SWK Holdings Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. SWK operates two segments: Finance Receivables, a life-sciences specialty finance business, and Pharmaceutical Development, launched with the 2019 acquisition of Enteris BioPharma and its Peptelligence oral drug-delivery platform. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior date |
|---|---|---|
| Total revenue | $7.302 million | $9.392 million in Q1 2019 |
| Net income (loss) | $(4.660) million; $(0.36) per diluted share | $6.559 million; $0.51 per diluted share in Q1 2019 |
| Operating cash flow | $3.317 million | $7.000 million in Q1 2019 |
| Cash and cash equivalents | $24.318 million | $11.158 million at December 31, 2019 |
| Finance receivables, net | $177.981 million | $172.825 million at December 31, 2019 |
| Total assets / stockholders’ equity | $265.119 million / $231.997 million | $254.372 million / $236.532 million at December 31, 2019 |
| Revolving credit facility | $14.288 million outstanding; $5.7 million available | $20 million total facility; no balance at December 31, 2019 |
Current assets were $28.789 million and current liabilities were $18.356 million, including the revolving facility balance. The facility matures June 29, 2021, bears interest at Daily LIBOR (1% floor) plus 3.25%, and is subject to borrowing-base and covenant terms. The filing does not present a standalone margin measure.
Material changes versus Q1 2019
- Revenue declined $2.1 million, primarily because a finance receivable payoff in Q1 2019 reduced interest and fee income by $3.5 million; higher income from new or increased investments partly offset the decline.
- Results shifted from $6.6 million net income to a $4.7 million net loss. Q1 2020 included $3.5 million of depreciation and amortization, largely from Enteris acquired in August 2019, and $1.2 million of pharmaceutical manufacturing, research and development costs. These costs were not present in Q1 2019.
- Other expense included $1.9 million of unrealized warrant losses and $0.9 million of unrealized losses on Misonix equity securities. Management attributed these losses primarily to COVID-19’s effect on global markets.
- General and administrative expense rose to $3.0 million from $1.3 million, reflecting Enteris-related staffing and occupancy costs and higher consulting, advisory and legal fees. Operating cash flow decreased by $3.7 million year over year.
Cash flow, portfolio, and unusual items
- Cash increased by $13.160 million during the quarter. Financing provided $14.226 million, mainly from the credit facility; investing used $4.383 million, including $5.5 million invested in finance receivables and $1.3 million of repayments received.
- The finance receivables allowance for credit losses was $8.388 million, unchanged from year-end. Receivables in nonaccrual status totaled $15.951 million. The filing identifies three nonaccrual investments: B&D Dental, Best ABT and Tissue Regeneration Therapeutics. SWK reported no cash received on its nonaccrual royalties in the quarter.
- Q1 included $0.163 million of impairment expense on a corporate debt security; no provision for loan credit losses was recorded. Three previously impaired royalties had a combined carrying value of $9.547 million.
- Enteris-related contingent consideration payable was $14.5 million, unchanged from year-end. Unfunded commitments totaled $6.3 million, contingent on specified revenue, performance or other contractual conditions.
- SWK repurchased 5,279 shares for approximately $62,000 during the quarter. A March 2020 program authorized up to $2 million in repurchases, subject to its stated limits and September 30, 2020 expiration.
Outlook, commentary, and risks
- Management expected the company to generate positive cash flow in aggregate, but provided no quantified earnings or revenue guidance. It expected existing finance receivables to generate positive cash flows in 2020 while noting uncertainty about additional investment timing.
- Management said Pharmaceutical Development had reduced productivity and supply delays in late March due to COVID-19. New Jersey restrictions significantly reduced activity at Enteris’s manufacturing facility. The company warned that disruption could delay development, reduce revenue and affect licensee milestones; timing of license-related payments is uncertain.
- Management was monitoring the liquidity of finance partners and said it might amend performance covenants, advance additional capital, or allow interest to be paid in kind to support certain partners.
- Interest-rate changes could increase borrowing costs and pressure returns, particularly if funding costs rise while investments remain fixed-rate. Fair values of warrants and equity holdings, and estimates for credit losses and acquired intangibles, rely in part on valuation assumptions and may be sensitive to market conditions.
- The company stated that its disclosure controls and procedures were effective as of March 31, 2020. It reported no legal proceeding expected to have a material effect on its business or financial condition.
Most important facts for investors to verify
- Whether COVID-19-related manufacturing and supply disruptions at Enteris persisted, and their effect on development, licensing revenues and costs.
- Performance and collectability of nonaccrual exposures, especially B&D Dental, Best ABT and TRT, and whether the existing credit-loss allowance remains adequate.
- Cash generation and liquidity after the $14.3 million facility draw, including compliance with borrowing-base and coverage covenants and the June 2021 maturity.
- Whether the $14.5 million Enteris contingent consideration and $6.3 million of conditional funding commitments change in amount or timing.
- Progress in converting Enteris’s platform and development programs into license payments or other revenue, given the segment’s reported Q1 loss and substantial acquired-intangible amortization.