SWK Holdings Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited. SWK invests in pharmaceutical and biotechnology royalty streams and provides financing to life-sciences businesses; it also provides investment advisory services.
Financial performance and position
| Metric | Q2 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Revenue | $1.010 million | $1.440 million |
| Operating income | $586,000 | $626,000 |
| Consolidated net income | $594,000 | $654,000 |
| Net income attributable to SWK shareholders | $380,000; $0.01 per share | $440,000; $0.01 per share |
| Operating cash flow | Not separately presented | $385,000 |
| Investing cash flow | Not separately presented | $(6.257) million |
| Financing cash flow | Not separately presented | $(866,000) |
Revenue comprised finance-receivable interest and fees, income from an unconsolidated investment, and management fees. General and administrative expense was $424,000 for Q2 and $814,000 for the six-month period. The filing does not report a conventional gross margin. No revenue was reported for the comparable 2012 periods.
At June 30, cash and cash equivalents were $17.846 million, restricted cash $634,000, total assets $44.936 million, and stockholders’ equity $44.108 million. Working capital was reported as $18.7 million. Total liabilities were $828,000; the filing reports no outstanding borrowings at period-end. Finance receivables totaled $14.378 million, up from $6.500 million at December 31, 2012. Cash declined from $24.584 million, primarily reflecting new finance receivables and distributions to non-controlling interests.
Changes, transactions, and outlook
- SWK recorded $1.440 million in first-half revenue and positive net income, versus no revenue and a $923,000 net loss in the first half of 2012. General and administrative expense fell 19% year over year for the first half; management cited lower professional fees.
- In April, SWK invested $6 million for a 40.1325% interest in a royalty stream on Besivance sales. In June, it paid $2 million for two royalty streams tied to cord-banking technology.
- Management said its first six transactions under the revised strategy were expected to generate income exceeding operating expenses in 2013 and to support book-value growth. Future deal timing and returns were uncertain; no quantified earnings guidance was provided.
- After quarter-end, SWK agreed to purchase $3 million of senior secured notes. On August 8, it funded $6 million of an $8 million term loan to Tribute Pharmaceuticals, with a further $2 million available subject to covenants.
Risks, contingencies, and unusual items
- Revenue was highly concentrated: three customers accounted for 96% of Q2 revenue and 93% of first-half revenue; one customer represented 98% of accounts receivable at June 30.
- SWK reported approximately $446 million of federal and $40 million of state net operating loss carryforwards, but fully reserved its deferred tax assets. Most NOLs expire, if unused, between 2013 and 2021; ability to use them is not assured.
- The company reported no past-due or nonaccrual finance receivables, no material off-balance-sheet arrangements, and no legal proceeding expected to have a material effect. Management said there were no material changes to previously disclosed risk factors.
- Management identified interest-rate and credit risks. Results depend on sourcing suitable investments and collecting royalty and loan cash flows; the interim results may not indicate full-year performance.
- The filing contains an internal inconsistency: the statements report shareholder-attributable income of $380,000 for Q2 and $440,000 for the first half, while the EPS note’s numerator lists $387,000 and $447,000. The statements’ reported EPS is $0.01 for both periods.
Important facts for investors to verify
- Reconcile the $7,000 differences in shareholder-attributable income between the statements and EPS note.
- Review customer concentration, borrower credit quality, collateral, and expected cash flows from the royalty and finance-receivable portfolio.
- Assess the assumptions behind management’s expectation that investments would exceed operating expenses and support book-value growth.
- Verify the terms, funding, performance, and credit exposure of the post-quarter notes purchase and Tribute loan.
- Evaluate the expirations and potential usability of NOLs, including the full valuation allowance.