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.
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 March 31, 2020,
the Company had 32 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.
As
of May 11, 2020, and since inception of the strategy, the Company and its partners have executed transactions with 36 different
parties under its specialty finance strategy, funding an aggregate $540.1 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.
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.
Enteris
is a clinical stage biopharmaceutical company offering innovative formulation solutions built around its proprietary oral drug
delivery technologies, the Peptelligence® platform. Since its founding in 2013, Enteris has advanced multiple internal and
external programs leveraging Peptelligence®, which enables the oral delivery of molecules that are typically injected, including
peptides and BCS Class II, III, and IV small molecules, in an enteric-coated tablet formulation. Peptelligence® utilizes a
unique multifaceted approach to increase the solubility and absorption of peptides and small molecules, addressing the complex
challenges regarding solubility and permeability of therapeutics with low oral bioavailability. Peptelligence® is protected
by an extensive patent estate that extends until 2036.
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, 2020. 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, 2019, filed with the SEC on March 30, 2020.
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 (loss) income.
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, 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.
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, for further information regarding our acquisition
of Enteris.
Segment
Information
The
Company earns revenues from its two U.S.-based business segments: its 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 business
offering oral therapeutic formulation solutions built around Enteris’ pharmaceutical Peptelligence® platform, which enables
the oral delivery of molecules that are typically injected, including peptides and BCS Class II, III, and IV small molecules in
an enteric-coated tablet formulation.
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.
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 $0.7 million and $0.1 million as of March 31, 2020 and December 31, 2019, respectively, and is included
in accounts payable and 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 (loss) income.
Recent Accounting Pronouncements
In
March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848), which provides
optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of)
reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to transactions
affected by reference rate reform if certain criteria are met. These transactions include: (i) contract modifications, (ii) hedging
relationships, and (iii) sales or transfers of debt securities classified as held-to-maturity. ASU 2020-04 is effective from March
12, 2020 through December 31, 2022. An entity may elect to adopt the amendments for contract modifications as of any date from
the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim
period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the
interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the
interim period that includes March 12, 2020. The one-time election to sell, transfer, or both sell and transfer debt securities
classified as held-to-maturity may be made at any time after March 12, 2020 but no later than December 31, 2022. The Company expects
that it will elect to apply some of the expedients and exceptions provided in ASU 2020-04; however, the Company is still evaluating
the guidance, and therefore, the impact of the adoption of ASU 2020-04 on the Company’s financial condition and results
of operations has not yet been determined.
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. On November 15, 2019, the FASB issued ASU 2019-10, “Credit Losses (Topic 326), Derivatives and Hedging (Topic 815),
and Leases (Topic 842): Effective Dates,” which finalized various effective dates delay for private companies, not-for-profit
organizations, and certain smaller reporting companies. Under ASU 2019-10, the effective date for implementation of CECL for smaller
reporting companies was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. 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.
Note 2. Net (Loss) Income
per Share
Basic
net (loss) 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 net (loss) income per share for the following periods (in thousands,
except per share amounts):
|
|
Three
Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,660
|
)
|
|
$
|
6,559
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
12,913
|
|
|
|
12,906
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
3
|
|
Weighted-average diluted shares
|
|
|
12,913
|
|
|
|
12,909
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.36
|
)
|
|
$
|
0.51
|
|
Diluted net (loss) income per share
|
|
$
|
(0.36
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2020 and 2019, outstanding stock options, restricted stock units and warrants to purchase
shares of common stock in an aggregate of approximately 460,000 and 400,000, respectively, have been excluded from the
calculation of diluted net (loss) income per share as all such securities were anti-dilutive.
Note 3. Business Combinations
On
August 26, 2019, Enteris, a biotechnology company offering innovative formulation solutions utilizing its proprietary oral drug
delivery technology, became a wholly-owned subsidiary of the Company. The total merger consideration was $34.6 million, which
included contingent consideration of $14.5 million. The purchase price was subject to certain adjustments with respect to cash,
debt, working capital, transaction expenses and the value of the contingent consideration agreement entered into, in connection
with the transaction.
The
acquisition was accounted for under the acquisition method of accounting. Accordingly, the merger consideration was allocated
to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The excess
of the merger consideration over the estimated fair value of the net assets of Enteris was recorded as goodwill, which consists
largely of synergies and the acquisition of intangible assets. The resulting goodwill is not expected to be deductible for
tax purpose.
