Note 4 - Variable Interest Entities

9 Months Ended

Sep. 30, 2013

Variable Interest Entities [Abstract]

Variable Interest Entities [Text Block]

Note 4. Variable Interest Entities

The Company consolidates the activities of VIEs of which we are the primary beneficiary. The primary beneficiary of a VIE is the variable interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether the Company owns a variable interest in a VIE, the Company performs qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements.

Consolidated VIE

SWK HP Holdings LP (“SWK HP”) 

For a discussion of the formation, operations and presentation of SWK HP please see Non-controlling Interests in Note 6. SWK HP is considered a VIE due to the lack of voting or similar decision-making rights by its equity holders regarding activities that have a significant effect on the economic success of the partnership. The Company’s ownership in SWK HP constitutes variable interests. The Company has determined that it is the primary beneficiary of the SWK HP as (i) the Company has the power to direct the activities that most significantly impact the economic performance of SWK HP via its obligations to perform under the partnership agreement, and (ii) the Company has the right to receive residual returns that could potentially be significant to SWK HP. As a result, the Company consolidates SWK HP in its financial statements and the limited partner interests of SWK HP owned by third parties are reflected as a non-controlling interest in the Company’s unaudited condensed consolidated balance sheet.

Unconsolidated VIEs

Holmdel Pharmaceuticals LP (“Holmdel”)  

In December 2012, Holmdel was formed to acquire the U.S. marketing authorization rights to a beta blocker pharmaceutical product indicated for the treatment of hypertension for a total purchase price of $13 million. SWK Holdings GP acquired a direct general partnership interest in SWK HP, which in turn acquired a limited partnership interest in Holmdel. The total initial investment by SWK HP was $13 million, of which SWK Holdings GP provided $6 million.

SWK HP has significant influence over the decisions made by Holmdel. SWK HP will receive quarterly distributions of cash flow generated by the pharmaceutical product according to a tiered scale that is subject to certain cash on cash returns received by SWK HP. Until SWK HP receives a 1x cash on cash return on its interest in Holmdel, SWK HP will receive approximately 84% of the pharmaceutical product’s cash flow. As the cash on cash multiple received by SWK HP Holdings LP increases, SWK HP’s interest in the cash flow generated by the pharmaceutical product decreases, but in no instance will it decline below 39%. Holmdel is considered a VIE because SWK HP’s control over the partnership is disproportionate to its economic interest. This VIE remains unconsolidated as the power to direct the activities of the partnership is not held by the Company. The Company is using the equity method to account for this investment.  SWK HP’s ownership in Holmdel approximates 84%. The Company accounts for its interest in the entity on a quarter lag applied on a consistent basis. For the three and nine months ended September 30, 2013, the Company recognized $627,000 and $1,042,000, respectively, of equity method gains. In addition, the Company received cash distributions totaling $3,403,000 during the nine months ended September 30, 2013, of which $1,815,000 was subsequently paid by the Company to holders of the non-controlling interests. Changes in the carrying amount of the Company’s investment in Holmdel for the nine months ended September 30, 2013, are as follows (in thousands):  

Balance at December 31, 2012	$	13,000
Add: Income from investments in unconsolidated entities		1,042
Less: Cash distribution on investments in unconsolidated entities		(3,403	)
Balance at September 30, 2013	$	10,639

  The following table provides the financial statement information related to Holmdel:

	As of September 30, 2013 (in millions)			Three months ended September 30,   2013 (in millions)		Nine months  ended September 30,   2013 (in millions)
Assets	$	12.5	Revenue	$	4.3	$	8.3
Liabilities	$	0.0	Expenses	$	3.6	$	7.1
Equity	$	12.5	Net income	$	0.7	$	1.2