SWK Holdings Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. SWK operates specialty finance and asset management, primarily lending to and purchasing royalties from life-sciences businesses, and pharmaceutical development through Enteris BioPharma.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $6.9 million | $22.3 million | $18.1 million | $31.6 million |
| Operating income | $1.7 million | $16.6 million | $7.0 million | $19.7 million |
| Net income | $0.6 million | $14.0 million | $4.0 million | $17.4 million |
| Diluted earnings per share | $0.04 | $1.09 | $0.31 | $1.35 |
- At June 30, cash and cash equivalents were $55.1 million, up from $42.9 million at year-end 2021. Finance receivables, net, were $174.9 million, down from $181.6 million.
- Six-month operating cash flow was $3.4 million, versus $19.3 million in 2021. Investing activities provided $8.9 million; financing activities used $8,000. Cash increased $12.3 million.
- Total assets were $284.4 million; total liabilities were $12.9 million and stockholders’ equity was $271.5 million. No amount was drawn on the revolving credit facility at quarter-end; $22.0 million was available.
- Interest expense was $80,000 for Q2 and $160,000 for the first half. The filing reports no material margin measure.
Material changes versus prior periods
- Revenue fell 69% in Q2 and 43% in the first half year over year. Pharmaceutical Development revenue declined mainly because a $10.0 million Cara license milestone recognized in 2021 did not recur.
- Finance Receivables revenue also declined: repayments/paydowns and royalty-rate step-downs following achievement of return premiums reduced income. Higher interest and fees from new and existing loans partly offset the declines.
- Net income fell substantially, reflecting lower revenue and a reversal from fair-value gains in 2021 to $1.0 million of net fair-value losses in Q2 2022 on warrants and equity securities. First-half net fair-value losses were $1.7 million.
- The $8.4 million credit-loss allowance was essentially unchanged from year-end. Two receivables were on nonaccrual: Flowonix, with a $9.8 million carrying value, and the Best royalty, with a $3.1 million carrying value. Flowonix was not considered impaired; the Best royalty was impaired.
Outlook, risks, contingencies, and unusual items
- Management expected the finance receivables portfolio, marketable investments, and cost-method investment to generate positive cash flows in aggregate during 2022. It also expected Pharmaceutical Development to generate cash above expenses, but timing depends on licensees’ development success. Management cautioned that broader economic uncertainty makes future positive cash flow uncertain.
- The $22.0 million revolving facility was scheduled to terminate September 30, 2022; SWK was exploring an extension or replacement. The filing gives no formal earnings guidance.
- Most finance receivables carry floating rates with LIBOR floors. Rising rates may benefit asset yields, but can also increase borrowing costs; SWK reported no interest-rate hedging. Certain loans reference LIBOR, and alternatives were being evaluated.
- Management said adoption of the expected-credit-loss (CECL) standard was likely to result in more upfront portfolio losses. The filing also identifies uncertainty in credit, fair-value, tax, and other estimates. SWK stated it may not generate enough taxable income to use all net operating loss carryforwards before expiration.
- Contingent consideration related to the Enteris acquisition was $8.5 million, with no fair-value change in the first half. Unfunded commitments were $1.4 million, subject to contractual conditions.
- After quarter-end, SWK funded $5.0 million of a $7.5 million Exeevo term loan, with another $2.5 million conditionally available. It received $4.3 million for the Beleodaq royalty payoff on July 1 and $6.1 million for the Trio/Ostomy royalty payoff on July 25.
- The company reported no legal proceeding expected to have a material effect, no material change to previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Whether recurring finance receivables income can offset portfolio repayments and royalty-rate step-downs, and how concentration and nonaccrual exposures evolve.
- Whether the Cara license or other development agreements produce new milestone or royalty revenue to replace the prior-year milestone.
- Whether the revolving facility was extended or replaced before its September 30, 2022 termination date, and the terms of any new borrowing.
- How CECL adoption affects the allowance, earnings, and carrying value of finance receivables.
- Whether post-quarter royalty payoffs and the Exeevo loan affect liquidity, future income, and portfolio composition as anticipated.