SWK Holdings Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Dollar amounts below are in millions unless stated otherwise. SWK provides specialty financing to life-science businesses, primarily through royalty interests and secured loans.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $6.1 | $8.6 | $20.9 | $13.8 |
| Net income (loss) attributable to SWK shareholders | $3.4 | $(1.0) | $8.6 | $2.1 |
| Basic and diluted earnings (loss) per share | $0.26 | $(0.08) | $0.66 | $0.16 |
- Q2 revenue included $5.7 million of finance-receivable interest and fees and $0.3 million of income from an unconsolidated investment. First-half revenue included $10.4 million and $10.5 million, respectively.
- At June 30, cash was $36.4 million; finance receivables, net, were $139.2 million; marketable investments were $4.2 million; total assets were $215.6 million; and stockholders’ equity was $214.8 million. Total liabilities were $0.8 million, principally accrued liabilities and warrant liability. The filing states SWK had no credit facility or other borrowing access at that time.
- Six-month operating cash flow was $6.1 million, investing cash flow was $7.2 million, and financing cash flow was $(9.0) million, reflecting distributions to non-controlling interests. Cash increased $4.3 million from year-end 2016.
- No credit-loss provision or impairment expense was recorded in the first half of 2017, compared with $1.7 million of credit-loss provision and $6.9 million of impairment expense in the first half of 2016. Q2 2017 income tax expense was $1.4 million; first-half expense was $5.1 million, both described as deferred tax expense.
Material changes and notable items
- Q2 revenue fell 29% year over year, mainly because the Holmdel investment’s U.S. product marketing rights had been sold in February 2017, reducing related partnership income. First-half revenue increased 51%, primarily due to $10.5 million of equity-method income associated with that investment, versus $3.8 million in the prior-year period.
- Holmdel generated $17.5 million of cash distributions to SWK during the first half; $9.0 million was distributed to non-controlling interest holders. The investment balance was zero at June 30, and SWK did not expect further material distributions.
- Finance receivables increased to $139.2 million from $126.4 million at year-end. Two term loans, with a combined net carrying value of $19.0 million, remained on nonaccrual; no cash was collected on them during the first half. These were ABT Molecular Imaging and B&D Dental.
- Cash and liquidity reflect significant portfolio cash flows and distributions; reported revenue and earnings also include investment-related income that may not recur at the same level. The filing provides no separate operating-margin measure.
Outlook, risks and contingencies
- Management expected existing portfolio assets to generate positive cash flows in 2017, but cautioned that investment timing is uncertain and cash flow might not exceed what current assets produce. No numerical earnings or revenue guidance was provided.
- At June 30, unfunded commitments totaled $8.6 million, contingent on revenue or other performance thresholds and, for loans, absence of default. A $3.75 million Narcan royalty milestone was paid in August; subsequent events also included new Imprimis and CeloNova loans and a $2.0 million Hooper Holmes loan.
- ABT was pursuing a strategic transaction with an uncertain outcome; B&D was in default and exploring strategic alternatives. SWK reported that collateral values supported its recorded loan balances and no additional credit-loss provision was required at quarter-end.
- SWK’s loan portfolio is concentrated in life sciences and is exposed to borrower credit risk, product performance and valuation uncertainty. Many loan rates reference LIBOR; the filing noted the announced intention to phase out LIBOR by the end of 2021 and the possibility that loan agreements may need renegotiation.
- SWK reported $404.0 million of federal NOL carryforwards, most of which expire by 2021, and said it may not generate enough income to use all NOLs before expiration. Management estimated $33.4 million of federal and state deferred tax assets were more likely than not realizable.
- The company reported no legal proceeding expected to have a material effect and no material change to previously disclosed risk factors other than the LIBOR issue. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the Holmdel sale-related income and distributions are nonrecurring, and how the portfolio performs without further material Holmdel distributions.
- Recovery prospects and collateral support for the $19.0 million of nonaccrual loans, particularly ABT and B&D, and whether additional provisions become necessary.
- Cash deployment, funding of contingent commitments, and liquidity needs given the absence of a credit facility.
- Portfolio yields, borrower concentration and sensitivity of LIBOR-linked loans to benchmark replacement or renegotiation.
- Future tax-asset realization, including NOL expiration timing and the assumptions supporting the deferred tax asset.