SWK Holdings Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement figures are generally converted from thousands to millions. SWK is a specialty finance and asset management company focused on financing life-sciences businesses and acquiring royalty-related cash flows.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $5.40m | $3.36m | $11.20m | $7.03m |
| Consolidated net income | $0.30m | $2.03m | $3.37m | $4.28m |
| Net income attributable to SWK shareholders | $(0.38)m | $1.39m | $1.88m | $2.85m |
| EPS attributable to SWK shareholders | $(0.00) | $0.03 | $0.01 | $0.07 |
- Quarterly revenue rose approximately 61% year over year, primarily as capital deployment increased finance-receivable interest and fees. Six-month revenue rose approximately 59%.
- Q2 revenue included $3.97m of finance-receivable interest and fees and $1.34m of equity-method income. Q2 results included a $2.59m credit-loss provision and a $1.56m net loss on warrant derivatives. The provision and derivative loss contributed to lower consolidated income and a loss attributable to SWK shareholders.
- Six-month operating cash flow was $4.56m, versus $2.41m a year earlier. Investing cash use was $33.06m, principally from a $36.53m net increase in finance receivables; financing cash use was $1.80m. Cash declined $30.29m to $28.44m.
- At June 30, total assets were $190.38m, including $122.44m of finance receivables net of allowance. Total liabilities were $1.53m and stockholders’ equity was $188.85m. The balance sheet shows no outstanding debt. The related-party credit facility’s draw period expired in March 2015, leaving no remaining availability; it matures in 2017.
- No conventional gross margin is reported. General and administrative expense was 17.5% of revenue in Q2, compared with 22.1% a year earlier; for the six-month periods it was 19.3% versus 20.1%.
Material changes and significant items
- Finance receivables before allowance increased to $125.03m from $93.35m at year-end 2014. The allowance for credit losses was $2.59m, compared with none at year-end.
- Two term loans totaling $17.23m were on nonaccrual at June 30, compared with one loan of $5.97m at December 31. One loan was identified as impaired and drove the $2.59m provision.
- After quarter-end, borrower Response Genetics filed for Chapter 11 on August 10, 2015. SWK disclosed that the related loan had a $10.6m carrying value before allowance at June 30 and that its Response warrant assets were written down by $0.80m to zero. SWK agreed to provide up to $3m of debtor-in-possession financing; the filing reports $715,000 funded in August as an initial DIP draw.
- Net warrant-derivative losses were $1.19m for the first half, compared with gains of $0.37m in the prior-year period. The company also wrote off the Response warrants’ entire $0.80m carrying value.
- The weighted-average share count increased substantially year over year, from about 41.5m to 130.0m, affecting per-share comparisons.
Outlook, risks and contingencies
- Management said income from the 18 transactions completed under its strategy was expected to exceed operating expenses in 2015 and that it continued to assess additional opportunities. This is not quantitative earnings guidance; management cautioned that timing and completion of investments are uncertain.
- SWK reported $9.5m of unfunded commitments on closed loans and a separate $0.5m contingent payment related to the Cambia royalty. Management believed available funds and alternative funding sources would be sufficient for current commitments.
- Management highlighted concentrated exposure to the life-sciences sector, credit and collateral risk, interest-rate risk, and uncertainty around future investment opportunities and cash generation. Federal net operating losses were approximately $421m at year-end 2014, with most expiring by 2021; ownership changes may limit their use.
- The company reported no material changes to previously disclosed risk factors and no current legal proceeding expected to have a material effect. Disclosure controls were judged effective.
Important facts for investors to verify
- Response’s bankruptcy sale outcome, collateral recovery, and the final amount and repayment prospects of SWK’s DIP financing.
- Performance and credit quality of the two nonaccrual loans, including the remaining exposure after the impairment allowance.
- Whether the growing finance-receivable portfolio produces cash collections and earnings sufficient to cover expenses and unfunded commitments.
- Basis and sensitivity of Level 3 valuations, especially finance receivables and warrants, and the effect of further fair-value changes on reported earnings.
- Availability of capital for future originations after expiration of the related-party facility’s draw period, and the practical ability to use tax-loss carryforwards.