SWK Holdings Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. SWK is a specialty finance and asset management company focused on life sciences. In August 2019, it added a second business, Pharmaceutical Development, through its acquisition of Enteris BioPharma.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $6.35 million | $5.88 million | $21.40 million | $19.47 million |
| Net income (loss) | $4.16 million | ($5.72 million) | $15.04 million | $1.60 million |
| Diluted EPS | $0.32 | ($0.44) | $1.17 | $0.12 |
- Finance receivable interest and fees accounted for $6.20 million of Q3 revenue. Pharmaceutical Development contributed $149,000 after Enteris was acquired on August 26; Enteris reported a $0.8 million net loss from acquisition through quarter-end.
- At September 30, total assets were $247.5 million, including $175.0 million of net finance receivables; stockholders’ equity was $227.6 million and total liabilities were $19.9 million. Liabilities included $16.3 million of contingent consideration.
- Cash was $4.5 million, down from $20.2 million at year-end 2018. SWK had no borrowings outstanding on its $20 million revolving credit facility, all of which was available, subject to facility terms.
- Nine-month operating cash flow was $13.4 million, investing cash flow was negative $28.3 million, and financing cash flow was negative $0.8 million. Investing uses included $41.0 million of finance receivable funding and $19.7 million for the Enteris acquisition, offset in part by $32.6 million of receivable repayments.
Material changes versus prior comparable periods
- Q3 revenue increased about 8% year over year; nine-month revenue rose about 10%. Management attributed growth chiefly to increased interest and fees on new and existing finance receivables, partly offset by loans paid off or paid down.
- Q3 returned to profit from a year-earlier loss. The comparison was significantly affected by 2018 credit-loss and impairment charges of $12.8 million in Q3; SWK recorded none in Q3 2019. For the nine-month period, credit-loss provision was $0.6 million in 2019 versus $14.0 million of provision and impairment charges in 2018.
- Q3 2019 included a $1.8 million unrealized gain on Misonix equity securities and a $1.2 million unrealized warrant loss. The equity gain followed the exchange of Solsys interests for Misonix shares and is not recurring operating revenue.
- Enteris added $32.7 million of net intangible assets and $4.6 million of goodwill. The acquisition’s estimated total consideration was $36.3 million, including contingent consideration; $21.5 million was paid in cash at closing. Acquisition accounting remained preliminary.
Portfolio, outlook, risks and unusual items
- Finance receivables were $175.0 million net of a $6.8 million credit-loss allowance. Three receivables totaling $17.6 million were on nonaccrual status, including B&D Dental, Best ABT and Tissue Regeneration Therapeutics. B&D was in default and evaluating strategic alternatives. Management said these nonaccrual assets were not considered impaired at quarter-end.
- SWK reported $9.8 million of unfunded commitments, conditional on specified revenue or performance milestones and, for loans, absence of default.
- Management expected the existing finance portfolio to generate positive cash flows in 2019 and expected company-wide cash flow to exceed expenses. Pharmaceutical Development’s cash contribution was expected to depend on licensing and development milestones; timing was uncertain and depended on licensees’ success. No quantitative earnings guidance was provided.
- Enteris’s Peptelligence platform is intended to support licensing and development of oral formulations, but the company had not out-licensed its internal pipeline. Product development, clinical and regulatory approval, commercialization, intellectual-property protection, and the ability to secure licensing agreements are material risks.
- SWK noted that adoption of the expected-credit-loss standard (CECL) could result in more upfront portfolio losses. It also identified interest-rate and credit risks. The Enteris acquisition introduced additional exposure to product liability, manufacturing regulation, personnel retention and insurance costs.
- Subsequent events: Cheetah repaid its facility on October 25, generating approximately $11.4 million, including exit fees and warrant proceeds. On November 13, SWK funded $5.0 million of a maximum $10.0 million term loan to Eton Pharmaceuticals.
Important facts for investors to verify
- Whether nonaccrual exposures, particularly B&D, Best ABT and TRT, produce the cash recoveries reflected in portfolio valuations.
- The assumptions underlying the $16.3 million Enteris contingent-consideration liability, the final purchase-price allocation and the value of acquired intangible assets.
- Enteris licensee progress, milestone timing, pipeline development and the commercial and regulatory prospects of its programs.
- Cash needs after the Cheetah repayment, the Eton advance, continued portfolio investment and $9.8 million of conditional commitments; also confirm borrowing-base availability under the revolver.
- The extent to which reported earnings depend on fair-value movements, acquisition-related accounting and prior-period credit charges rather than recurring cash income.