SWK Holdings Corporation — Q1 2018 Form 10-Q
Business and period: Specialty-finance company focused on healthcare and life-sciences royalty interests and secured lending. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Financial statement amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparison |
|---|---|---|
| Total revenue | $6.8 | $14.9 in Q1 2017 |
| Finance-receivable interest and fees | $6.8 | $4.7 in Q1 2017 |
| Credit-loss provision | $1.2 | None in Q1 2017 |
| General and administrative expense | $1.2 | $0.7 in Q1 2017 |
| Income before taxes | $4.6 | $14.0 in Q1 2017 |
| Net income attributable to SWK shareholders | $3.6; $0.28 per basic and diluted share | $5.2; $0.40 per share in Q1 2017 |
| Operating cash flow | $5.2 | $3.0 in Q1 2017 |
| Cash and cash equivalents | $21.5 | $30.6 at December 31, 2017 |
| Finance receivables, net | $165.8 | $152.0 at December 31, 2017 |
| Total assets / stockholders’ equity | $214.2 / $211.7 | $209.9 / $208.0 at December 31, 2017 |
| Total liabilities | $2.5 | $1.9 at December 31, 2017 |
Cash used in investing activities was $14.3 million, primarily reflecting $29.3 million of finance-receivable investments, partly offset by $14.9 million of repayments. Cash decreased by $9.1 million during the quarter. The balance sheet reports no borrowings; management said the company had no credit facility or other borrowing access at quarter-end. The filing does not present a conventional operating-margin measure.
Material changes and notable items
- Revenue declined by $8.1 million, mainly because Q1 2017 included $10.2 million of income from an unconsolidated investment whose underlying product rights were sold in February 2017. Higher interest and fees from finance receivables added about $2.2 million year over year.
- SWK recorded a $1.2 million credit-loss allowance on its Cambia royalty purchase after reducing expected future royalty receipts. The allowance for finance-receivable credit losses was $2.8 million at March 31, versus $1.7 million at year-end.
- Three term loans, with a combined carrying value of $18.9 million net of allowance, were on nonaccrual, compared with two loans totaling $11.4 million at year-end. ABT Molecular Imaging, B&D Dental, and Hooper Holmes were in default or evaluating strategic options. Management reported collateral coverage for these loans; only one of the three was deemed impaired.
- Narcan royalty receipts increased Q1 finance income, but SWK reached the 1.5x cash-on-cash royalty cap during the quarter and expects substantially lower Narcan revenue going forward.
- Q1 2018 included a $0.3 million unrealized gain on warrant derivatives and a $0.1 million unrealized loss on equity securities. Adoption of the new equity-security accounting guidance moved approximately $0.2 million of accumulated unrealized appreciation from other comprehensive income to retained earnings.
- After quarter-end, OraMetrix repaid its credit facility on May 1, 2018 in connection with its sale; SWK received approximately $9.2 million, including accrued interest and exit fees.
Outlook, risks and contingencies
- Management expected the existing portfolio, including $165.8 million of finance receivables and $1.7 million of marketable investments, to generate positive cash flows in 2018. It cautioned that timing of new investments is uncertain and may limit additional cash generation. No specific earnings or revenue guidance was provided.
- Management was negotiating a non-binding term sheet for a potential credit facility; timing and final terms were uncertain. Funding additional investments may depend on obtaining capital.
- Unfunded commitments totaled $14.0 million, contingent on revenue thresholds or other performance conditions and, for loans, absence of default.
- The portfolio is concentrated in life sciences, exposing SWK to borrower and sector credit risk. The company also cited interest-rate, valuation, liquidity, and estimation risks. It expects the forthcoming CECL credit-loss standard may cause more upfront portfolio losses.
- Management stated there were no material changes to previously disclosed risk factors and no current legal proceeding expected to have a material effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Developments in the three nonaccrual/defaulted loans, collateral values, recoveries, and whether further impairments or allowance increases are required.
- Actual post-cap Narcan receipts and future Cambia royalty performance relative to revised expectations.
- Cash generation and investment deployment, including the effect of OraMetrix’s repayment and any new transactions.
- Whether SWK secures external borrowing, and the final facility terms, availability, and cost.
- Drawdown and performance conditions for the $14.0 million of unfunded commitments and the potential impact of CECL adoption.