SWK Holdings Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. SWK is building a specialty finance and asset-management business focused on life-science royalty streams, secured lending, and related investments; results reflect an early stage of that strategy.
Financial results and position
- Revenue: $430,000, versus none in Q1 2012. This included $374,000 of interest income on finance receivables and $56,000 from acquired investment-advisory contract interests.
- Profit and margins: Operating income was $40,000, compared with an operating loss of $300,000. Net income was $60,000 versus a net loss of $256,000; basic and diluted EPS rounded to $0.00 versus a loss of $0.01. Revenue less general and administrative expense was about 9% of revenue; the filing does not present a formal operating margin measure.
- Expenses and other income: General and administrative expense increased 30% to $390,000. Interest and other income, net, was $23,000 versus $45,000; management attributed the decline to lower rates and cash balances.
- Cash flow: Operating activities provided $168,000, versus $301,000 used in Q1 2012. Investing activities used $4,000. Cash and cash equivalents increased $164,000 to $24.748 million; restricted cash was $750,000.
- Liquidity and balance sheet: Working capital was $25.7 million, versus $26.0 million at year-end 2012. Total assets were $45.270 million and total liabilities were $962,000. The balance sheet reports no borrowings; finance receivables were $6.5 million and investments in unconsolidated entities were $13.0 million.
- Capital and tax: Total stockholders’ equity was $44.308 million. Federal and state net operating loss carryforwards were approximately $446 million and $40 million, respectively; deferred tax assets were fully offset by a valuation allowance.
Material changes and transactions
- Compared with Q1 2012, SWK moved from a loss and no revenue to modest revenue and net income, primarily reflecting its new investment strategy and a December 2012 specialty-pharmaceutical loan.
- The $22.5 million loan to a neurology-focused pharmaceutical company matures in 2017. SWK retained $6.5 million after assigning portions to clients; the loan has a minimum interest rate of 16%, revenue-based payments, collateral over substantially all borrower assets, and an exit fee. SWK recognized $374,000 of loan interest in the quarter, including $115,000 of exit-fee accretion. A $750,000 interest reserve remained restricted at quarter-end.
- SWK’s consolidated partnership invested $13 million in Holmdel Pharmaceuticals, which acquired U.S. marketing rights to InnoPran XL; SWK provided $6 million of the investment, with third-party limited-partner interests of $7 million.
- After quarter-end, on April 2, SWK and Bess Royalty purchased a Besivance royalty stream for $15 million; SWK funded $6 million for a 40.1325% interest.
Outlook, risks, and other disclosures
- Management stated that, as of May 14, 2013, it had completed its first three transactions under the revised strategy and expected income from them to exceed operating expenses in 2013. It said additional opportunities were under review, but timing and completion were uncertain; positive cash flow beyond existing assets was not assured.
- Revenue was highly concentrated: one customer accounted for 87% of Q1 revenue and 97% of accounts receivable. SWK also cited credit and interest-rate exposure and uncertainty in finding suitable investments and using its NOLs.
- The filing reports no off-balance-sheet arrangements and no litigation expected to have a material effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Management reported no material changes to the risk factors in the 2012 Form 10-K. The filing cautions that interim results may not indicate full-year performance.
Key facts for investors to verify
- Whether the concentrated customer and the underlying loan and royalty cash flows remain collectible and perform as expected.
- Whether the 16% loan-rate floor and exit-fee economics translate into realized cash returns, and how much of reported interest reflects noncash accretion.
- Whether management’s 2013 expectation that investment income will exceed expenses is achieved, given the timing and uncertainty of new transactions.
- How the Besivance purchase and Holmdel investment perform, and whether the company can realize value from its substantial NOL carryforwards, most of which expire between 2013 and 2021.