SWK Holdings Corporation — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are against FY2020. This is an annual filing, not a standalone fourth-quarter report. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
SWK operates two segments: Finance Receivables, which provides life-sciences companies with royalty-backed and other financing, and Pharmaceutical Development, conducted through Enteris BioPharma and its Peptelligence oral drug-delivery platform. In November 2021, following a strategic review, the Board approved a streamlined go-forward plan intended to improve strategic focus, growth profile and capital allocation. The filing does not specify the full operating details of that plan.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Total revenue | $56.2 million | $36.7 million |
| Net income | $25.9 million | $5.2 million |
| Diluted EPS | $2.02 | $0.40 |
| Operating cash flow | $34.3 million | $19.3 million |
| Cash and cash equivalents | $42.9 million | $3.0 million |
| Total assets | $282.7 million | $273.9 million |
| Total liabilities | $15.4 million | $33.4 million |
| Stockholders’ equity | $267.2 million | $240.5 million |
- Revenue comprised $39.3 million of finance-receivable interest, fees and royalties; $16.1 million of Pharmaceutical Development revenue; and $0.7 million of other revenue. Finance Receivables income increased $8.5 million; Pharmaceutical Development revenue increased $10.2 million.
- Net margin was approximately 46% (net income divided by reported revenue). Results included $2.1 million of net gains from changes in fair value and sales of investments, and a $7.1 million income-tax expense. The filing’s income-tax discussion cites deferred-tax-asset valuation changes and write-offs among the tax drivers.
- FY2021 cash flow from investing activities was positive $25.8 million, reflecting finance-receivable repayments of $67.2 million against $42.4 million of new investment. Financing cash flow was negative $20.2 million, including $11.8 million of credit-facility repayments and $8.1 million of acquisition-related contingent-consideration payments.
- Finance receivables were $181.6 million net of an $8.4 million allowance for credit losses. The allowance was unchanged from 2020; no credit-loss provision or impairment expense was recognized in 2021. Nonaccrual receivables totaled $21.7 million, versus $12.2 million in 2020.
- At year-end, approximately $8,000 was drawn on the revolving facility, with $22.0 million available. The facility commitment is $22.0 million and its termination date was extended to September 30, 2022. The balance sheet classifies the small drawn amount as current.
- Working-capital indicators included $47.4 million of current assets and $5.1 million of current liabilities. The company reported $7.2 million in unfunded investment commitments.
Material changes and unusual items
- Revenue rose about 53% year over year; net income rose from $5.2 million to $25.9 million. The comparison was affected by a $4.4 million contingent-consideration expense in 2020 versus a $0.3 million gain in 2021, and depreciation and amortization fell $8.0 million, primarily as Enteris intangible assets amortized.
- Pharmaceutical Development revenue included milestone-related income under the Cara Therapeutics license agreement. Cara accounted for approximately 98% of Pharmaceutical Development segment revenue, making that segment highly concentrated.
- Pharmaceutical manufacturing, research and development expense increased to $7.3 million from $4.3 million, including costs for leuprolide clinical trials and a central-nervous-system product program. G&A increased to $13.6 million, including $1.9 million of strategic-review costs.
- Cash increased by $39.9 million, supported by receipts from finance receivables and Pharmaceutical Development. The company also paid $8.1 million of Enteris-related contingent consideration. The liability remaining at year-end was $8.5 million, measured using significant unobservable inputs.
- In October 2021, the Misonix acquisition by Bioventus resulted in SWK receiving $1.9 million in cash and 71,361 Bioventus shares.
Outlook, risks and contingencies
- Management expected existing finance-receivable assets to generate positive cash flows in 2022 and expected Pharmaceutical Development to produce cash flow above expenses from license and customer payments. Timing depends on borrower performance and development milestones; management cautioned that new investments and repayments are uncertain and gave no quantified earnings guidance.
- Key risks include borrower defaults and collateral impairment, portfolio concentration, dependence on third parties to market royalty-generating products, and the early-stage and regulatory risks of Enteris programs. COVID-19 and supply-chain disruption had affected borrowers and Enteris operations and could continue to delay supply or clinical milestones.
- Most term loans used LIBOR-based floating rates. The company was evaluating reference-rate alternatives; transition terms or replacement rates could affect investment income. SWK reported no interest-rate hedging activity.
- The company had $154.1 million of federal NOL carryforwards, some expiring by 2037, but said it did not expect current strategies to use all NOLs before expiration. Use may also be limited by ownership changes under tax rules. The Rights Agreement, intended to protect NOLs, was extended to April 8, 2022.
- Funds affiliated with Carlson held 70.8% of issued and outstanding common stock and unvested restricted stock at year-end and held contractual approval rights over specified matters. SWK also disclosed investment-company-status and financing-access risks.
- SWK reported no current legal proceeding expected to have a material effect. Its independent auditor issued an unqualified opinion on the financial statements and identified finance-receivable valuation as a critical audit matter because expected cash flows require significant judgment. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls.
Important facts for investors to verify
- Review the status and collection outlook of the $21.7 million in nonaccrual receivables and the adequacy of the $8.4 million credit-loss allowance. The filing says the B&D loan was paid off for $10.4 million in March 2022, above its $8.3 million year-end carrying value.
- Assess the sustainability of FY2021 earnings given milestone-dependent Pharmaceutical Development revenue, Cara concentration, fair-value gains, and the sizable income-tax expense and deferred-tax judgments.
- Confirm the status of the revolving facility after its September 30, 2022 termination date and the availability and terms of replacement financing.
- Track use of NOLs, ownership-change limitations and any renewal or replacement of the Rights Agreement, as well as the remaining contingent-consideration liability.
- Evaluate the company’s strategic-plan execution, portfolio concentration and exposure to LIBOR transition, supply-chain disruption and clinical or regulatory delays.