SWK Holdings Corporation — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed March 31, 2021. SWK operates in Finance Receivables, providing life-sciences royalty-backed and other financing, and Pharmaceutical Development, principally through Enteris BioPharma’s Peptelligence oral drug-delivery platform. The 2019 comparison includes Enteris only from its August 2019 acquisition, limiting comparability.
Financial performance and position
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $36.7 million | $30.7 million |
| Net income | $5.2 million | $23.8 million |
| Basic and diluted EPS | $0.40 | $1.85 |
| Cash from operating activities | $19.3 million | $18.5 million |
| Cash and cash equivalents at year-end | $3.0 million | $11.2 million |
| Total assets | $273.9 million | $254.4 million |
| Total liabilities | $33.4 million | $17.8 million |
| Stockholders’ equity | $240.5 million | $236.5 million |
- Revenue increased about 19%, mainly reflecting $5.0 million of Enteris milestone revenue under its Cara license agreement and a $0.7 million rise in Finance Receivables interest, fees and royalties. Pharmaceutical Development revenue was $5.9 million, versus $0.6 million in 2019.
- Net income declined about 78%. Key year-over-year expense increases included $7.1 million of additional depreciation and amortization, $4.4 million of acquisition-related contingent-consideration remeasurement expense, and $3.1 million each in R&D/manufacturing and general and administrative expenses. The tax benefit was $1.5 million, versus $7.0 million in 2019.
- Finance Receivables generated $30.8 million of interest, fees and royalties. Its reported segment net income was $28.3 million; Pharmaceutical Development reported a segment loss of $18.7 million. These segment figures precede holding-company and other costs and tax.
- Net cash used in investing activities was $35.2 million, including $42.9 million invested in finance receivables and $3.9 million in property and equipment, partly offset by $11.8 million in finance-receivable repayments. Financing activities provided $7.7 million, including $11.8 million of net credit-facility borrowings and $2.0 million of share repurchases.
- Finance receivables were $204.5 million, net of an $8.4 million allowance for credit losses. Two receivables totaling $12.2 million were on nonaccrual: the B&D Dental loan and the Best ABT royalty. Three business partners represented 34% of finance-receivable interest income, including fees.
- At year-end, $11.8 million was drawn on the $20 million revolving facility and $8.2 million remained available. The facility matured June 30, 2021. The filing reports a further $9.0 million draw and $10.3 million of availability as of March 25, 2021, while management said it was exploring replacement financing.
Changes, outlook and notable items
- Management expected the existing Finance Receivables portfolio to generate positive cash flows in 2021 and income in excess of operating expenses; new investment opportunities could add income, but timing and completion were uncertain.
- Management expected Pharmaceutical Development income to offset segment operating expenses, but emphasized that receipts depend on licensees reaching clinical and operational milestones. The filing provides no formal earnings or revenue guidance.
- COVID-19 reduced Enteris productivity and delayed supplies from vendors; management expected near-term disruption to continue. The pandemic also could delay clinical milestones, disrupt counterparties and impair borrower repayment capacity.
- The $4.4 million contingent-consideration expense reflected remeasurement of the Enteris acquisition earnout; the liability was $16.9 million at year-end. The company paid $2.0 million against it during 2020. Cara milestone revenue included $5.0 million recognized in 2020, of which $2.0 million was paid to Enteris’s seller under earnout provisions.
- SWK reported $289.4 million of federal NOL carryforwards, with approximately half expiring by December 2021 and approximately $4.0 million eligible for indefinite carryforward. Management said it did not expect current strategies to generate enough income to use all NOLs before expiration; utilization may also be limited by ownership-change rules.
- Major risks include credit losses and portfolio concentration, borrower and product underperformance, competition and financing access, the near-term credit-facility maturity, LIBOR transition and rate sensitivity, pharmaceutical development/regulatory/IP risks, and continued COVID-19 disruption. The company also disclosed risks from its reliance on third-party product marketers and suppliers and from maintaining an exclusion from investment-company regulation.
- The filing reports no legal proceeding expected to have a material effect. The auditor gave an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not attest to internal-control effectiveness.
Investor verification priorities
- Confirm replacement or extended borrowing capacity ahead of the June 30, 2021 facility maturity, and review subsequent draws, repayments, covenants and liquidity.
- Review collections, collateral support and updated impairment assumptions for B&D Dental, Best ABT and other nonaccrual or impaired assets; the auditor identified finance-receivable valuation as a critical audit matter.
- Track concentration and cash performance in the finance-receivables portfolio, including borrower repayment, royalty trends and the $8.4 million credit-loss allowance.
- Verify progress and timing of Cara/Oral KORSUVA and other Enteris programs, including milestone attainment, COVID-related delays, cash receipts and the changing earnout liability.
- Assess NOL expiration and potential Section 382 ownership-change limitations, as well as the assumptions supporting the $27.5 million net deferred tax asset.