SWK Holdings Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. SWK provides specialty financing and asset-management services focused on life-sciences businesses, including royalty-backed and secured lending. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $5.801 million | $3.668 million |
| Net income attributable to SWK shareholders | $2.256 million | $1.457 million |
| Consolidated net income | $3.067 million | $2.258 million |
| Basic and diluted earnings per share | $0.02 | $0.04 |
| Net cash provided by operating activities | $3.361 million | $1.257 million |
| Cash and cash equivalents, March 31 | $59.487 million | $58.728 million at December 31, 2014 |
| Finance receivables, March 31 | $95.456 million | $93.347 million at December 31, 2014 |
| Total assets / total liabilities, March 31 | $191.345 million / $2.131 million | $188.219 million / $1.285 million at December 31, 2014 |
| Total stockholders’ equity, March 31 | $189.214 million | $186.934 million at December 31, 2014 |
Finance-receivable interest income, including fees, was $4.145 million; income from the unconsolidated investment was $1.551 million. General and administrative expense was $1.218 million, and interest expense was $381,000. The filing does not provide a conventional operating-margin measure. Net income per share fell despite higher shareholder net income; weighted-average basic shares rose to 129.964 million from 41.462 million.
Material changes and cash flows
- Revenue increased about 58% year over year, which management primarily attributed to a larger investment portfolio: 14 investments in 2015 versus 9 in 2014.
- General and administrative expense rose to $1.218 million from $669,000, primarily due to higher income-based bonus and stock-compensation expense.
- Operating cash flow increased to $3.361 million. Investing activities used $1.618 million, primarily for net finance-receivable funding; financing activities used $984,000, primarily for distributions to non-controlling interests. Cash increased $759,000 during the quarter.
- Finance receivables comprised $82.645 million of term loans and $12.811 million of royalty purchases. The company reported one non-accrual loan of approximately $6.65 million; collateral fair value exceeded the balance, and no impairment charge was recorded. No finance receivables were classified as impaired.
- The balance sheet reports no debt line. The related-party credit facility bears interest at LIBOR plus 6.50%, is secured by substantially all company assets, and had no remaining draw availability after its draw period expired March 6, 2015. The filing does not provide a clear outstanding principal balance for that facility.
Outlook, risks, and unusual items
- Management said that, as of May 8, 2015, SWK had completed 16 transactions and expected income from those assets to exceed operating expenses in 2015, with book value expected to grow. It cautioned that investment timing is uncertain and positive cash flow beyond existing assets was not assured. This is management’s outlook, not a guarantee.
- After quarter-end, SWK entered two senior secured credit agreements totaling $12.5 million, with $10 million funded at closing. It also committed $1 million to a partner-company loan amendment and signed a conditional commitment to fund up to $12 million in another loan. These commitments add to approximately $5.5 million of unfunded commitments on closed loans.
- SWK received $8.4 million in notes and preferred stock in connection with repayment of a loan. The quarter also included a $371,000 unrealized net gain on derivatives; warrant assets increased to $1.406 million and the warrant liability to $586,000.
- SWK reported a net deferred tax asset of $18.6 million and approximately $421 million in federal net operating loss carryforwards at December 31, 2014; most are scheduled to expire by 2021, with expirations extending through 2032. Ownership changes may limit their use.
- Portfolio concentration in life sciences exposes SWK to sector and borrower credit risks. Holmdel reached a 1x cash-on-cash return for SWK HP in February 2015; SWK HP’s share of product cash flows declines as returns increase, subject to a 39% minimum. The company cited interest-rate and valuation risks and said no material risk-factor changes or material expected legal proceedings were reported. Management assessed disclosure controls as effective.
Important facts for investors to verify
- The outstanding principal, repayment terms, and any covenants or security implications of the related-party credit facility.
- Borrower performance and collateral coverage for the $6.65 million non-accrual loan, and any changes in impairment status.
- Funding status and terms of post-quarter transactions and commitments, including the conditional commitment of up to $12 million and the related warrants.
- Whether portfolio income and cash collections support management’s 2015 expectation, especially as Holmdel’s distribution share declines after reaching the 1x return threshold.
- The company’s ability to realize deferred tax assets and use its net operating loss carryforwards, including potential ownership-change limitations.