SWK Holdings Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. SWK operates specialty finance and pharmaceutical development businesses serving the life sciences sector. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $13.6 | $9.6 | $31.7 | $41.2 |
| Operating income | $6.8 | $2.6 | $13.8 | $22.3 |
| Net income | $6.6 | $2.2 | $10.7 | $19.6 |
| Diluted earnings per share | $0.51 | $0.17 | $0.83 | $1.53 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5.1 | $23.1 |
Q3 net income margin was approximately 48.6%, versus 23.5% a year earlier; nine-month net income margin was approximately 33.6%, versus 47.6%. These percentages are calculated from reported revenue and net income. Q3 results included a $1.8 million net fair-value gain on warrant derivatives and Bioventus stock.
At September 30, cash and cash equivalents were $19.4 million, down from $42.9 million at December 31, 2021. Finance receivables, net, were $213.0 million, compared with $181.6 million at year-end. Total assets were $292.3 million and stockholders’ equity was $277.4 million. The balance sheet reported no revolving-facility borrowings; the company stated that $22.0 million was available under the facility. The facility’s termination date had been extended to November 29, 2022, and the company was working with its lender on a further extension.
Nine-month investing cash outflow was $27.8 million, including $71.8 million of finance-receivable investments and $43.9 million of repayments. Financing cash outflow was $0.8 million. Interest income paid in kind was $3.3 million, an item to distinguish from cash collections.
Changes versus comparable periods
- Q3 revenue increased $4.0 million year over year, mainly because of $5.0 million of Cara license milestone revenue received in 2022. Finance Receivables revenue decreased $0.9 million, primarily from lower royalty income as certain return premiums were achieved and royalty rates stepped down.
- Nine-month revenue fell $9.5 million, reflecting a $5.4 million decline in Pharmaceutical Development revenue and a $4.1 million decline in Finance Receivables revenue. Cara milestone revenue was $5.0 million in 2022 versus $10.0 million in 2021; lower royalty income also weighed on finance revenue.
- Nine-month net income decreased $8.9 million. The prior-year period included larger net gains on warrant derivatives and equity securities; 2022 also had lower revenue. In Q3, lower pharmaceutical R&D expense and higher fair-value gains contributed to the year-over-year increase in net income.
- Q3 general and administrative expense rose $0.7 million, including $1.1 million of former-CEO severance and higher legal and audit fees, partly offset by lower strategic-planning and special-committee costs.
Outlook, risks and unusual items
- The filing gives no quantitative earnings or revenue guidance. Management said the finance-receivables portfolio, marketable investments and cost-method investment were expected to generate positive cash flows in 2022.
- Management said most finance-receivable debt instruments have floating rates with reference-rate floors and that SWK may benefit from rising rates. It does not currently hedge interest-rate exposure; higher funding costs could reduce income if borrowings increase.
- Two receivables were on nonaccrual at September 30: Flowonix term debt, with a $9.8 million net carrying value, and the Best ABT royalty, with a $3.0 million net carrying value. The company collected $11.4 million on nonaccrual receivables during the first nine months, including $10.7 million to settle B&D debt.
- The finance-receivable credit-loss allowance was $8.4 million. SWK was evaluating the upcoming CECL standard and said it likely would recognize more upfront portfolio losses under the new model.
- Unfunded commitments totaled $12.9 million, conditional on contractual revenue, performance or other requirements. The $8.5 million Enteris-related contingent consideration liability was unchanged during the first nine months.
- SWK noted that it may not generate sufficient income to use all of its net operating loss carryforwards before expiration. It also identified valuation, credit, interest-rate, liquidity and litigation risks; no material change to previously disclosed risk factors was reported, and no current legal proceeding was expected to have a material effect.
- The company repurchased 34,463 shares for $0.6 million through September 30 under a program authorizing up to $10.0 million of repurchases. The former CEO departed September 30; the filing reports his severance and identifies an interim CEO.
Key facts for investors to verify
- Whether the revolving credit facility was extended beyond its November 29, 2022 termination date, and whether its stated availability and terms changed.
- Cash collections and credit performance for Flowonix and Best ABT, along with any changes to nonaccrual status or the $8.4 million allowance.
- How much future revenue depends on one-time license milestones versus recurring royalties and interest, particularly as royalty rates step down after return premiums.
- The timing and financial impact of CECL adoption, and the recoverability of deferred tax assets and NOLs.
- Whether the company’s $12.9 million in conditional commitments were funded and whether planned portfolio investments affect liquidity.