SWK Holdings Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. SWK provides specialty financing to life-sciences businesses, principally through loans, royalty interests and related investments. Figures below are in millions, except per-share amounts.
Financial performance and position
- Revenue: $14.9, up from $5.2 in Q1 2016. Finance-receivable interest and fees were $4.7, versus $3.5; income from an unconsolidated investment was $10.2, versus $1.7. The investment income primarily reflected Holmdel’s February sale of U.S. marketing rights to InnoPran XL.
- Profit: Consolidated net income was $10.3, compared with $3.9. Net income attributable to SWK stockholders was $5.2, or $0.40 per diluted share, compared with $3.1, or $0.24. The reported $3.7 income-tax provision followed no tax expense in the prior-year quarter.
- Expenses and other items: General and administrative expense was $0.7, down from $0.9; there was no impairment expense, compared with $0.3 in Q1 2016. Other income/expense included a $0.5 unrealized warrant loss and a $0.2 realized securities gain. The filing does not provide a conventional operating-margin measure.
- Cash flow: Operating cash flow was $3.0, compared with $2.3. Investing cash flow was $14.1, including $17.2 in distributions from the unconsolidated investment; financing cash flow was negative $8.8, largely distributions to non-controlling interests. Cash increased $8.3 to $40.5, from $32.2.
- Assets, liquidity and debt: Total assets were $212.4, including $130.8 of finance receivables and $4.3 of marketable investments. Total liabilities were $0.9. SWK reported no borrowing facility or other current access to borrowing; its balance sheet showed no conventional funded debt. The filing reports $8.1 of contingent unfunded commitments.
- Portfolio credit: Finance receivables rose from $126.4 to $130.8, net of a $1.7 allowance. Two term loans totaling $19.0 were on nonaccrual, with no cash collected on them during the quarter. SWK said neither was deemed impaired, citing collateral assessments.
Material changes and unusual items
- Holmdel sold its U.S. marketing authorization rights on February 23, 2017. SWK recognized $10.2 of equity-method income and received distributions; its investment carrying value fell to zero at quarter-end. The transaction was the primary driver of the year-over-year revenue and earnings increase and should not be assumed recurring.
- SWK’s portfolio grew following six investments funded in the second through fourth quarters of 2016; management attributed higher finance-receivable interest to those investments.
- Marketable investments increased to $4.3. SWK sold 75,000 Cancer Genetics shares, recognizing a $0.2 gain, and recorded a $1.8 unrealized gain on securities in other comprehensive income.
- SWK adopted ASU 2016-09 in January 2017, recognizing previously unrecognized stock-compensation-related deferred tax assets, offset by a valuation allowance; there was no retained-earnings cumulative effect.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management said existing finance receivables and marketable investments were expected to generate positive cash flows in 2017, but cautioned that additional investment timing is uncertain and cash flow beyond existing-asset production may not be achieved.
- Management stated it was evaluating investment opportunities and could borrow to fund investments if appropriate, while noting it then had no access to a credit facility or other borrowing.
- Key exposures include concentration in life sciences, borrower credit and royalty-stream performance, valuation of Level 3 assets and warrants, and interest-rate movements. Federal NOLs were $404.0, with most expirations by 2021; use depends on generating qualifying future taxable income. The filing does not assure utilization.
- Two nonaccrual loans warrant attention: ABT Molecular Imaging remained in a workout, and B&D Dental was in default and pursuing operational improvements and strategic alternatives. SWK reported no material legal proceeding expected to affect its business, and no material change to previously disclosed risk factors.
- After quarter-end, SWK amended Soluble Systems’ credit agreement to provide up to $1.5 of additional funding by August 2017, matched by insider subordinated capital; the amendment also permitted payment-in-kind interest for specified installments and extended the interest-only period.
Investor verification priorities
- Assess how much Q1 earnings depended on the one-time Holmdel sale and whether recurring portfolio interest can sustain results.
- Review performance, collateral coverage and recovery prospects for the $19.0 of nonaccrual loans, particularly ABT Molecular Imaging and B&D Dental.
- Confirm the terms, conditions and potential funding needs associated with the $8.1 of contingent commitments, including any subsequent commitments.
- Evaluate the realization assumptions behind the $34.8 deferred tax asset and the ability to use NOLs before expirations.
- Monitor cash generation, portfolio concentration and valuation sensitivity given the absence of a borrowing facility and the use of Level 3 valuations.