SWK Holdings Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report; it does not present a standalone fourth-quarter income statement. Dollar amounts below are in millions unless noted.
Business context
SWK provides specialty financing to life-science businesses, principally through loans backed by royalties or product revenue, royalty purchases, and revenue interests. It also offers non-discretionary investment advisory services. At year-end, the portfolio included $152.0 million of finance receivables and $1.9 million of marketable investments. The company reported four full-time employees.
Financial results and position
| Metric | FY2017 / Dec. 31, 2017 | FY2016 / Dec. 31, 2016 |
|---|---|---|
| Revenue | $37.5 | $22.4 |
| Income before taxes | $24.0 | $10.4 |
| Consolidated net income | $8.3 | $32.0 |
| Net income attributable to SWK shareholders | $3.0; $0.23 per diluted share | $28.9; $2.22 per diluted share |
| Operating cash flow | $19.5 | $9.6 |
| Cash and cash equivalents | $30.6 | $32.2 |
| Total assets / total liabilities | $209.9 / $1.9 | $208.9 / $0.9 |
| Shareholders’ equity | $208.0 | $208.1 |
- Finance-receivable interest and fees were $26.9 million; income from the unconsolidated investment was $10.5 million. The filing reports no separate operating-margin measure. Net income attributable to shareholders was about 8% of revenue.
- Revenue increased $15.1 million, mainly from higher interest and fees on finance receivables—including Narcan royalty revenue—and income from the Holmdel investment. Holmdel’s sale of U.S. marketing rights generated approximately $8.6 million of net proceeds for SWK in 2017; SWK recorded $10.5 million of related investment income. The investment had no year-end carrying value.
- Despite higher pretax income, consolidated net income fell year over year, primarily because the tax line changed from a $21.6 million benefit in 2016 to a $15.8 million provision in 2017. The company reported a $22.7 million net deferred tax asset after a $63.7 million valuation allowance.
- Impairment expense was $8.5 million, including $7.6 million on ABT’s second-lien receivable and $0.9 million on a women’s-health royalty-backed security. No credit-loss provision was recorded in 2017; 2016 included $1.7 million.
- Investing activities used $12.1 million, including $37.4 million of new finance-receivable funding, partly offset by repayments and distributions. Financing activities used $9.0 million for distributions to non-controlling interests. Cash declined $1.6 million during the year.
- SWK reported no corporate credit facility or borrowings at year-end. It was negotiating a non-binding lender term sheet. A $5.0 million loan commitment remained unfunded, subject to specified conditions.
Changes, outlook, and notable items
- Finance receivables grew to $152.0 million from $126.4 million. Term loans in nonaccrual status totaled $11.4 million, down from $19.0 million; no cash was collected on nonaccrual loans in either year. Two portfolio companies accounted for 51% of FY2017 revenue, versus 41% in 2016.
- Management expected existing portfolio assets to generate positive cash flows in 2018 and believed portfolio income would exceed operating expenses, supporting book-value growth. It cautioned that investment timing makes future cash generation uncertain. The company did not provide numerical earnings guidance.
- Management said it expected the current strategy to generate insufficient taxable income to use all NOL carryforwards before expiration. Federal NOLs were $376.0 million, with most expiring by 2021 and the remainder by 2032; utilization may be limited by ownership changes. The tax reform law lowered the federal corporate rate to 21%, and its full accounting effects were not yet complete.
- Subsequent to year-end, SWK announced a $10.0 million Veru financing in March 2018, a pSivida loan with $15.0 million funded at closing, and a Tenex amendment with an initial $1.3 million advance. These are post-period events, not FY2017 results.
- Key risks include borrower defaults and concentrated exposures, life-science product sales and regulatory risks, reliance on a small management team, competition and financing access, LIBOR transition and rate exposure, and maintaining exclusions from Investment Company Act registration. Carlson-affiliated funds held approximately 69% of specified outstanding and underlying share interests at year-end.
- The company paid no cash dividends and did not expect to do so in the foreseeable future. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal-control effectiveness.
Important facts for investors to verify
- Collection prospects and collateral valuations for nonaccrual/defaulted exposures, particularly ABT and B&D, and whether further impairment or additional advances may be needed.
- How much of 2017 earnings and cash generation depended on the Holmdel asset sale and Narcan-related performance, and the sustainability of recurring portfolio income.
- Concentration and credit quality across the portfolio, including the 51% revenue concentration in two partners and the $5.0 million contingent loan commitment.
- Cash needs and investment capacity if the prospective credit facility is delayed or not completed, and the terms and funding status of post-year-end transactions.
- Recoverability and potential ownership-change limits on NOLs, the final effects of tax reform, and the amount of deferred tax assets ultimately realizable.