SWK Holdings Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Unless noted otherwise, amounts below are in millions of dollars. SWK provides specialty financing to life-sciences businesses, principally through loans, royalty purchases and revenue interests.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5.49 | $4.21 | $26.43 | $18.06 |
| Net income attributable to SWK shareholders | $2.76 | $3.12 | $11.40 | $5.17 |
| EPS, basic and diluted | $0.21 | $0.24 | $0.87 | $0.39 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $9.58 | $7.63 |
Q3 revenue was primarily finance-receivable interest and fees of $5.42 million. Nine-month revenue included $15.81 million of finance-receivable interest and fees and $10.54 million of income from an unconsolidated investment. The filing does not present conventional gross or operating margins.
Balance sheet, liquidity and cash flow
- At September 30, cash and cash equivalents were $15.98 million, down from $32.18 million at December 31, 2016. Finance receivables, net, were $163.72 million, versus $126.37 million; total assets were $218.49 million.
- Total reported liabilities were $1.69 million, consisting of accounts payable and accrued liabilities and a warrant liability. No borrowing facility or debt balance is reported on the balance sheet. The company said it had no access to a credit facility at the reporting date.
- For the first nine months, investing cash outflow was $16.83 million, including $36.48 million of finance-receivable funding, partly offset by $17.52 million of distributions from the unconsolidated investment and $1.72 million of loan repayments. Financing cash outflow was $8.96 million, comprising distributions to non-controlling interests.
- Cash declined by $16.21 million during the nine months. Management attributed the reduction primarily to new and add-on funding, partly offset by investment proceeds and cash generated by partner investments.
- Unfunded commitments totaled $8.3 million, contingent on contractual revenue, performance and other conditions.
Changes versus prior comparable periods
- Q3 revenue increased $1.28 million year over year, mainly from a $2.5 million increase in interest and fees on finance receivables; this was partly offset by the absence of $1.3 million of prior-year unconsolidated-investment income.
- Q3 shareholder net income decreased to $2.76 million from $3.12 million. Higher general and administrative expense ($1.48 million versus $0.62 million), a $0.19 million derivative loss versus a $0.50 million gain, and $1.05 million of income tax expense offset revenue growth.
- Nine-month revenue rose $8.37 million and shareholder net income rose $6.23 million. The comparison reflects the 2017 Holmdel asset sale and higher finance-receivable income, as well as $8.90 million of credit-loss and impairment expense recorded in 2016 and none in 2017. Nine-month 2017 results also included $6.16 million of income tax expense.
- Finance receivables expanded, while the Holmdel investment and related non-controlling interest were reduced to zero following the February 2017 sale and distributions.
Outlook, risks and unusual items
- Management said existing finance receivables and marketable investments were expected to generate positive cash flows in 2017, but acknowledged that timing of new investments is uncertain and cash generation above existing portfolio output was not assured. No quantified earnings or revenue guidance was provided.
- SWK reported two nonaccrual term loans, with a combined carrying value of $19.04 million, and no cash collected on those loans during the nine months. ABT Molecular Imaging and B&D Dental were in default or workout processes; management considered collateral values sufficient and recorded no additional credit-loss provision at September 30. Outcomes of strategic alternatives for both borrowers remained uncertain.
- Holmdel sold the U.S. marketing rights to InnoPran XL in February 2017. SWK recognized $10.54 million of equity-method income for the nine months and received approximately $8.0 million of net proceeds through SWK Holdings GP; the company did not anticipate further material distributions.
- On November 7, 2017, SWK had executed a non-binding term sheet with a potential lender. The timing and terms of any credit facility were uncertain.
- Subsequent to quarter-end, Soluble Systems’ loan maturity was extended to October 2022 and its rate reduced to LIBOR plus 10.25%, subject to a 1.5% floor. The interest-only period was extended to two years, with a possible additional six months subject to a performance threshold.
- Key risks include concentration in life-sciences borrowers, credit and collateral uncertainty, Level 3 valuations for finance receivables and warrants, and uncertainty over LIBOR’s planned phaseout after 2021. SWK also disclosed $405 million of federal net operating loss carryforwards, most expiring by 2021, and said it might not use all of them before expiration.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no current legal proceeding expected to have a material effect.
Important facts for investors to verify
- Collectability, collateral support and workout progress for the ABT and B&D nonaccrual loans, and whether additional credit provisions become necessary.
- Cash available after the $8.3 million of contingent commitments, ongoing portfolio funding needs and any final credit-facility terms.
- Sustainability of finance-receivable interest income and the extent to which reported earnings depend on episodic investment-sale or equity-method income.
- Valuation assumptions for Level 3 assets and warrants, and the effect of market and borrower changes on those estimates.
- Realizability and expiration schedule of tax attributes, along with the consequences of replacing LIBOR in partner loan agreements.