The
allocation of the merger consideration has been prepared on a preliminary basis and changes to the allocation to certain assets,
liabilities, including tax estimates and potential indemnities, may be revised as additional information becomes available. The
Company will finalize the acquisition accounting within the required measurement period of one year.
The
following table summarizes the allocation of the merger consideration (at fair value) to the assets and liabilities of Enteris
as of August 26, 2019 (the date of acquisition) (in thousands):
Cash
|
|
$
|
334
|
|
Accounts receivable
|
|
|
145
|
|
Inventory
|
|
|
274
|
|
Prepaid expenses and other current assets
|
|
|
121
|
|
Property and equipment
|
|
|
1,324
|
|
Patents and other intangible assets
|
|
|
29,850
|
|
Right of use operating lease asset
|
|
|
348
|
|
Other assets
|
|
|
110
|
|
Goodwill
|
|
|
8,404
|
|
Accounts payable
|
|
|
(255
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,365
|
)
|
Deferred revenue
|
|
|
(385
|
)
|
Lease liability
|
|
|
(348
|
)
|
Deferred tax liability
|
|
|
(3,988
|
)
|
Total purchase price
|
|
$
|
34,569
|
|
|
|
|
|
|
Unaudited
Supplemental Pro Forma Information
The following
unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January
1, 2019, the earliest period presented herein (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
Revenues
|
|
$
|
10,871
|
|
Net income
|
|
|
2,812
|
|
|
|
|
|
|
The
pro forma financial information includes adjustments that are directly attributable to the business combination and are factually
supportable. The pro forma adjustments include incremental amortization and depreciation of intangible assets and property and
equipment based on preliminary values of each asset and acquisition-related expenses. The pro forma financial information excludes
non-recurring acquisition-related expenses. These pro forma results are illustrative only and not indicative of the actual results
of operations that would have been achieved nor are they indicative of future results of operations.
Goodwill
There
was no change in the carrying amount of goodwill from December 31, 2019 to March 31, 2020, and net book value
remains at $8.4 million. The net book value of goodwill is solely related to the Enteris acquisition in 2019. As of March 31,
2020, the Company concluded that it is more likely than not that fair value of the reporting unit is greater than its carrying
value, and goodwill is not considered to be impaired.
Intangible
Assets
As
of March 31, 2020, the gross book value and accumulated amortization of acquired intangible assets were as follows (in thousands,
except estimated useful life data):
|
|
As
of March 31, 2020
|
|
|
|
Gross
Book
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Estimated
Useful Life
|
|
Licensing
agreement
|
|
$
|
29,400
|
|
|
$
|
8,174
|
|
|
$
|
21,226
|
|
|
|
10
|
|
Patents
|
|
|
146
|
|
|
|
28
|
|
|
|
118
|
|
|
|
1
- 20
|
|
Trade names and trademarks
|
|
|
210
|
|
|
|
13
|
|
|
|
197
|
|
|
|
10
|
|
Customer
relationships
|
|
|
240
|
|
|
|
14
|
|
|
|
226
|
|
|
|
10
|
|
|
|
|
29,996
|
|
|
|
8,229
|
|
|
|
21,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
patent costs
|
|
|
29
|
|
|
|
—
|
|
|
|
29
|
|
|
|
N/A
|
|
Total
intangibles
|
|
$
|
30,025
|
|
|
$
|
8,229
|
|
|
$
|
21,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense from the acquisition of Enteris was $3.4 million for the period ended March 31, 2020 and was
recorded in depreciation and amortization expense. Based on amounts recorded at March 31, 2020, the Company will recognize
acquired intangible asset amortization as follows (in thousands):
2020 (remaining)
|
|
$
|
8,850
|
|
2021
|
|
|
3,019
|
|
2022
|
|
|
1,764
|
|
2023
|
|
|
1,764
|
|
2024
|
|
|
1,421
|
|
Thereafter
|
|
|
4,949
|
|
|
|
$
|
21,767
|
|
Note 4. 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.
