SWK Holdings Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. SWK operates two segments: Finance Receivables, which provides specialty financing to life-sciences businesses, and Pharmaceutical Development, which includes Enteris and its Peptelligence oral drug-delivery platform.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $10.647 | $6.349 | $25.823 | $21.396 |
| Net income | $4.342 | $4.157 | $0.558 | $15.043 |
| Diluted EPS | $0.34 | $0.32 | $0.04 | $1.17 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $9.209 | $13.394 |
- Q3 revenue comprised $7.869 million of finance-receivable interest income, including fees, and $2.778 million of Pharmaceutical Development revenue. The latter included approximately $2.5 million of milestone revenue under the Cara license agreement.
- For the first nine months, finance-receivable interest income, including fees, was $22.738 million; Pharmaceutical Development revenue was $3.076 million.
- Q3 net income was slightly higher year over year. Nine-month net income fell sharply, despite higher revenue, reflecting substantially greater Enteris-related amortization, R&D and general expenses, a $1.964 million increase in acquisition-related contingent-consideration expense, and unfavorable fair-value movements in warrants and equity securities. A $0.199 million tax benefit partly offset the nine-month pretax decline.
- Profit margins are not separately presented in the filing. Net income includes fair-value movements and tax effects; Q3 2020 included a $0.451 million income tax benefit.
- At September 30, cash and cash equivalents were $9.314 million, total current assets $16.969 million, current liabilities $3.625 million, total assets $256.803 million, and stockholders’ equity $235.701 million.
- Finance receivables, net, were $183.242 million, versus $172.825 million at year-end 2019. The portfolio had an $8.388 million credit-loss allowance and $15.801 million of net receivables in nonaccrual status.
- Cash declined $1.844 million during the nine-month period to $9.314 million. Investing activities used $9.055 million, including $12.458 million of finance-receivable investment and $2.354 million of property and equipment purchases; financing activities used $1.998 million, primarily for share repurchases.
- No amount was outstanding on the $20 million revolving credit facility at September 30; the full $20 million was available. SWK had drawn $15 million in March to support partners and investment opportunities and repaid it by August. The facility matures June 29, 2021. Total liabilities were $21.102 million, including $16.464 million of acquisition-related contingent consideration payable.
Changes versus comparable periods
- Q3 revenue rose $4.3 million year over year, largely from the Cara milestone, increased royalty income and additional funding on existing loans. Pharmaceutical Development revenue was $2.778 million compared with $0.149 million in Q3 2019; Enteris was acquired in August 2019, so the prior-year comparison includes only a partial period.
- Nine-month revenue rose $4.4 million. Increased finance-receivable interest, fees and royalties and the Cara milestone more than offset repayments and paydowns on certain earlier investments.
- Nine-month net income decreased $14.5 million year over year. The prior-year period included a $1.787 million unrealized gain on equity securities, while 2020 included a $0.666 million loss; 2020 also had a $1.151 million warrant fair-value loss. Enteris acquisition-related amortization was $9.4 million for the 2020 nine-month period.
- Cash was down from $11.158 million at December 31, 2019. Finance receivables increased, while intangible assets declined to $15.983 million, principally reflecting amortization.
Outlook, risks and unusual items
- Management expected existing finance-receivable assets to generate positive cash flows in 2020, but said the pandemic and uncertain economic recovery made aggregate cash-flow expectations uncertain. It did not provide numerical earnings or revenue guidance.
- COVID-19 reduced Enteris productivity and delayed supplies; New Jersey restrictions curtailed manufacturing-facility activity, with phased reopening beginning in July. Management warned that further disruptions could delay development milestones and reduce revenue. It also monitored borrower liquidity and contemplated covenant amendments, additional funding and payment-in-kind interest arrangements for portfolio companies.
- Credit exposure is material: B&D Dental was in default and nonaccrual; Best and TRT royalties were also nonaccrual. SWK reported three nonaccrual receivables with a combined net carrying value of $15.801 million. The filing states B&D was not considered impaired based on collateral valuation; Best had previously been written down, and the TRT royalty agreement was exchanged for equity and a convertible note in August 2020.
- The $16.464 million Enteris contingent-consideration liability is a Level 3 fair-value estimate and may fluctuate; actual payments could differ materially. SWK also disclosed an $8 million contingent unfunded commitment to eTon Pharmaceuticals.
- Subsequent events: Aimmune repaid its term loan on October 20, 2020, generating approximately $4.4 million including accrued interest, prepayment penalty and exit fees. On October 22, SWK funded $3.9 million for a royalty purchase agreement with Trio Healthcare.
- Other risks include portfolio concentration, LIBOR transition uncertainty, floating-rate exposure, dependence on key personnel, and the possibility that the company will not use all of its net operating loss carryforwards before expiration. Management reported disclosure controls were effective; it reported no legal proceeding expected to have a material effect and no defaults upon senior securities.
Most important facts for investors to verify
- Whether Enteris’s operating disruption, milestone timing and manufacturing activity improve, and whether Cara-related milestone and royalty income recur.
- Repayment prospects, collateral values and allowance adequacy for nonaccrual exposures, particularly B&D, Best and TRT; also monitor DxTerity’s reported covenant default and remediation.
- The assumptions underlying the $16.464 million contingent-consideration valuation and the timing and amount of any earnout payments.
- Cash generation and investment funding needs, including the contingent eTon commitment, after the Aimmune repayment and Trio investment.
- Effects of COVID-19 and the LIBOR transition on borrower performance, portfolio yields, Enteris operations and future results.