SWK Holdings Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. SWK is a specialty finance and asset management company focused on providing capital to life-sciences businesses, principally through secured loans, royalties and revenue interests.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $5.655M | $6.767M | $15.047M | $13.588M |
| Net income | $4.327M | $3.668M | $10.886M | $7.312M |
| Diluted EPS | $0.34 | $0.28 | $0.84 | $0.56 |
| Credit-loss provision | None | None | $0.609M | $1.179M |
| Operating cash flow | Not provided on a quarterly basis | $10.859M | $9.089M |
Q2 revenue declined about $1.1M year over year, mainly as income from loans paid off or paid down exceeded growth from new and existing receivables. First-half revenue rose about $1.5M, reflecting higher income from new and existing investments and $2.9M of exit and prepayment fees from a first-quarter loan payoff. First-half net income benefited from a $1.006M unrealized warrant gain; the comparable 2018 period included a $0.664M unrealized equity-securities loss. The filing does not provide a clear operating-margin measure.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $27.373M, up from $20.227M at year-end. Total assets were $224.668M; finance receivables, net, were $169.156M.
- Total liabilities were $1.333M and stockholders’ equity was $223.335M. No amount was drawn on the $20M revolving credit facility at June 30; the full $20M was available. The facility matures June 29, 2021, and bears interest at Daily LIBOR (1% floor) plus 3.25%, subject to borrowing-base and covenant requirements.
- First-half cash flows: $10.859M provided by operations, $2.915M used in investing, and $0.798M used in financing; cash increased $7.146M. The company reported $43.7M of interest, fees and principal collections, including $27.7M from two term-loan payoffs, offset by $32.3M of new and add-on investment funding.
- The company had $17.4M of unfunded, conditional commitments to four counterparties. These are contingent on specified performance or other conditions.
Portfolio developments, risks and outlook
- The $6.788M allowance for credit losses includes allowances associated with Cambia, Besivance and Best ABT. First-half provision expense of $0.609M related to Besivance; management cited lower sales and higher chargebacks and rebates.
- Three receivables were on nonaccrual at June 30, with a combined net carrying value of $17.640M: B&D Dental ($8.337M), Best ABT royalty ($5.751M) and TRT royalty ($3.552M). The filing says these were not considered impaired; B&D was in default and evaluating strategic alternatives. TRT’s U.S. licensee had ended payments, while its Canadian licensee continued paying royalties.
- Management expects the existing portfolio to generate positive cash flows in 2019, but cautioned that investment timing is uncertain and the company may not generate positive cash flow beyond that produced by existing assets. No quantified earnings or revenue guidance was provided.
- The company reported $365M of federal NOL carryforwards, most of which expire by 2021, and said its current business strategy may not generate enough income to use all NOLs before expiration.
- SWK said it is evaluating the forthcoming CECL credit-loss standard and believes it is likely to recognize more upfront portfolio losses under that model. Changes in rates could also affect investment returns and borrowing costs if the facility is drawn.
- The share-repurchase program expired May 31, 2019. By June 30, SWK had repurchased 222,566 shares in total; 143,000 were bought under the program for $1.4M, or $9.59 per share. Q2 repurchases under the program totaled 5,200 shares at an average $10.03 per share.
Most important facts for investors to verify
- Performance and collections of the nonaccrual exposures, particularly B&D, Best ABT and TRT, and whether any require further reserves or impairments.
- Whether portfolio growth and realized cash collections can offset repayments and support recurring revenue, apart from payoff-related fees and noncash warrant gains.
- Terms, conditions and expected funding timing for the $17.4M of commitments, including the Solsys/Misonix-related conditions.
- Expected CECL adoption impact, NOL utilization and expiration schedule, and facility borrowing-base capacity and covenants if SWK draws on its revolver.