Variable Interest Entities

12 Months Ended

Dec. 31, 2016

Receivables [Abstract]

Variable Interest Entities

Note 4. Variable Interest Entities

The Company consolidates the activities of VIEs of which it is 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 was formed in December 2012 to acquire a limited partnership interest in Holmdel Pharmaceuticals LP (“Holmdel”).   Holmdel acquired the U.S. marketing authorization rights to a beta blocker pharmaceutical product indicated for the treatment of hypertension for a total purchase price of $13.0 million. The Company, through its wholly owned subsidiary SWK Holdings GP LLC (“SWK Holdings GP”) acquired a direct general partnership interest in SWK HP, which in turn acquired a limited partnership interest in Holmdel. The total investment in SWK HP of $13.0 million included $6.0 million provided by SWK Holdings GP and $7.0 million provided by non-controlling interests.  Subject to customary limited partner protections afforded the investors by the terms of the limited partnership agreement, the Company maintains voting and managerial control of SWK HP and therefore includes it in its consolidated financial statements.

SWK HP has significant influence over the decisions made by Holmdel. SWK HP receives 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. SWK HP received approximately 84 percent and 70 percent of the pharmaceutical product's cash flow until SWK HP received a 1x and 2x, respectively, cash on cash return on its interest in Holmdel. SWK HP's current ownership in Holmdel approximates 49 percent. In no instance will SWK HP's economic interest decline below 39 percent. 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. The Company accounts for its interest in the entity based on the timing of quarterly distributions, which are paid on a quarter lag basis.

Unconsolidated VIE

For the year ended December 31, 2016, the Company recognized $6.2 million of equity method gains, of which $3.2 million was attributable to the non-controlling interest in SWK HP. In addition, SWK HP received cash distributions totaling $7.2 million during the year ended December 31, 2016, of which $3.7 million was subsequently paid to holders of the non-controlling interests in SWK HP. For the year ended December 31, 2015, the Company recognized $5.9 million of equity method gains, of which $3.0 million was attributable to the non-controlling interest in SWK HP. In addition, SWK HP received cash distributions totaling $6.9 million during the year ended December 31, 2015, of which $3.6 million was subsequently paid to holders of the non-controlling interests in SWK HP. Changes in the carrying amount of the Company’s investment in Holmdel for the years ended December 31, 2016 and 2015, are as follows (in thousands):

Balance at December 31, 2014	$	9,044
Add: Income from investments in unconsolidated entities		5,884
Less: Cash distribution on investments in unconsolidated entities		(6,940	)
Balance at December 31, 2015	$	7,988
Add: Income from investments in unconsolidated entities		6,219
Less: Cash distribution on investments in unconsolidated entities		(7,222	)
Balance at December 31, 2016	$	6,985

The following table provides the financial statement information related to Holmdel for the comparative periods during which SWK HP has reflected its share of Holmdel income in the Company’s consolidated statements of operations:

in millions	At December 31, 2016			Year Ended December 31, 2016
Assets	$	8.8	Revenue	$	8.9
Liabilities	$	1.8	Expenses	$	1.5
Equity	$	7.0	Net income	$	7.4

in millions	At December 31, 2015			Year Ended December 31, 2015
Assets	$	11.7	Revenue	$	10.9
Liabilities	$	3.3	Expenses	$	1.4
Equity	$	8.4	Net income	$	9.5