SWK Holdings Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; amounts below are in millions except per-share data. SWK invests in financing and royalty streams tied to commercial-stage life-science products and also provides investment advisory services.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.558 | $0.054 | $2.999 | $0.054 |
| Operating income (loss) | $1.095 | $(0.792) | $1.721 | $(1.803) |
| Net income (loss) attributable to SWK shareholders | $0.620 | $(0.749) | $1.059 | $(1.672) |
| EPS, basic and diluted | $0.01 | $(0.02) | $0.03 | $(0.04) |
| Operating margin, approximate | 70% | Not meaningful | 57% | Not meaningful |
Revenue growth reflected new finance-receivable interest and fees, marketable-investment interest, and income from an equity-method investment; the 2012 comparison had only $54,000 of management fees. General and administrative expense was $0.463 million in Q3 and $1.278 million for nine months, down 38% and 32%, respectively, from prior-year periods. SWK recorded $0.133 million of net interest and other expense in Q3 and $0.096 million for nine months, including warrant fair-value movements and financing-cost amortization.
Cash, assets, debt and liquidity
- At September 30, cash and cash equivalents were $9.919 million, restricted cash $0.609 million, and working capital $11.3 million. Cash declined from $24.584 million at year-end 2012.
- Total assets were $45.489 million; finance receivables were $20.179 million, marketable investments $3.000 million, and investment in unconsolidated entities $10.639 million.
- Total liabilities were $1.311 million, including a $0.288 million warrant liability. No amount was drawn on the company’s new credit facility at quarter-end; therefore the filing reports no outstanding balance under that facility.
- Nine-month operating cash flow was positive $0.875 million; investing cash flow was negative $13.390 million and financing cash flow negative $2.150 million. Cash decreased by $14.665 million. Investing outflows principally funded finance receivables and a $3.0 million note investment; distributions from Holmdel partly offset them.
Material changes and portfolio activity
- SWK funded $6 million of a $15 million Besivance royalty purchase in April, for a stated 40.3125% interest in the royalty stream. The filing’s MD&A gives a different percentage, 40.1325%; investors should verify the correct figure.
- In June, SWK paid $2 million for two royalty streams related to Tissue Regeneration Therapeutics technology.
- In July, SWK purchased $3 million of senior secured notes due November 2026, secured by specified pharmaceutical royalty and milestone payments.
- In August, SWK funded $6 million of an $8 million term loan to Tribute Pharmaceuticals; the remaining $2 million could be drawn subject to covenants. The loan has a 13.5% minimum interest rate and an associated warrant.
- A September credit agreement with a stockholder permits delayed draws of up to $30 million, subject to conditions, and is secured by substantially all SWK assets. The facility has a four-year maturity and includes warrants for 1 million shares, recorded as a liability. An increase to the $30 million facility requires at least $10 million of net cash proceeds from new equity issuance.
Outlook, risks and contingencies
Management stated that, as of November 13, 2013, six transactions had been completed under the revised strategy and expected income from those assets to exceed operating expenses in 2013 and support future book-value growth. This is forward-looking and not assured; management also noted that the timing and completion of additional investments are uncertain and cash yields remain low.
- Revenue and credit exposure are concentrated: three customers represented 78% of Q3 revenue and 85% of nine-month revenue; three customers accounted for all accounts receivable at September 30.
- Management reported no impaired or non-performing finance receivables and no allowance for credit losses at quarter-end. Loan and royalty collections remain dependent on borrowers’ and products’ performance.
- SWK reported approximately $446 million of federal and $40 million of state net operating loss carryforwards, mostly expiring between 2013 and 2021 if unused. Deferred tax assets were fully offset by a valuation allowance.
- The filing states there were no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no current legal proceeding expected to have a material effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the Besivance royalty ownership percentage discrepancy between the financial-statement note and MD&A.
- Review the credit facility’s collateral, draw conditions, equity-issuance requirement, warrant terms, and potential dilution.
- Assess collection and valuation risks in the concentrated loan and royalty portfolio, including the major customers and Holmdel investment.
- Confirm the status of the stated 2013 income outlook and whether subsequent investments were completed and generated the expected returns.
- Evaluate the availability and expiration of NOLs and whether future taxable income can support their use.