As
of March 31, 2020, the Company had a credit loss allowance of $8.4 million. Of the total $8.4 million, $1.2 million and $0.6 million
are associated with the Company’s Cambia® and Besivance® royalties, respectively. The remaining $6.6 million is related
to the ABT Molecular Imaging, Inc. (“ABT”), now known as Best ABT, Inc. (“Best”), second lien term loan that
was recognized in order to reflect the Best royalty at its estimated fair value of $4.1 million. The carrying values of finance
receivables are as follows (in thousands):
Portfolio
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Term loans
|
|
$
|
156,592
|
|
|
$
|
150,453
|
|
Royalty purchases
|
|
|
29,777
|
|
|
|
30,760
|
|
Total before allowance for credit losses
|
|
|
186,369
|
|
|
|
181,213
|
|
Allowance for credit losses
|
|
|
(8,388
|
)
|
|
|
(8,388
|
)
|
Total carrying value
|
|
$
|
177,981
|
|
|
$
|
172,825
|
|
|
|
|
|
|
|
|
|
|
The
following table presents nonaccrual and performing finance receivables by portfolio segment, net of credit loss allowance (in
thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Nonaccrual
|
|
|
Performing
|
|
|
Total
|
|
|
Nonaccrual
|
|
|
Performing
|
|
|
Total
|
|
Term loans
|
|
$
|
8,337
|
|
|
$
|
148,255
|
|
|
$
|
156,592
|
|
|
$
|
8,337
|
|
|
$
|
142,116
|
|
|
$
|
150,453
|
|
Royalty purchases, net of credit loss allowance
|
|
|
7,614
|
|
|
|
13,775
|
|
|
|
21,389
|
|
|
|
7,614
|
|
|
|
14,758
|
|
|
|
22,372
|
|
Total carrying value
|
|
$
|
15,951
|
|
|
$
|
162,030
|
|
|
$
|
177,981
|
|
|
$
|
15,951
|
|
|
$
|
156,874
|
|
|
$
|
172,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2020 and December 31, 2019, the Company had three finance receivables in nonaccrual status: (a) the term loan
to B&D Dental Corporation (“B&D”), with a net carrying value of $8.3 million, (b) the Best royalty, with a
net carrying value of $4.1 million, and (c) the Tissue Regeneration Therapeutics, Inc. (“TRT”) royalty, with a net
carrying value of $3.5 million. Although in nonaccrual status, the B&D term loan and the TRT royalty were not considered impaired
as of both March 31, 2020 and December 31, 2019. The Company did not collect any cash on its nonaccrual royalties during
the three months ended March 31, 2020. (Please see B&D, Best, and TRT below for further details regarding nonaccrual
and impaired finance receivables).
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. The loan was scheduled to mature on
December 10, 2018. Subsequently, the terms of the loan have been amended, and the Company has funded additional amounts to B&D.
As of December 31, 2019, the total amount funded was $8.3 million. B&D is currently evaluating strategic options, including
a potential sale of the business.
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 2016 and 2018, the Company executed three additional amendments to the loan to advance
an additional $0.7 million in order to directly pay critical vendors and protect the value of the collateral. The Company obtained
a third-party valuation of B&D as of December 31, 2019. As a result of the third-party valuation and facts and circumstances
regarding B&D’s operations, 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, 2020.
Best
On
October 31, 2018, ABT announced that it entered into an asset purchase agreement with Best, a wholly-owned subsidiary of Best
Medical International, Inc. for aggregate consideration of (i) $500,000, paid over ten years in equal quarterly installments,
plus (ii) a ten percent royalty on ABT’s net sales, including any commercialized improvements made to ABT’s technology,
paid quarterly for the ten year period from closing pursuant to a royalty security agreement by and between Best and SWK Funding
LLC, a wholly-owned subsidiary of the Company (“SWK Funding”). SWK Funding will receive 100 percent of the consideration.
On November 8, 2018, the Bankruptcy Court approved the asset sale transaction, and the Company has no further funding liabilities.
During
the year ended December 31, 2018, the Company re-evaluated its collateral position, considering the expected outcome of the Chapter
11 process, and as a result, the Company recognized an impairment expense of $5.3 million to write off the second lien term loan,
as well as provision for credit losses of $5.0 million to reflect the Best royalty at its estimated fair value of $5.7 million.
During
the year ended December 31, 2019, the Company re-evaluated the value of the Best royalty based on 2019 business trends, and as
a result, the Company recognized a provision for credit losses of $1.6 million to reflect the Best royalty at its estimated fair
value of $4.1 million.
