SWK Holdings Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; financial amounts below are in millions of dollars unless stated otherwise. SWK invests in and finances royalty and other cash-flow streams from life-sciences products, and provides investment advisory services.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3.361 | $1.010 | $7.028 | $1.440 |
| Operating income | $2.619 | $0.586 | $5.617 | $0.626 |
| Net income attributable to SWK shareholders | $1.392 | $0.380 | $2.849 | $0.440 |
| Diluted EPS | $0.03 | $0.01 | $0.07 | $0.01 |
| Operating cash flow | Not presented | Not presented | $2.414 | $0.385 |
- Revenue growth reflected higher finance-receivable interest and fees and increased income from the Holmdel equity-method investment. For the first half, these contributed $4.017 million and $2.695 million, respectively; marketable-investment interest was $0.178 million.
- General and administrative expense was $0.742 million in Q2 and $1.411 million for the first half, up from $0.424 million and $0.814 million, respectively, mainly due to higher professional fees and compensation.
- Income tax provision was $0.592 million in Q2 and $1.298 million for the first half, compared with $0.007 million and $0.010 million in the prior-year periods.
- At June 30, cash was $15.817 million; working capital was $16.7 million. Total assets were $71.360 million and stockholders’ equity was $58.485 million.
- Finance receivables totaled $31.575 million. The company reported no impaired finance receivables or non-performing assets.
- Debt under the credit agreement with an affiliate of a stockholder was $11.0 million, versus $5.0 million at December 31, 2013. The facility bears LIBOR plus 6.50% (6.73% at June 30), matures in September 2017, and is secured by substantially all company assets.
- First-half cash increased by $8.153 million: operating activities provided $2.414 million, investing activities provided $1.590 million, and financing activities provided $4.149 million. Financing included a $6.0 million credit-facility draw, partly offset by distributions to non-controlling interests.
Material changes and notable items
- Compared with the first half of 2013, revenue rose from $1.440 million to $7.028 million and shareholder-attributable net income from $0.440 million to $2.849 million, reflecting the expansion of SWK’s specialty-finance portfolio and Holmdel income.
- Three partner companies accounted for 69% of Q2 revenue and 71% of first-half revenue, down from 96% and 93% in the comparable 2013 periods.
- SWK’s $10.0 million Parnell loan was repaid on June 27, 2014. The company reported $0.834 million of first-half interest income and $0.321 million of syndication income related to the transaction.
- After quarter-end, SWK purchased a 25% Cambia royalty interest for $4.0 million and funded $8.5 million of a $12.0 million Response Genetics loan; Response may draw the remaining $3.5 million subject to conditions.
- On August 18, 2014, Carlson-affiliated funds bought 55.908 million newly issued shares for $76.594 million, or $1.37 per share. A planned rights offering and additional share purchase are intended to result in Carlson and affiliates holding 69% of voting shares on a fully diluted basis. The transactions also included governance rights, board changes and up to $0.9 million of expense reimbursement.
Outlook, risks and contingencies
- Management expected the 11 transactions completed by August 10 to generate income exceeding operating expenses in 2014, while noting that future investment timing is uncertain and positive cash flow beyond existing assets was not assured. It continued to evaluate additional opportunities.
- Key risks include borrower and royalty-stream credit performance, reliance on a concentrated group of partners, interest-rate exposure, and valuation uncertainty for investments using unobservable inputs. SWK stated that future use of its tax-loss carryforwards cannot be assured.
- Federal NOL carryforwards were approximately $433 million, with most due to expire by 2021. Changes in ownership may limit their use. Net deferred tax assets were $8.505 million, after a $139.840 million valuation allowance.
- The filing reported no material legal proceedings, no defaults upon senior securities, and no material change in previously disclosed risk factors. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Review the Carlson share issuance, rights offering, resulting ownership and governance provisions, including their effects on dilution and control.
- Assess whether income and cash generation are sustainable without large contributions from Holmdel or a small number of partners; distinguish accounting equity income from cash distributions.
- Verify borrower performance, collateral and repayment terms across the finance-receivable portfolio, including the conditional Response Genetics commitment and subsequent Cambia purchase.
- Review the related-party credit facility’s collateral, interest cost, maturity and conditions for increasing availability, as well as the company’s reliance on it for investment funding.
- Evaluate the realizability and ownership-change limitations of the NOLs and deferred tax assets.