SWK Holdings Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions unless stated otherwise. SWK operates Finance Receivables and Pharmaceutical Development; the latter began with the 2019 acquisition of Enteris.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $7.9 | $5.7 | $15.2 | $15.0 |
| Net income (loss) | $0.9 | $4.3 | $(3.8) | $10.9 |
| Diluted EPS | $0.07 | $0.34 | $(0.29) | $0.84 |
| Operating cash flow | Not provided for quarter | $5.1 | $10.9 |
- Q2 revenue increased $2.2 million year over year, primarily from higher royalty income and interest and fees on new and existing finance receivables. Six-month revenue was nearly flat as new income was offset by payoffs and paydowns of existing receivables.
- Q2 net income fell despite revenue growth. Results included $3.4 million of depreciation and amortization, $1.0 million of pharmaceutical R&D and manufacturing expense, and a $1.8 million increase in Enteris-related contingent consideration. Six-month results also reflected $1.2 million of warrant fair-value losses and $0.5 million of equity-security losses.
- Margins are not separately reported in the filing. At June 30, assets were $259.0 million, liabilities $26.9 million, and stockholders’ equity $232.1 million. Finance receivables, net, were $178.4 million, including an $8.4 million credit-loss allowance.
- Cash and equivalents were $17.2 million, up from $11.2 million at year-end 2019. Six-month investing cash outflow was $4.5 million; financing cash inflow was $5.4 million. Operating cash flow was down from the prior-year period.
- The $20 million revolving facility had $6.4 million outstanding and $13.6 million available at June 30. It matures June 29, 2021 and bears interest at daily LIBOR, subject to a 1.00% floor, plus 3.25%. As of August 10, $4.9 million was outstanding and $15.1 million available.
Changes, outlook, risks and notable items
- The year-over-year earnings comparison reflects Enteris, acquired in August 2019, and its related operating costs and amortization. Six-month depreciation and amortization was $6.9 million versus $9, and G&A was $5.7 million versus $2.6 million.
- Management expected existing finance receivables to generate positive cash flow in 2020 and anticipated positive company-wide cash flow in excess of expenses, but cautioned that COVID-19 makes this uncertain. Pharmaceutical Development had not materially contributed to positive cash flow; licensing income depends on development progress and milestone achievement.
- COVID-19 reduced Enteris productivity and delayed supplies, with New Jersey restrictions affecting its manufacturing facility. The company warned of possible further disruption, delays to development and clinical programs, weaker borrower liquidity, defaults, declining collateral values, and impaired royalty income.
- Credit concentration is a stated risk: a limited number of significant investments can materially affect returns. Three finance receivables were on nonaccrual, with a combined net carrying value of $15.9 million. B&D was in default; the Best and TRT royalty exposures were also nonaccrual. Management reported no impairment for B&D or TRT at quarter-end.
- Enteris acquisition-related contingent consideration was valued at $16.3 million, up from $14.5 million at year-end; its fair value depends on forecasts and other unobservable inputs, and actual payments may differ materially. Goodwill was $8.4 million and was not considered impaired.
- After quarter-end, SWK amended eTon’s loan, funded $2.0 million and increased the maximum principal amount to $15.0 million, with additional draws conditional on milestones. It also amended BIOLASE’s facility, extending its interest-only period and maturity and requiring a $0.7 million principal payment.
- The company identified LIBOR’s planned phaseout as a risk to loans and funding costs. It had no interest-rate hedges. It also stated that it might not be able to use all its net operating loss carryforwards before expiration.
- Management reported effective disclosure controls as of June 30. It reported no currently pending legal proceeding expected to have a material effect and no defaults upon senior securities.
Important facts for investors to verify
- Performance and payment status of significant borrowers and royalty exposures, including B&D, Best, TRT, and any other nonaccrual or covenant-default positions.
- COVID-19’s continuing effect on Enteris operations, portfolio-company liquidity, loan collections, royalties, and milestone timing.
- Cash generation and the extent to which reported interest income includes paid-in-kind interest; six-month cash flow was materially below the prior-year level.
- Assumptions behind the $16.3 million contingent consideration valuation, future Enteris amortization, and the company’s ability to utilize tax NOLs.
- Availability and terms of the revolver, the June 2021 maturity, and any effects of LIBOR transition on portfolio yields and borrowing costs.
- Subsequent eTon and BIOLASE amendments, including milestone-dependent funding, covenant terms, and borrower performance.