TRT
On
June 13, 2013, the Company purchased royalties from TRT related to its technology licenses in the family cord banking services
sector for $2.0 million, and on October 20, 2014, funded an additional $1.25 million upon the achievement of royalty receipts-based
milestones. During the quarter ended March 31, 2016, royalty payments from the primary U.S. licensee ended as a result of the
licensee terminating a technology license. The Company and TRT continue to evaluate both options in regard to enforcing TRT’s
intellectual property rights against this licensee, as well as seeking additional U.S. licensees. TRT’s Canadian licensee
continues to pay royalties. The Company is in discussions with TRT to restructure the purchase agreement. Given uncertainties
regarding the outcome of the negotiations and the ultimate timing of cash flows related to the U.S. intellectual property, the
Company has placed the TRT royalty on non-accrual status, although does not consider it impaired as of March 31, 2020. The Company
evaluated several factors in this determination, including input from intellectual property counsel regarding the strength of
the related intellectual property, continued receipt of Canadian licensee royalty payments and anticipated terms of the restructured
purchase agreement.
Note 5. Marketable
Investments
Investments
in corporate debt securities and equity securities at March 31, 2020 and December 31, 2019 consist of the following (in thousands):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Corporate debt securities
|
|
$
|
285
|
|
|
$
|
466
|
|
Equity securities
|
|
|
912
|
|
|
|
1,802
|
|
Total marketable investments
|
|
$
|
1,197
|
|
|
$
|
2,268
|
|
|
|
|
|
|
|
|
|
|
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, 2020 and December 31, 2019, are as follows (in thousands):
March 31, 2020
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair Value
|
|
Corporate debt securities
|
|
$
|
285
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair Value
|
|
Corporate debt securities
|
|
$
|
466
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents unrealized net losses on equity securities during the three months ended March 31, 2020 and 2019 (in
thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Unrealized net loss on equity securities reflected in the unaudited condensed consolidated statements of (loss) income
|
|
$
|
(890
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
As
of March 31, 2020, the Company’s equity securities include 96,810 shares of Misonix, Inc. (“Misonix”) common stock received
pursuant to Misonix’s purchase of Solsys Medical, Inc. (“Solsys”) on September 27, 2019. During the three months
ended September 30, 2019 and prior to the acquisition, the Company exercised its Solsys warrants in a cashless transaction to
purchase Solsys preferred stock and exercised its preemptive right to protect against dilution of its Solsys equity position.
Of the total 109,472 shares of Misonix common stock received for its Solsys equity interests, 12,662 shares are held in escrow
by Misonix, are subject to reduction based on terms of the acquisition agreement, and any shares remaining at the end of the escrow
period will be released within 15 to 18 months post closing of the acquisition. The 96,810 shares are subject to a one year lock-up
that expires on September 27, 2020. As of March 31, 2020, the 96,810 shares of Misonix common stock are reflected at their estimated
fair value of $0.9 million.
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, 2020 and 2019 was $17,660 and $21,000, respectively, which was credited to the notes’ carrying value. During the
three months ended March 31, 2020, impairment expense of $0.2 million was recognized in order to reflect the notes at their estimated
fair value of $0.3 million. The notes are included in long-term marketable investments in the unaudited condensed consolidated
balance sheets.
Note 6. Revolving
Credit Facility
On
June 29, 2018, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with State Bank and Trust
Company as a lender and the administrative agent (“State Bank”) pursuant to which State Bank will provide the Company
with up to a $20 million revolving senior secured credit facility, which the Company can draw down and repay until maturity, subject
to borrowing base eligibility. The Loan Agreement matures on June 29, 2021.
The
Loan Agreement accrues interest at the Daily LIBOR Rate, with a floor of 1.00 percent, plus a 3.25 percent margin and principal
is repayable in full at maturity. Interest is generally required to be paid monthly in arrears. The Loan Agreement requires the
payment of an unused line fee of 0.50 percent, which will be recorded as interest expense. The Company paid $0.5 million in fees
at closing, which have been capitalized as deferred financing costs and are being amortized on a straight-line basis over the
term of the Loan Agreement.
The
Loan Agreement has an advance rate against the Company’s finance receivables portfolio, including 85 percent against senior
first lien loans, 70 percent against second lien loans and 50 percent against royalty receivables, subject to certain eligibility
requirements as defined in the Loan Agreement. The Loan Agreement contains certain affirmative and negative covenants including
minimum asset coverage and minimum interest coverage ratios.
During
both the three months ended March 31, 2020 and 2019, the Company recognized $0.1 million of interest expense. On March 17, 2020,
the Company drew $15.0 million on its revolving credit facility in order to support existing business partners and to finance
future investment opportunities. As of March 31, 2020, $14.3 million was outstanding under the revolving credit facility, and
$5.7 million was available for borrowing.
