SWK Holdings Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Business context
SWK is a specialty finance and asset management company focused on financing life-science businesses and monetizing cash flows from commercialized products, including through loans, royalty purchases and revenue interests. At September 30, 2016, its portfolio included $88.5 million of finance receivables, $3.5 million of marketable investments and a $7.2 million investment in an unconsolidated entity. The company reported 22 transactions and approximately $274 million funded across the life-sciences sector as of November 8, 2016.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $4.2 million | $5.7 million | $18.1 million | $16.9 million |
| Net income (loss) attributable to SWK shareholders | $3.1 million | $(5.8) million | $5.2 million | $(3.9) million |
| Basic and diluted EPS | $0.24 | $(0.44) | $0.39 | $(0.30) |
| Operating cash flow | Not presented separately | Not presented separately | $7.6 million | $7.7 million |
Q3 revenue fell about 26% year over year, mainly as prior-period loan payoffs reduced interest income. Nine-month revenue increased about 7%. For the nine-month period, total costs and expenses were $11.2 million, including $1.7 million of credit-loss provision and $7.2 million of impairment expense. Reported profit also reflected a $0.9 million net gain on warrant derivatives. The filing does not present a conventional operating margin measure.
Cash and cash equivalents were $66.4 million at September 30, 2016, up from $47.3 million at December 31, 2015. Nine-month investing cash flow was a $14.5 million inflow, including a net decrease in finance receivables; financing cash flow was a $3.0 million outflow, primarily distributions to non-controlling interests.
Total assets were $185.2 million, compared with $180.5 million at year-end 2015. Finance receivables declined to $88.5 million from $99.3 million; stockholders’ equity was $184.4 million. Reported liabilities totaled $0.8 million, comprising accrued liabilities and warrant liability; the balance sheet shows no debt outstanding. SWK said it had no credit facility or other current borrowing access.
Material changes, risks and unusual items
- Credit and impairment items: SWK recorded $5.3 million of impairment expense related to the June sale of its SynCardia interests for $7.2 million cash plus contingent future payments. Nine-month impairment also included losses on marketable securities. A $1.7 million allowance was recorded against the Besivance royalty purchase after lower sales and increased rebates reduced expected receipts.
- Credit quality: Two term loans, with a combined carrying value of $18.9 million net of allowance, were on nonaccrual at September 30; neither was deemed impaired. B&D Dental remained in default and nonaccrual, while SWK stated collateral value exceeded the unpaid balance. ABT Molecular Imaging had defaults and received additional first-lien liquidity; SWK reported no required credit-loss provision for ABT at quarter-end.
- Liquidity commitments: Unfunded loan commitments totaled $6.8 million, contingent on specified revenue thresholds. A further $0.8 million could be payable in connection with the Cambia royalty transaction. Management believed available funds and alternative sources would cover current commitments.
- Portfolio concentration and valuation: Finance receivables are concentrated in life sciences. Some warrant and investment valuations use significant unobservable inputs, and management estimates are subject to uncertainty.
- Outlook: Management expected existing assets to generate income exceeding expenses in 2016 and was evaluating additional opportunities, but cautioned that investment timing could prevent positive cash flow beyond what existing assets produce. No numerical earnings guidance was provided.
- Tax assets: SWK reported $405.0 million of federal net operating loss carryforwards, most expiring by 2021, and $2.7 million of federal research credits. Management believed approximately $16.8 million of deferred tax assets could be realized, but stated utilization of NOLs could not be assured.
- Other disclosures: The company said no material changes had occurred in previously disclosed risk factors, no current legal proceeding was expected to have a material effect, and disclosure controls were effective. Results for interim periods may not indicate full-year results.
Important facts for investors to verify
- Whether the 2016 earnings improvement is sustainable apart from warrant fair-value changes, investment gains and prior-year credit charges.
- Recovery prospects and collateral support for nonaccrual exposures, particularly B&D Dental and ABT Molecular Imaging, and the adequacy of credit-loss allowances.
- Actual cash realization and any contingent payments from the SynCardia sale, and the financial impact of the Besivance royalty decline.
- Whether the $6.8 million of conditional commitments and Cambia-related potential payment affect liquidity or require additional capital.
- Assumptions behind Level 3 valuations and the expected realization of deferred tax assets and NOL carryforwards.