SWK Holdings Corporation — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, with comparison to Q1 2021. SWK operates two businesses: specialty finance and asset management focused on life sciences finance receivables, and pharmaceutical development through Enteris BioPharma and its Peptelligence platform. Unless stated otherwise, amounts below are in U.S. dollars and millions.
Financial performance and position
- Revenue: $11.1, up $1.7 (19%) from $9.4. Finance receivable interest income and fees were $10.4, compared with $8.7; pharmaceutical development revenue was $0.2, compared with $0.2; other revenue was $0.5, compared with $0.5.
- Profit: Operating income was $5.3, versus $3.1. Net income was $3.5, versus $3.4; diluted earnings per share were $0.27, versus $0.26. Operating margin was approximately 47.5%, compared with 33.2%; net margin was approximately 31.2%, compared with 36.2%.
- Key expenses and unusual fair-value items: Pharmaceutical manufacturing, research and development expense rose to $1.9 from $1.5. Depreciation and amortization fell to $0.7 from $1.7, primarily due to lower Enteris intangible amortization. Other expense was $0.7, versus other income of $1.2, reflecting a $0.7 net fair-value loss on warrants and Bioventus shares; the prior period included fair-value gains.
- Cash flow: Operating activities provided $4.3, compared with $4.4. Investing activities used $5.7, including $22.7 of finance receivable funding offset by $17.0 of repayments. Financing activities used $0.01. Cash decreased $1.5 to $41.4 from $42.9.
- Assets, debt and liquidity: Total assets were $286.0 and stockholders’ equity was $270.8 at March 31. Finance receivables, net, were $188.3, including an $8.4 credit-loss allowance. The company reported no revolver borrowings and had $22.0 available under its facility; the facility was due to terminate September 30, 2022. Total liabilities were $15.2, including $8.5 of contingent consideration. Current assets were $46.0 and current liabilities $4.9.
Material changes versus Q1 2021
- Management attributed higher revenue mainly to $2.6 of interest and fees from two loan payoffs and $1.9 more from new and existing loans. These gains were partly offset by lower income from loans paid off in 2021 and reduced royalty revenue.
- Higher operating income reflected revenue growth and lower amortization, partly offset by increased research and development and general and administrative costs.
- Net income increased only modestly as the period moved from fair-value gains to a net fair-value loss and incurred higher income tax expense.
- Finance receivables grew from $181.6 at year-end 2021 to $188.3. Nonaccrual balances declined to $13.0 from $21.7; two receivables remained on nonaccrual: Flowonix and the Best royalty. The company collected $0.5 on nonaccrual receivables during the quarter.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance was provided. Management expects the finance receivables portfolio and related investments to generate positive cash flows in 2022 in aggregate, and expects Pharmaceutical Development to generate cash flow above expenses from licenses and customer relationships. Timing depends on portfolio collections and the success of licensees’ development candidates.
- Management said COVID-19-related economic uncertainty makes future cash generation difficult to predict. Most finance receivables carry floating rates with LIBOR floors; interest-rate movements may affect earnings. SWK said it does not currently hedge interest-rate exposure and is evaluating alternatives for LIBOR-referencing loans.
- Unfunded commitments totaled $5.2, subject to specified performance conditions and, for loans, the absence of default. Management expects the CECL credit-loss standard, effective for the company after December 15, 2022, may result in more upfront portfolio losses.
- The $8.5 Enteris-related contingent consideration is a Level 3 fair-value estimate based on unobservable inputs. Management noted that the company may not be able to use all of its net operating loss carryforwards before expiration.
- The filing reported no material changes to previously disclosed risk factors and no legal proceeding expected to have a material effect. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Portfolio credit quality and recovery prospects for Flowonix and the impaired Best and Cambia royalties; verify nonaccrual and allowance levels in subsequent filings.
- Ability to renew or replace the revolving credit facility before its September 30, 2022 termination date.
- Whether finance receivable originations, repayments and collections support management’s positive cash-flow expectations, and whether the $5.2 of conditional commitments are funded.
- Performance and payment timing under Enteris licensing and customer agreements, including any related contingent consideration.
- Adoption effects of CECL and the transition away from LIBOR, as well as interest-rate sensitivity and fair-value assumptions for warrants and other Level 3 items.