Note 7. 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 unaudited condensed consolidated balance sheets. The Company recorded a nominal loss for the three months ended
March 31, 2020. The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Dividend rate
|
|
|
—
|
|
|
|
—
|
|
Risk-free rate
|
|
|
0.15
|
%
|
|
|
1.6
|
%
|
Expected life (years)
|
|
|
0.4
|
|
|
|
0.7
|
|
Expected volatility
|
|
|
69.9
|
%
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
The
changes on the value of the warrant liability during the three months ended March 31, 2020 were as follows (in thousands):
Fair value – December 31, 2019
|
|
$
|
76
|
|
Issuances
|
|
|
—
|
|
Changes in fair value
|
|
|
53
|
|
Fair value – March 31, 2020
|
|
$
|
129
|
|
Note
8. Commitments and Contingencies
Unfunded
Commitments
As
of March 31, 2020, the Company’s unfunded commitments were as follows (in millions):
Aimmune Therapeutics, Inc.
|
|
$
|
1.3
|
|
eTon Pharmaceuticals, Inc.
|
|
|
5.0
|
|
Total unfunded commitments
|
|
$
|
6.3
|
|
|
|
|
|
|
All
unfunded commitments are contingent upon reaching an established revenue threshold or other performance metrics on or before a
specified date or period of time per the terms of the royalty purchase or credit agreements, and in the case of loan transactions,
are only subject to being advanced as long as an event of default does not exist.
Note
9. Stockholders’ Equity
Stock
Compensation Plans
During
the three months ended March 31, 2020 and 2019, the Company’s Board of Directors (the “Board”) approved compensation
for Board services by granting 5,937 and 4,725 shares, respectively, of common stock as compensation for the non-employee directors.
During the three months ended March 31, 2020 and 2019, the Company recorded approximately $0.1 million and $47,000, respectively,
in Board stock-based compensation expense. The aggregate stock-based compensation expense, including the quarterly Board grants,
recognized by the Company for the three months ended March 31, 2020 and 2019 was $0.2 million and $0.1 million, respectively.
Share Repurchase
Programs
On
December 21, 2018, September 5, 2019 and March 26, 2020, the Board authorized share repurchase programs, which are more fully
described in Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds. The March 26, 2020 share repurchase
program will expire on September 30, 2020.
Note 10.
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, 2020.
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.
Marketable
Investments
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.
Contingent
Consideration
The
Company recorded contingent consideration related to the August 2019 acquisition of Enteris and sharing of certain milestone and
royalties due to Enteris pursuant to the License Agreement. Please refer to Note 3, Business Combinations, for further
details on the Company’s acquisition of Enteris and contingent consideration.
The
fair value measurements of contingent consideration obligations and the related intangible assets arising from business combinations
are classified as Level 3 estimates under the fair value hierarchy as these items have been valued using unobservable inputs.
These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the
factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted
cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher
fair value measurement.
As
of March 31, 2020 and December 31, 2019, the Company’s contingent consideration was recorded at its estimated fair value of $14.5
million.
Marketable
Investments and Derivative Securities
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, 2020 (in
thousands):
|
|
Total
Carrying
Value in
Consolidated
Balance
Sheets
|
|
|
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
|
|
$
|
1,748
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,748
|
|
Marketable investments
|
|
|
1,197
|
|
|
|
912
|
|
|
|
—
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
|
$
|
14,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,500
|
|
Warrant liability
|
|
|
129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31,
2019 (in thousands):
|
|
Total
Carrying
Value in
Consolidated
Balance
Sheets
|
|
|
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
|
|
$
|
3,555
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,555
|
|
Marketable investments
|
|
|
2,268
|
|
|
|
1,802
|
|
|
|
—
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
|
$
|
14,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,500
|
|
Warrant liability
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76
|
|
The
changes on the value of the warrant assets during the three months ended March 31, 2020 were as follows (in thousands):
Fair value – December 31, 2019
|
|
$
|
3,555
|
|
Issued
|
|
|
—
|
|
Canceled
|
|
|
—
|
|
Change in fair value
|
|
|
(1,807
|
)
|
Fair value – March 31, 2020
|
|
$
|
1,748
|
|
|
|
|
|
|
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, 2020
|
|
|
December
31, 2019
|
|
Dividend
rate range
|
|
|
—
|
|
|
|
—
|
|
Risk-free rate
range
|
|
|
0.37%
to 0.55%
|
|
|
|
1.7%
to 1.8%
|
|
Expected life
(years) range
|
|
|
4.3
to 7.1
|
|
|
|
4.6
to 7.4
|
|
Expected volatility
range
|
|
|
70.0%
to 141.1%
|
|
|
|
50.3%
to 114.6%
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2020 and December 31, 2019, the Company had three royalties, Besivance®, Best, and Cambia®, that were deemed
to be impaired based on reductions in carrying values in prior periods. The following table presents these royalties measured
at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
Total
Carrying
Value in
Consolidated
Balance
Sheets
|
|
|
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired royalties
|
|
$
|
9,547
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,547
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired royalties
|
|
$
|
10,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019.
