SWK Holdings Corporation — Q3 2021 Form 10-Q
Business context and period. SWK is a specialty finance and asset management company focused on life sciences, with a second segment in pharmaceutical development through Enteris. This unaudited report covers the three and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods unless stated otherwise. Amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $9.6 | $10.6 | $41.2 | $25.8 |
| Net income | $2.2 | $4.3 | $19.6 | $0.6 |
| Diluted EPS | $0.17 | $0.34 | $1.53 | $0.04 |
| Operating cash flow | Not presented by quarter | $23.1 | $9.2 |
- Q3 revenue declined about 10% year over year, while nine-month revenue rose about 60%. Finance receivables interest income and fees were $29.9 for nine months, up from $22.7; pharmaceutical development revenue was $10.8, up from $3.1.
- The nine-month pharmaceutical revenue increase included a $10.0 Cara license milestone. Q3 pharmaceutical revenue fell to $0.2 from $2.8, mainly because the prior-year period included $2.5 of non-recurring milestone revenue.
- Nine-month net income improved substantially, supported by higher revenue, lower amortization and favorable fair-value movements in warrants and equity securities. These include non-cash valuation items; nine-month income tax expense was $5.0 versus a $0.2 tax benefit in 2020. Q3 net income fell to $2.2 from $4.3.
- Q3 R&D and manufacturing expense increased to $2.5 from $1.2, primarily due to pipeline and clinical-trial materials. Q3 general and administrative expense rose to $3.6 from $2.5, including $1.0 of strategic-review costs.
Financial position, cash flow and liquidity
- At September 30, 2021, cash and cash equivalents were $18.6, versus $3.0 at December 31, 2020. Current assets were $24.8 and current liabilities $4.5. Stockholders’ equity was $260.7.
- Finance receivables, net, were $196.1, down from $204.5 at year-end. The portfolio included $8.4 of credit-loss allowance, unchanged from year-end; $11.8 of receivables were on nonaccrual.
- Nine-month cash flow: $23.1 provided by operations, $10.4 provided by investing activities, and $17.8 used in financing. Financing outflows included $11.8 of net credit-facility repayments and $6.1 of contingent-consideration payments.
- Only about $8,000 was drawn on the revolving facility at quarter-end; approximately $22.0 was available. The facility commitment was increased to $22.0 and its maturity extended to September 30, 2022. Contingent consideration payable was $10.7, down from $16.9 at year-end.
- Subsequent to quarter-end, SWK reported receiving $35.7 of finance-receivable payments, including loan payoffs; cash and cash equivalents were $56.8 as of November 8, 2021.
Material changes, outlook and risks
- On November 1, 2021, the Board approved a streamlined go-forward plan following a strategic review, with an emphasis on improving strategic focus, growth and capital allocation. Management described a focus on the core specialty finance business.
- On October 29, Misonix was acquired by Bioventus. SWK received $31.6 for payoff of its Misonix term loan and, for its Misonix shares, $1.9 cash plus 71,361 Bioventus shares valued at $1.2 at closing. Thermedx repaid its loan on October 22 for $0.5, including accrued interest and paid-in-kind interest.
- Management expected the finance portfolio and pharmaceutical development activities to generate positive cash flow in aggregate, but cautioned that COVID-19-related disruption, vendor delays and clinical-trial delays could affect revenue, operations and milestone timing. The filing gives no specific earnings or revenue guidance.
- Key credit exposures include B&D Dental, whose first-lien loan was in default and nonaccrual, and the Best royalty, also on nonaccrual. The filing reports $6.4 of unfunded commitments, conditional on contractual performance thresholds and other terms.
- Most finance receivables carry floating rates tied to LIBOR, and the company had no interest-rate hedges. Management noted that rate movements could affect both investment income and borrowing costs. The company also expected CECL adoption to likely result in more upfront portfolio losses.
- Management said no legal proceeding was expected to have a material effect and reported no material change in previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the strategic plan’s focus on specialty finance changes Enteris investment, spending or future reporting.
- The collectability and status of the B&D loan and Best royalty, and developments in the other impaired royalty exposures.
- The durability of finance-receivable income and the degree to which reported earnings depend on milestone revenue and fair-value gains.
- Post-quarter cash levels and use of proceeds from the Misonix and Thermedx repayments, including the value and liquidity of Bioventus shares received.
- The timing and conditions on the $6.4 of unfunded commitments, contingent consideration payments, and transition to the $22.0 credit facility maturity in September 2022.