| 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. The
Company has net operating loss carryforwards (“NOLs”) and believes that the ability to utilize these NOLs is an important
and substantial asset. However, at this time, under current law, the Company does not anticipate that the Finance Receivables
and/or Pharmaceutical Development segments will generate sufficient income to permit the Company to utilize all of its NOLs prior
to their respective expiration dates. As such, it is possible that the Company might pursue additional strategies that it believes
might result in the ability to utilize more of the NOLs. As
of March 17, 2023, the Company and its partners have executed transactions with 50 different parties under its specialty finance
strategy, funding an aggregate $725.2 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. During
2019, the Company commenced its Pharmaceutical Development segment with the acquisition of Enteris BioPharma, Inc. (“Enteris”).
Enteris is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral
drug delivery technologies, the Peptelligence® platform. Basis
of Presentation and Principles of Consolidation The
Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States. 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. Use
of Estimates The
preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required
in the determination of revenue recognition; stock-based compensation; valuation of accounts receivable; impairment of finance
receivables; long-lived assets; property and equipment; intangible assets; goodwill; valuation of warrants and other investments;
contingent consideration; income taxes; and contingencies and litigation, among others. Some of these judgments can be subjective
and complex, and consequently, actual results may differ from these estimates. The Company’s estimates often are based on
complex judgments, probabilities and assumptions that it believes to be reasonable but that are inherently uncertain and unpredictable.
For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are
reasonable. The
Company regularly evaluates its estimates and assumptions using historical experience and other factors, including the economic
environment. As future events and their effects cannot be determined with precision, the Company’s estimates and assumptions
may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause changes to those
estimates and assumptions. Market conditions, such as illiquid credit markets, health crises such as the COVID-19 global pandemic,
volatile equity markets, and economic downturns, can increase the uncertainty already inherent in the Company’s estimates
and assumptions. The Company adjusts its estimates and assumptions when facts and circumstances indicate the need for change.
Those changes generally will be reflected in our consolidated financial statements on a prospective basis unless they are required
to be treated retrospectively under the relevant accounting standard. It is possible that other professionals, applying reasonable
judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Segment
Information The
Company earns revenues from its two 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. Goodwill and indefinite-lived intangible assets are not amortized,
but instead, are subject to annual impairment testing. We review goodwill and indefinite-lived intangible assets for impairment
annually during the fourth quarter and continually assess whether a triggering event has occurred to determine whether the carrying
value exceeds the implied fair value. For the years ended December 31, 2022, and 2021, the Company determined there were no indicators
of impairment relating to identifiable finite-lived intangible assets. The
identification and measurement of goodwill impairment involves the estimation of the fair value of the reporting unit. We have
the option to assess impairment through a qualitative assessment, which includes factors such as general economic conditions,
negative developments in equity and credit markets, adverse changes in the markets in which a reporting unit operates, increases
in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple
periods, among others. When a potential impairment is indicated, we perform quantitative testing by comparing the estimated fair
value of the reporting unit to the carrying value of the reported net assets. Under our quantitative testing, fair value is generally
based on the income approach using a calculation of discounted cash flows, based on the most recent financial projections for
the reporting unit. The revenue growth rates included in the financial projections are our best estimates based on current and
forecasted market conditions, and the profit margin assumptions are projected by the reporting unit based on current cost structure
and, when applicable, anticipated net cost reductions. Based
on the Company’s 2022 goodwill impairment testing, no goodwill impairment was indicated as of December 31, 2022. 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 method. The components of inventory include raw materials of $ 0.6 million 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. 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: Schedule
of Useful Life of Property and Equipment, Net
Asset Estimated Useful Life
Leasehold improvements Lesser of lease term or useful life
Furniture, fixtures and equipment 3 15 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 is expected to be recognized within one year from the balance sheet
date. Deferred revenue was $33,000 and $0.2 million as of December 31, 2022 and 2021, respectively, and is included in accounts
payable and accrued liabilities in the consolidated balance sheets. Research
and Development Research
and development expenses include the costs associated with internal research and development and research and development conducted
for the Company by third parties. These costs primarily consist of salaries, pre-clinical and clinical trials, outside consultants,
and supplies. All research and development costs discussed above are expensed as incurred. Third-party expenses reimbursed under
research and development contracts, which are not refundable, are recorded as a reduction to pharmaceutical manufacturing research
and development expense in the consolidated statements of income. 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 in the consolidated balance sheets. It
is the Company’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 an impairment when the carrying amount exceeds fair value
and the difference relates to credit quality. Otherwise the write-down is recorded as a reduction in finance receivable interest
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 finance receivable interest 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 management’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. The
Company accounts for its finance receivables at amortized cost, net of unamortized origination fees, if any. Related fees and
costs are recorded net of any amounts reimbursed, and interest is accreted or accrued to interest revenue using the effective
interest method. When and if supplemental payments are received from these long-term receivables, an adjustment to the estimated
effective interest rate is affected prospectively. The
Company evaluates the collectibility of both interest and principal for each loan to determine whether it is impaired. A loan
is considered to be impaired when, based on current information and events, the Company determines it is probable that it will
be unable to collect amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount
of loss is calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected
future cash flows at the loan’s effective interest rate or to the estimated fair value of the underlying collateral, less
costs to sell, if the loan is collateralized and the Company expects repayment to be provided solely by the collateral. Impairment
assessments require significant judgments and are based on significant assumptions related to the borrower’s credit risk,
financial performance, expected sales, and estimated fair value of the collateral. Allowance
for Credit Losses on Finance Receivables The
allowance for credit losses is intended to provide for credit losses inherent in the finance 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 in the consolidated statements of income. Marketable
Investments The
Company’s marketable investment portfolio includes debt securities as of December 31, 2022. The debt security is
classified as an available-for-sale security, which is reported at fair value with unrealized gains or losses recorded in statements
of 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 collectibility
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. Foreign
Currency Transactions The
Company uses the U.S. dollar as its functional currency. Monetary assets and liabilities and transactions denominated in currencies other
than an entity’s functional currency are remeasured into its functional currency using current exchange rates, whereas nonmonetary