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.
As
of March 31, 2020 (in thousands):
|
|
Carry Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,318
|
|
|
$
|
24,318
|
|
|
$
|
24,318
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables
|
|
|
177,981
|
|
|
|
177,981
|
|
|
|
—
|
|
|
|
—
|
|
|
|
177,981
|
|
Marketable investments
|
|
|
1,197
|
|
|
|
1,197
|
|
|
|
912
|
|
|
|
—
|
|
|
|
285
|
|
Warrant assets
|
|
|
1,748
|
|
|
|
1,748
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
|
$
|
14,500
|
|
|
$
|
14,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,500
|
|
Warrant liability
|
|
|
129
|
|
|
|
129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
129
|
|
As
of December 31, 2019 (in thousands):
|
|
Carry Value
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,158
|
|
|
$
|
11,158
|
|
|
$
|
11,158
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables
|
|
|
172,825
|
|
|
|
172,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
172,825
|
|
Marketable investments
|
|
|
2,268
|
|
|
|
2,268
|
|
|
|
1,802
|
|
|
|
—
|
|
|
|
466
|
|
Warrant assets
|
|
|
3,555
|
|
|
|
3,555
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable
|
|
$
|
14,500
|
|
|
$
|
14,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,500
|
|
Warrant liability
|
|
|
76
|
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76
|
|
Note 11. Segment Information
Selected
financial and descriptive information is required to be provided about reportable operating segments, considering
a “management approach” concept as the basis for identifying reportable segments. The management approach is based
on the way that management organizes the segments within the Company for making operating decisions, allocating resources, and
assessing performance. Consequently, the segments are evident from the structure of the Company’s internal organization, focusing
on financial information that a Company’s chief operating decision-makers use to make decisions about the Company’s operating
matters.
As
described in Note 1, SWK Holdings Corporation and Summary of Significant Accounting Policies, the Company has determined
it has two reportable segments: Finance Receivables and Pharmaceutical Development, and each are individually managed and provide
separate services. Revenues by segment represent revenues earned on the services offered within each segment.
Segment
performance is evaluated based on several factors, including income (loss) from continuing operations before income. Management
uses this measure of profit (loss) to evaluate segment performance because the Company believes this measure is indicative of
performance trends and the overall earnings potential of each segment.
The
following tables present financial information for the Company’s reportable segments for the periods indicated (in thousands):
Three Months Ended March 31, 2020
|
|
Finance
Receivables
|
|
|
Pharmaceutical
Development
|
|
|
Holdings
Company and
Other
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
7,136
|
|
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
7,302
|
|
Provision for credit losses and impairment expense
|
|
|
163
|
|
|
|
—
|
|
|
|
—
|
|
|
|
163
|
|
Interest expense
|
|
|
101
|
|
|
|
—
|
|
|
|
—
|
|
|
|
101
|
|
Pharmaceutical manufacturing, research and development expense
|
|
|
—
|
|
|
|
1,150
|
|
|
|
—
|
|
|
|
1,150
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
3,502
|
|
|
|
3
|
|
|
|
3,505
|
|
General and administrative
|
|
|
512
|
|
|
|
1,047
|
|
|
|
1,481
|
|
|
|
3,040
|
|
Other expense, net
|
|
|
(2,697
|
)
|
|
|
—
|
|
|
|
(53
|
)
|
|
|
(2,750
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
1,253
|
|
|
|
1,253
|
|
Net income (loss)
|
|
|
3,663
|
|
|
|
(5,533
|
)
|
|
|
(2,790
|
)
|
|
|
(4,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in Holdings Company and Other are the expenses of the parent holding company and certain other enterprise-wide overhead costs,
including public company costs and non-Enteris corporate employees, which have been included for purposes of reconciling to the
consolidated amounts.