SWK Holdings Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in millions unless stated otherwise. SWK operates a specialty finance business focused on life sciences and a pharmaceutical development business through Enteris.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $9.37 | $7.30 |
| Income (loss) before taxes | $4.33 | $(3.41) |
| Net income (loss) | $3.39 | $(4.66) |
| Basic and diluted EPS | $0.26 | $(0.36) |
| Cash from operations | $4.37 | $3.32 |
| Cash used in investing | $(5.17) | $(4.38) |
| Cash from (used in) financing | $(0.60) | $14.23 |
| Cash and cash equivalents | $1.61 | $3.01 at Dec. 31, 2020 |
| Total assets / stockholders’ equity | $277.22 / $244.08 | $273.90 / $240.51 at Dec. 31, 2020 |
Finance receivables interest income, including fees, was $8.68; pharmaceutical development revenue was $0.20 and other revenue was $0.50. Total costs and expenses were $6.26. Income included $1.22 of net fair-value gains: $0.28 on warrants and $0.93 on equity securities. No credit-loss provision or impairment expense was recorded in Q1 2021.
Finance receivables, net, were $209.90, against an $8.39 credit-loss allowance. Current assets were $6.91 and current liabilities $15.20. The revolving credit facility had $11.16 outstanding and $8.8 available at quarter-end. The company reported $16.9 of contingent consideration payable. The filing says the credit facility was paid off after quarter-end; $20.0 was available to borrow as of May 10, 2021.
Changes versus the prior comparable period
- Revenue increased $2.07, principally from higher finance-receivable interest, fees and royalty income, plus increased pharmaceutical development revenue.
- Net income improved by $8.05 from a prior-year loss. Lower depreciation and amortization (down $1.82) and the swing from $2.75 of net other expense to $1.22 of net other income were significant contributors.
- Pharmaceutical manufacturing, research and development expense increased $0.40, primarily due to materials purchases. General and administrative expense declined $0.16.
- Cash decreased $1.40 during the quarter, as $7.10 of finance-receivable investment and other outflows exceeded operating cash generation and receipts.
Outlook, risks and unusual items
- Management expects the finance-receivables portfolio to generate positive cash flows in 2021 and expects the company, in aggregate, to generate cash flow in excess of expenses, but says COVID-19-related uncertainty prevents certainty. No specific financial guidance was provided.
- COVID-19 disrupted Enteris productivity and supplies and may delay clinical trials and licensee milestones, affecting revenue and cash flows.
- Two receivables were on nonaccrual at March 31: B&D Dental, with an $8.3 net carrying value, and the Best royalty, with a $3.7 net carrying value. B&D was in default and considering strategic options. The allowance includes $6.6 related to the Best loan/royalty exposure.
- The revolving facility was scheduled to mature June 30, 2021, with a 90-day extension option; management was exploring a replacement facility. Most finance receivables carry floating rates linked to LIBOR, and the company reported no interest-rate hedging.
- Management noted that it may not generate enough income to use all net operating loss carryforwards before they expire. The company is evaluating the forthcoming CECL standard and expects it may result in more upfront portfolio losses.
- Subsequent events: Tenex repaid its loan for $6.5 on April 1; Harrow repaid its loan for approximately $9.4 on April 30; and SWK funded $3.0 for an Ideal Implant synthetic royalty, with a further $2.0 available subject to milestones.
- On May 17, the board announced its intention to form a committee to explore strategic alternatives; a previously announced proposal from Carlson Capital-affiliated funds to acquire loan and royalty assets was withdrawn. No transaction was approved or assured.
Key facts for investors to verify
- Whether the strategic review results in a transaction, and the status of the withdrawn asset-acquisition proposal.
- Repayment and redeployment of the credit facility, its maturity or replacement financing, and liquidity after the Tenex and Harrow repayments and Ideal funding.
- Performance and collectability of nonaccrual exposures, particularly B&D and Best, and whether the $8.39 allowance remains adequate.
- Whether Enteris can overcome pandemic-related supply and productivity delays and achieve license, development and milestone revenue.
- The sustainability of earnings excluding fair-value gains, and the eventual effects of CECL adoption and NOL utilization.