SWK Holdings Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. SWK provides financing and royalty-based capital to life-sciences businesses and also manages investments for institutional clients.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $3.718 | $1.558 | $10.746 | $2.999 |
| Income from operations | $2.587 | $1.095 | $8.204 | $1.721 |
| Net income attributable to SWK shareholders | $0.432 | $0.620 | $3.281 | $1.059 |
| Basic and diluted EPS | $0.01 | $0.01 | $0.07 | $0.03 |
- Revenue rose about 139% in Q3 and 258% for the first nine months year over year. Growth primarily reflected increased finance-receivable interest and fees and income from the Holmdel investment.
- Q3 shareholder-attributable net income fell about 30%, despite higher revenue, mainly as general and administrative expense rose to $1.131 million from $0.463 million and net interest and other expense increased to $0.711 million from $0.133 million. The nine-month result improved substantially year over year.
- Q3 and nine-month 2014 general and administrative expense was $1.131 million and $2.542 million, respectively. Management cited higher professional fees and compensation; Q3 compensation included about $0.5 million of accelerated equity-compensation expense related to the Carlson transaction.
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $69.183 million, total assets $135.102 million, and working capital $70.8 million. Cash was $7.664 million and working capital $8.7 million at December 31, 2013.
- Finance receivables totaled $41.466 million, up from $29.286 million at year-end 2013. SWK reported no impaired or non-performing finance receivables and no allowance for credit losses at September 30.
- There was no balance outstanding on the related-party loan credit agreement at September 30; SWK had repaid $5 million during the nine-month period. The facility matures in 2017, is secured by substantially all company assets, and had $19 million of stated availability after the equity transaction. SWK reported no amount outstanding as of November 14, 2014.
- Nine-month operating cash flow was $2.608 million, investing cash flow was negative $7.630 million, and financing cash flow was positive $66.541 million. Financing included $74.499 million of net equity proceeds; investing included $11.672 million of net finance-receivable additions and $5.543 million of distributions from Holmdel.
- Q3 operating margin was approximately 70% versus 70% in the prior-year quarter; the filing does not present these margins as a separate reported metric.
Material changes and notable transactions
- On August 18, Carlson-affiliated funds purchased 55.908 million newly issued shares at $1.37 per share for $76.594 million gross proceeds; net proceeds after issuance costs were $74.499 million. Shares issued and outstanding increased to 99.083 million at September 30 from 43.035 million at December 31, 2013.
- The related agreement provides for a rights offering and additional share issuance intended to bring Carlson and affiliates to 69% voting ownership on a fully diluted basis. The rights offering began November 3 at $0.86 per share; the company estimated approximately $12.5 million of gross proceeds if fully subscribed. Carlson’s affiliate serves as standby purchaser. The Stockholders’ Agreement grants Carlson approval rights over specified matters and other financing and governance rights.
- SWK invested $1.730 million in SynCardia Series F preferred stock, including $0.230 million received in lieu of interest cash payment. The preferred shares accrue a 10% annual dividend.
- After quarter-end, SWK increased Tribute’s loan commitment to $17 million, with $6 million funded at amendment; it also entered a $10 million second-lien loan with ABT Molecular Imaging and a $20 million term loan with PDI.
Outlook, risks and other disclosures
- Management expected existing investments to generate income exceeding operating expenses in 2014 and to support book-value growth, while continuing to evaluate additional opportunities. It cautioned that investment timing is difficult to predict and cash yields were expected to remain low.
- Revenue is concentrated: three partner companies represented 69% of nine-month revenue, and two partners represented 65% of Q3 revenue. Credit performance, product sales and royalty streams at a small number of counterparties can materially affect results.
- SWK reported approximately $426 million of federal NOL carryforwards, most expiring by 2021. Ownership changes may limit their use; the filing does not assure that SWK can realize the tax benefits.
- Fair values for warrants and certain other investments rely on valuation models and unobservable inputs. Q3 net other expense included approximately $0.6 million of warrant fair-value losses and loan interest expense.
- The filing reported no material litigation expected to affect the company and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm final rights-offering proceeds, subsequent share issuance and Carlson’s resulting ownership and control.
- Assess the credit quality and revenue concentration of major borrowers and royalty counterparties, particularly given the growth in finance receivables.
- Track actual cash collections and distributions against reported investment income, including Holmdel equity-method income.
- Review the availability and terms of the related-party credit facility, collateral provisions and any later borrowing.
- Reconcile the transaction count: the filing says 15 transactions as of November 14 in one section but 13 in its Outlook section.