
Asset Estimated
Useful Life
Leasehold
improvements Lesser
of lease term or useful life
Furniture,
fixtures, and equipment 3
to 10 years Deferred Revenue and Deferred Costs Deferred revenue includes
amounts that have been billed per the contractual terms but have not been recognized as revenue. The Company classifies as current
the portion of deferred revenue that are expected to be recognized within one year from the balance sheet date. Deferred revenue
of $0.3 million is included in accounts payable and other accrued liabilities in the Unaudited Condensed Consolidated Balance
Sheets. Research and Development Research and development
expenses include the costs associated with internal research and development and research and development conducted for the Company
by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants, and supplies.
All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under research and
development contracts, which are not refundable, are recorded as a reduction to pharmaceutical manufacturing research and development
expense in the Unaudited Condensed Consolidated Statements of Income (Loss). Recent Accounting Pronouncements In August 2018, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair
Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”
ASU 2018-13 updates the fair value measurement disclosure requirements by (i) eliminating certain requirements, including disclosure
of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers
between levels and the valuation processes for Level 3 fair value measurements, (ii) modifying certain requirements, including
clarifying that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of
the reporting date and (iii) adding certain requirements, including disclosure of the changes in unrealized gains and losses for
the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting
period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
ASU 2018-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early
adoption permitted for any eliminated or modified disclosures. The Company is currently evaluating the new guidance but believes
it will not have a material impact on its consolidated financial statements, as the Company has had no historical transfers between
hierarchies. 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 February 2016, the
FASB issued ASU No. 2016-02, Leases, as amended by subsequent ASUs (Topic 842). ASU 2016-02 supersedes guidance related to accounting
for leases and provides for the recognition of lease assets and lease liabilities by lessees for those leases classified as operating
leases under previous GAAP. The objective of the ASU is to establish the principles that lessees and lessors shall apply to report
useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease.
ASU 2016-02 does not fundamentally change lessor accounting; however, some changes have been made to lessor accounting to conform
and align that guidance with the lessee guidance and other areas within GAAP. The ASU is effective for fiscal years and interim
periods within those years beginning after December 15, 2018. The Company adopted ASU 2016-02 on January 1, 2019 using the modified
retrospective transition method, which permits application of the new standard on the adoption date as opposed to the earliest
comparative period presented in the financial statements. In addition, the Company elected to use the available practical expedient
package, and therefore did not reassess classification of its existing leases. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements. |