assets and liabilities are remeasured using historical exchange rates. The Company recognizes gains and losses from such remeasurements
within other income (expense), net in the consolidated statements of income in the period of occurrence. Other
Receivables As
of December 31, 2022, the Company had collateral receivable of $2.8 million with the counterparties on its foreign currency exchange
contract and is recorded as collateral on foreign currency forward contract in the consolidated balance sheets. Derivatives All
derivatives held by the Company are recognized in the consolidated balance sheets at fair value. Changes in fair value for derivatives
that do not meet the criteria for hedge accounting, or for which the Company has not elected hedge accounting are recorded in the consolidated statements of income. If a derivative
is recorded using hedge accounting, 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 income or recorded in other comprehensive income. The
Company had no derivatives designated as hedges as of December 31, 2022 and 2021. The Company holds warrants issued to the Company in
conjunction with term loan investments discussed in Note 3. These warrants meet the definition of a derivative and are included in warrant
assets in the consolidated balance sheets. The Company also uses a foreign currency forward contract to manage the impact of fluctuations in foreign currency denominated cash flows expected to be received from one of its royalty finance receivables denominated in a foreign currency. The foreign currency forward contract discussed in Note 9 is not designated as a hedging instrument, and changes in fair value are recognized in earnings. Revenue
Recognition Finance
Receivables Segment The
Company’s Finance Receivables segment 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 when clients invest in
our recommended transactions 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. The Company did not recognize any management or incentive fees in 2022
or 2021. Other service revenues are recognized when contractual obligations are fulfilled or as services are provided. Pharmaceutical
Development Segment 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. In
determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the
Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination
of whether the promised goods or services are performance obligations including whether they are distinct in the context of the
contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the
transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance
obligation. As part of the accounting for these arrangements, the Company must use its judgment to determine: (a) the number of
performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; (c)
the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price
in step (iv) above; and (d) the contract term and pattern of satisfaction of the performance obligations under step (v) above.
The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included
in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative
stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract
are satisfied. Amounts
received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s consolidated
balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as
current deferred revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are
classified as deferred revenue, net of current portion. Deferred revenue as of December 31, 2022 and 2021 was $ 33,000 0.2
million The
Company evaluates collaboration agreements with respect to FASB ASC Topic 808, Collaborative Arrangements Exclusive
Licenses If
the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations
identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when
the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether
a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, manufacturing
and commercialization capabilities of the collaboration partner; the retention of any key rights by the Company; and the availability
of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can
benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of the promise
is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether
it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company exercises
judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation
is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing
revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance
and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject
to estimates by management and may change over the course of the research and development and licensing agreement. Such a change
could have a material impact on the amount of revenue the Company records in future periods. Customer
Options If
an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the
goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement,
as they are contingent upon option exercise. The Company evaluates the customer options for material rights, or options to acquire
additional goods or services for free or at a discount. If the customer options are determined to represent a material right,
the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates
the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified
discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized
as revenue until, at the earliest, the option is exercised. Research
and Development Services The
promises under the Company’s collaboration agreements may include research and development services to be performed by the
Company on behalf of the partner. Payments or reimbursements resulting from the Company’s research and development efforts
are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts.
Reimbursements from and payments to the partner that are the result of a collaborative relationship with the partner, instead
of a customer relationship, such as co-development activities, are recorded as a reduction to research and development expense. Milestone
Payments At
the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are
considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount
method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the
transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals,
are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific,
clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment.
There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur.
At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject
to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a
cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. Royalties For
arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed
to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related
sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied
(or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. 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, 2022 or 2021, as all of our cash was held in checking,
savings and brokerage accounts. As of December 31, 2022, cash was deposited in financial institutions and consisted
of immediately available fund balances. The Company maintains its cash deposits with well-known
and stable financial institutions but balances may exceed stated federally insured limits. Interest
and Accounts Receivable The
Company records interest receivable on an accrual basis and recognizes it as earned in accordance with the contractual terms of the loan
agreement, to the extent that such amounts are expected to be collected. When management does not expect that principal, interest, and
other obligations due will be collected in full, the Company will generally place the loan on nonaccrual status and cease recognizing
interest income on that loan until all principal and interest due has been paid or the Company believes the partner company has demonstrated
the ability to repay the Company’s current and future contractual obligations. Any uncollected interest related to prior periods
is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, the Company may
make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. The Company did
not recognize any provision for interest receivable credit losses in 2022 and 2021. Accounts
receivable for management fees are recorded at the aggregate unpaid amount less any allowance for doubtful accounts. The Company
determines an account receivable’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, 2022 and 2021, 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, interest and 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. Finance
Receivables Segment The
Company performs ongoing credit evaluations of its partner companies and generally requires collateral. For the year ended
December 31, 2022, two of our business partners accounted for 31 percent of our interest and accounts receivable. For the year
ended December 31, 2021, five of our business partners accounted for 63 percent of our interest and accounts receivable. Pharmaceutical
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