SWK Holdings Corporation — 2019 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019; comparisons are with 2018, not a standalone fourth quarter. SWK operates a life-sciences specialty finance business and, following its August 2019 acquisition of Enteris BioPharma, a pharmaceutical development business built around the Peptelligence oral drug-delivery platform.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $30.7 million | $26.0 million |
| Pre-tax income | $16.8 million | $6.2 million |
| Net income | $23.8 million | $6.2 million |
| Diluted earnings per share | $1.85 | $0.47 |
| Net cash from operating activities | $18.5 million | $19.6 million |
- Revenue was primarily interest and fees from finance receivables: $30.1 million. Pharmaceutical Development contributed $0.6 million from the acquisition date through year-end.
- Net income included a $7.0 million income tax benefit, principally reflecting a reduction in the deferred-tax valuation allowance. Net income therefore exceeded pre-tax income.
- Cash and cash equivalents were $11.2 million at year-end, down from $20.2 million. Total assets were $254.4 million; finance receivables, net, were $172.8 million. Stockholders’ equity was $236.5 million.
- At December 31, no borrowings were outstanding under the $20 million revolving facility, and the full amount was available, subject to borrowing-base requirements. The facility matures June 2021. SWK drew $15 million after year-end by March 23, 2020, reporting cash of $23.6 million.
- Total liabilities were $17.8 million, including $14.5 million of contingent consideration related to Enteris. Year-end unfunded investment commitments were $14.8 million; the filing reports these had fallen to $6.3 million by March 23, 2020.
- Cash flow from investing was negative $26.7 million, including $51.0 million invested in finance receivables and $19.7 million paid for the Enteris acquisition, net of cash acquired. Finance-receivable repayments were $44.0 million.
Material changes versus 2018
- Revenue rose $4.7 million, driven by higher interest and fees on new and existing receivables and $3.8 million in exit and prepayment fees; this was partly offset by lower income from repaid or paid-down assets and declining royalty receipts, including Forfivo royalties after generic competition.
- Net income increased $17.6 million. Credit-loss provisions fell to $2.2 million from $6.2 million, and there was no impairment expense versus $7.9 million in 2018. The 2019 result also included $1.6 million of unrealized gains on equity securities and a substantial tax benefit.
- General and administrative expense rose to $7.4 million from $4.9 million; depreciation and amortization was $5.0 million, primarily due to Enteris. Enteris recorded $0.6 million of revenue and a $6.7 million net loss for its post-acquisition period.
- The Enteris acquisition had total consideration of $34.6 million, including $14.5 million contingent consideration, and added $25.1 million of net intangible assets and $8.4 million of goodwill.
- Finance receivables, net, increased to $172.8 million from $166.6 million. The allowance for credit losses rose to $8.4 million from $6.2 million; three receivables totaling $16.0 million were on nonaccrual, compared with $14.1 million in 2018.
Outlook, risks and unusual items
- Management expected existing Finance Receivables income to exceed that segment’s operating expenses and expected consolidated operating income to exceed consolidated operating expenses. Pharmaceutical Development was expected to cover its operating expenses, but its income depends on development milestones and licensee progress. Management said COVID-19 made the timing and impact difficult to predict.
- COVID-19 risks include disruption to partner sales, clinical trials, collections and capital access. Enteris relied on certain excipients sourced from China and was seeking alternative suppliers; the company said no related supply disruption had yet occurred.
- Credit exposure is concentrated in small and mid-sized life-sciences companies and royalty streams, with limited control and potentially limited information about partners. B&D Dental was in default and evaluating strategic alternatives; Best royalty and Besivance royalty values were reduced through 2019 credit-loss provisions. TRT royalty remained on nonaccrual.
- Enteris’ products are largely in development and require clinical progress, regulatory approvals, successful licensing and commercialization. Other risks include intellectual-property protection, product liability, reimbursement and pricing pressure, supplier dependence, and competition.
- All term loans to partners used LIBOR as a reference rate at year-end. The filing cited LIBOR transition uncertainty and the potential effects of rate increases on borrowers’ ability to service debt.
- SWK reported $360.4 million of federal NOL carryforwards, with the majority due to expire by 2021, and stated it did not expect its current strategies to use all NOLs before expiration. Use may also be limited by ownership changes.
- Funds affiliated with Carlson held approximately 70.5% of the combined issued and outstanding shares, unvested restricted stock and warrant shares at year-end. A registration statement covering Carlson-affiliated shares became effective in February 2020. The common stock began trading on Nasdaq in January 2020.
- No material litigation was reported as of year-end. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- How much of 2019 earnings and reported EPS is attributable to the $7.0 million tax benefit, versus recurring operating performance?
- Current performance, collectability and collateral coverage for nonaccrual or impaired exposures, particularly B&D, Best, TRT and Besivance, and the adequacy of the $8.4 million allowance.
- Enteris’ cash requirements, licensing pipeline, clinical and regulatory milestones, and whether milestone-dependent revenue can support the segment’s costs.
- Liquidity after the subsequent $15 million facility draw, remaining borrowing capacity, unfunded commitments and compliance with facility covenants.
- The NOL disclosure contains differing expiration references: one risk-factor passage says expiration by 2032, while MD&A and the tax note say by 2037; confirm the applicable schedule and ownership-change limits.
- The portfolio discussion includes a reference to an additional Misonix funding dated December 24, 2020, which is later than the filing date; verify whether this is a typographical error or otherwise requires clarification.