SWK Holdings Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. SWK operates specialty finance and pharmaceutical development businesses, primarily serving life-sciences companies. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $9.5 million | $6.9 million | $18.9 million | $18.1 million |
| Income from operations | $4.7 million | $1.7 million | $10.0 million | $7.0 million |
| Net income | $3.9 million | $0.6 million | $8.6 million | $4.0 million |
| Diluted earnings per share | $0.31 | $0.04 | $0.67 | $0.31 |
| Operating cash flow | Not separately stated | Not separately stated | $5.4 million | $3.5 million |
Q2 revenue rose about 37% year over year, mainly from higher finance-receivable interest and fees. Six-month revenue increased about 5%; growth in finance receivables was partly offset by lower pharmaceutical development revenue. Q2 and six-month net income improved substantially. Q2 other income included warrant valuation and foreign-currency gains, while the prior-year quarter included warrant and equity-security valuation losses. Derived net margins were approximately 41% for Q2 and 45% for the first half.
At June 30, cash and cash equivalents were $6.8 million, versus $6.2 million at year-end 2022. Net finance receivables were $223.0 million, against an allowance for credit losses of $11.1 million. Total assets were $290.4 million and stockholders’ equity was $273.9 million. No borrowings were outstanding under the new facility; the prior facility had $2.4 million outstanding at December 31, 2022. Six-month investing cash flow was $3.7 million and financing cash flow was negative $8.4 million. The company repurchased $5.1 million of shares during the period.
Material changes and notable items
- On June 28, SWK replaced its Cadence Bank agreement with a First Horizon revolving facility. Initial capacity is $45 million, with potential increases up to $80 million subject to lender approval. The facility matures in 2027 after a one-year amortization period; the stated rate is Term SOFR plus 3.75% before the commitment termination date and plus 4.25% afterward.
- The new facility includes financial tests, including leverage, interest coverage, portfolio cash collection, net charge-offs and risk rating, as well as minimum tangible net worth of $145 million and minimum liquidity of $5 million.
- SWK adopted the CECL expected-credit-loss standard on January 1, 2023. The transition reduced accumulated deficit by $9.7 million, net of tax; prior-year comparative figures were not recast. The company recorded a $0.7 million credit-loss benefit in the first half, attributed to a decrease in finance receivables.
- Three finance receivables were on nonaccrual at June 30, with aggregate net carrying value of $18.0 million. These included the Flowonix term loan and Best and Ideal Implant royalties. The filing says the nonaccrual receivables were not considered impaired at quarter-end; elsewhere, Best is identified as partially impaired based on prior-period carrying-value reductions.
- Unfunded commitments totaled $7.4 million, including $5.0 million for MedMinder and $2.4 million for Duo Royalty. They are contingent on contractual conditions.
- The Board authorized a new share repurchase program of up to $10 million through May 16, 2024. Approximately $5.8 million remained available under the program at June 30.
Outlook, risks and contingencies
Management expects the existing finance-receivables portfolio to generate positive cash flows in 2023, but cautions that new investment timing is difficult to predict and gives no assurance results will meet that expectation. The filing provides no numerical earnings or revenue guidance. Management says the company does not assume near-term borrower repayments.
Key risks include borrower credit deterioration, the life-sciences sector concentration, uncertainty in credit-loss estimates, and sensitivity to interest rates. Most finance receivables carry floating rates, but SWK does not currently hedge interest-rate exposure; higher rates could also raise borrowing costs if the facility is drawn. Inflation at partner companies could impair their results and repayment capacity. Litigation arises in the normal course of business, but SWK reported no proceeding it expected to have a material effect. The company said there were no material changes to previously disclosed risk factors and that disclosure controls were effective.
Important facts for investors to verify
- Performance and repayment outlook for the $18.0 million of nonaccrual receivables, especially Flowonix, Best and Ideal Implant, and the distinction between nonaccrual and impairment disclosures.
- Credit-loss allowance assumptions under CECL, including the effects of the adoption adjustment and future portfolio performance.
- Compliance with the First Horizon facility’s financial covenants and the availability of its $45 million commitment.
- Whether projected portfolio cash flows materialize, given repayments, unfunded commitments and the uncertain timing of new investments.
- Drivers and sustainability of earnings, including the contribution from floating-rate income and non-cash warrant and foreign-currency valuation changes.