SWK Holdings Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted. SWK provides specialty financing to life-science businesses, primarily through secured loans and royalty or revenue interests.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $9.4 million | $6.8 million |
| Income before taxes | $7.7 million | $4.6 million |
| Net income | $6.6 million | $3.6 million |
| Diluted EPS | $0.51 | $0.28 |
| Net cash provided by operating activities | $7.0 million | $5.2 million |
| Cash and cash equivalents | $39.2 million | $20.2 million at Dec. 31, 2018 |
| Finance receivables, net | $154.4 million | $166.6 million at Dec. 31, 2018 |
| Total assets / stockholders’ equity | $221.3 million / $219.0 million | $215.7 million / $213.1 million at Dec. 31, 2018 |
| Total liabilities | $2.3 million | $2.6 million at Dec. 31, 2018 |
Finance receivable interest income and fees were the primary revenue source. No amount was drawn on the $20 million revolving credit facility at quarter-end, leaving the full facility available; the filing reports no other funded debt. No operating or net margin is stated; calculated from reported figures, net income was approximately 69.8% of revenue in Q1 2019 versus 53.4% in Q1 2018.
Performance and changes versus prior year
- Revenue rose $2.6 million, with management citing $2.5 million of higher interest and fees on new and existing receivables and $3.4 million in exit and prepayment fees from a loan payoff. These increases were partly offset by $2.6 million less income from loans paid off or paid down during 2018.
- Net income increased $3.0 million. Credit-loss provision declined to $0.6 million from $1.2 million; general and administrative expense edged up to $1.3 million from $1.2 million. Q1 2019 other income included a $0.3 million net warrant fair-value gain.
- Investing activities provided $12.7 million, versus using $14.3 million in Q1 2018, reflecting $23.9 million of receivable repayments against $11.2 million of new investment funding. Cash increased $19.0 million during the quarter, primarily due to a $23.3 million receivable payoff, partly offset by new and add-on funding.
- SWK repurchased 77,300 shares during the quarter for approximately $0.7 million. The company reported 12,898,599 shares outstanding at March 31.
Portfolio, liquidity, outlook and risks
- The $6.8 million allowance for credit losses included $1.2 million for Cambia, $0.6 million for Besivance and $5.0 million associated with Best ABT. Besivance expectations were reduced because of lower sales volumes and elevated chargebacks and rebates. Besivance and Cambia were identified as impaired royalties.
- Two receivables were on nonaccrual at quarter-end: B&D Dental’s term loan, carried at $8.3 million and currently in default, and the Best ABT royalty, carried at $5.8 million. SWK collected no cash on nonaccrual items during the quarter. Neither was considered impaired as of March 31, according to the filing.
- Unfunded commitments totaled $5.8 million at March 31: $3.8 million to Aimmune and $2.0 million to Veru. They were conditional on specified revenue, performance or other agreement terms. Subsequent to quarter-end, SWK eliminated the Veru commitment as part of an amendment.
- Management expected existing portfolio assets to generate positive cash flows in 2019, while cautioning that investment timing makes additional positive cash flow uncertain. No formal earnings or revenue guidance was provided.
- Subsequent events: SWK agreed to provide Solsys up to $5 million in additional capital; a proposed Misonix acquisition of Solsys could result in Misonix assuming the facility and having access to an additional $5 million loan. SWK also agreed to provide BIOLASE an additional $2.5 million. A May 2019 Veru amendment temporarily cut applicable FC2 royalty rates by 50% for four payment periods; rates were to return to prior levels in 2020 and increase in 2021, while the maturity payment formula was revised.
- SWK identified interest-rate and credit risks, including potential higher funding costs if it borrows at rising rates while holding fixed-rate investments. The company said it was evaluating the upcoming CECL credit-loss standard and expected it could cause more upfront portfolio losses. Management reported disclosure controls were effective and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the B&D default and nonaccrual exposures, and the Best ABT and impaired royalty valuations, result in further losses or collections.
- How Besivance and Cambia sales and royalty receipts develop, and whether credit-loss allowances remain adequate.
- Completion and terms of the proposed Solsys-Misonix transaction, including further funding, facility assumption and the revised interest terms.
- The effect of the Veru royalty amendment and BIOLASE additional funding on portfolio income, exposure and commitments.
- Future deployment of the undrawn $20 million facility, liquidity needs, and the effects of CECL adoption and interest-rate changes.
- Progress and final share count under the repurchase program, authorized for up to $3.5 million and scheduled to end May 31, 2019.