SWK Holdings Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; financial statements are unaudited. SWK operates two segments: Finance Receivables, which provides financing and royalty-based capital to life-sciences businesses, and Pharmaceutical Development, centered on Enteris BioPharma’s Peptelligence oral drug-delivery platform.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $22.3 million | $7.9 million | $31.6 million | $15.2 million |
| Net income (loss) | $14.0 million | $0.9 million | $17.4 million | $(3.8) million |
| Diluted EPS | $1.09 | $0.07 | $1.35 | $(0.29) |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $19.3 million | $5.1 million |
- Q2 revenue comprised $11.8 million of finance-receivables interest and fees and $10.5 million of pharmaceutical-development revenue. The latter included a $10.0 million Cara license milestone.
- For the first half, finance-receivables interest and fees were $20.5 million; pharmaceutical-development revenue was $10.7 million, plus $0.5 million of other revenue.
- Q2 costs and expenses were $5.7 million. The filing does not provide a reported operating margin; reported earnings also reflect fair-value gains and the milestone revenue.
- At June 30, cash and cash equivalents were $6.6 million; current assets were $12.8 million and current liabilities $3.1 million. Total assets were $272.8 million and stockholders’ equity $258.2 million.
- Finance receivables, net, were $203.0 million, including an $8.4 million credit-loss allowance. Two receivables were on nonaccrual, totaling $11.9 million net carrying value: B&D Dental and the Best royalty.
- No balance was outstanding on the revolving credit facility at quarter-end; the full $20.0 million was available. The company reported no other funded debt balance in the presented balance sheet.
- Six-month investing cash flow was positive $2.2 million and financing cash flow was negative $17.8 million. Cash increased $3.6 million from year-end 2020.
Changes versus prior comparable periods
- Q2 revenue rose $14.4 million year over year, including a $10.3 million increase in pharmaceutical-development revenue, chiefly from the Cara milestone, and a $4.1 million increase in finance-receivables income.
- First-half revenue increased $16.4 million and net income improved by $21.2 million versus the first half of 2020. The improvement included the $10.0 million milestone, lower contingent-consideration expense and lower amortization, as well as a shift from fair-value losses to gains on warrants and equity securities.
- Q2 general and administrative expense increased $0.8 million year over year; pharmaceutical manufacturing, research and development expense increased $0.5 million. Depreciation and amortization fell $2.6 million, primarily due to lower Enteris intangible-asset amortization.
- Compared with December 31, 2020, cash increased from $3.0 million, while finance receivables declined from $204.5 million. The revolver balance was reduced from $11.8 million to zero, and contingent consideration fell from $16.9 million to $10.7 million.
Outlook, risks and unusual items
- Management expects the finance-receivables portfolio and Pharmaceutical Development segment to generate positive cash flows in aggregate, but cautions that this is uncertain. License-related receipts depend on counterparties’ development progress and milestone achievement.
- The revolver maturity was extended to September 27, 2021; SWK said it was exploring options for a new credit facility. A post-quarter amendment fee of $16,750 was paid.
- COVID-19 had reduced Pharmaceutical Development productivity and delayed supplies; management said disruption could continue in the near term. The pandemic may also delay clinical trials and license milestones.
- On May 17, 2021, SWK disclosed that its board’s strategic review committee was exploring strategic alternatives and that a previously announced proposal from Carlson Capital-affiliated funds to acquire loan and royalty assets had been withdrawn. No transaction had been approved, and there was no assurance one would result. Subsequent to quarter-end, the board approved special bonuses for certain employees if a strategic corporate transaction closes before April 1, 2022.
- Other items to monitor include $6.4 million of conditional unfunded commitments; the $10.7 million Level 3 contingent-consideration liability; and management’s expectation that CECL adoption may result in more upfront portfolio losses. SWK also stated it may not generate enough income to use all its net operating loss carryforwards before expiration.
- Most finance-receivables debt has floating rates tied to LIBOR with floors. SWK does not currently hedge interest-rate exposure. B&D’s first-lien loan was in default, and B&D was evaluating strategic alternatives; the filing says this loan was not considered impaired at June 30.
- Management reported effective disclosure controls and no material legal proceeding expected to affect the company.
Most important facts for investors to verify
- Whether the $10.0 million Cara milestone is nonrecurring and how future milestone and royalty receipts depend on licensee progress.
- Any outcome of the strategic review, including transaction terms, timing, and potential employee bonus costs.
- Replacement financing for the revolver before or at its September 27, 2021 maturity, and related borrowing terms.
- Credit quality and recoverability of nonaccrual exposures, especially B&D and the Best royalty, and the adequacy of the $8.4 million allowance.
- Cash conversion and the sustainability of earnings excluding milestone revenue and fair-value changes.
- COVID-19 effects on Enteris operations, clinical programs, supply availability, and milestone timing.