SWK Holdings Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly results are not clearly provided in the filing text. Financial statement amounts below are in U.S. dollars and generally in millions, unless noted.
Business context
SWK is a specialty finance and asset management company focused on healthcare and life sciences. It finances or purchases royalties and revenue interests and makes loans, primarily to commercial-stage life science businesses. Its income principally comes from interest, fees, and royalty-related receipts. The company reported five full-time employees.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $26.0 million | $37.5 million |
| Provision for loan credit losses | $6.2 million | None reported |
| Impairment expense | $7.9 million | $8.5 million |
| General and administrative expense | $4.9 million | $4.1 million |
| Interest expense | $0.2 million | None reported |
| Consolidated net income | $6.2 million | $8.3 million |
| Net income attributable to SWK shareholders | $6.2 million | $3.0 million |
| Basic and diluted earnings per share | $0.47 | $0.23 |
| Net cash from operating activities | $19.6 million | $19.5 million |
- Revenue fell $11.5 million, mainly because 2017 included $10.5 million of income related to the Holmdel investment; SWK reported no such income in 2018. Finance receivable interest and fees were $26.0 million in 2018 versus $26.9 million in 2017.
- 2018 consolidated net income was 23.8% of revenue. The year-over-year comparison is affected by the 2017 tax provision of $15.8 million and by non-controlling interests in 2017; the filing does not present a normalized margin comparison.
- Cash and cash equivalents were $20.2 million at year-end, down from $30.6 million. Net investing cash use was $28.1 million, including $90.1 million of new and add-on finance receivable funding, partly offset by $61.7 million of repayments and receipts. Financing cash use was $1.8 million, including $1.4 million of share repurchases and $0.5 million of credit-facility fees.
- Finance receivables, net, were $166.6 million, compared with $152.0 million a year earlier. The allowance for credit losses was $6.2 million, versus $1.7 million. Year-end nonaccrual balances were $14.1 million, compared with $11.4 million in 2017.
- Total assets were $215.7 million, total liabilities $2.6 million, and stockholders’ equity $213.1 million. A $20 million revolving facility was undrawn at year-end, subject to borrowing-base eligibility; no facility balance was outstanding. The facility matures June 2021, bears interest at LIBOR subject to a 1% floor plus 3.25%, and includes financial covenants.
- SWK reported a $22.7 million net deferred tax asset after a $62.6 million valuation allowance. Federal NOL carryforwards were $377.4 million, with the majority set to expire by 2021; management said it did not expect the life science strategy to generate enough income to use all NOLs before expiration.
Material changes and notable items
- SWK recorded a $5.3 million impairment on ABT’s second-lien loan and a $5.0 million credit-loss allowance on its first-lien exposure after ABT’s Chapter 11 restructuring and asset sale. The transaction left SWK with a royalty interest in the buyer’s sales and no further funding liability.
- SWK recorded a $2.5 million impairment related to Hooper Holmes, received $15.9 million in cash proceeds following its 2018 asset sale, and wrote off its Hooper equity and warrants.
- A $1.2 million allowance was recorded against the Cambia royalty purchase after sales trends weakened. B&D Dental was in default and on nonaccrual; its loan balance was approximately $8.3 million and the company was evaluating strategic alternatives.
- 2018 other income and expense included a $1.0 million loss on equity securities, a $0.5 million fair-value gain on warrant derivatives, and a net $0.1 million loss on investment sales and write-offs.
- SWK repurchased 140,066 shares in 2018 for a total of $1.4 million. It authorized a separate $3.5 million repurchase program; 60,500 shares had been repurchased under that program by year-end, with 251,991 shares remaining authorized. The company has not paid cash dividends and does not expect to do so in the foreseeable future.
- Subsequent events: EyePoint repaid its loan in February 2019 for approximately $23.4 million, including accrued interest, prepayment penalty, and exit fees. SWK also funded a $20 million Cheetah Medical loan (later syndicating $10 million) and committed $5 million to an indirect interest in an Aimmune senior secured loan.
Outlook, risks, and contingencies
Management expected income from the existing portfolio to exceed operating expenses and said it expected book value to grow. It anticipated positive cash flows from the year-end portfolio in 2019, while cautioning that timing of new investments was uncertain and positive cash flow beyond existing assets was not assured. No quantified earnings or investment guidance was provided.
- Principal risks include potential credit losses, a limited number of investments, borrower and product underperformance, and reliance on third parties to market royalty-generating products. Healthcare regulation, reimbursement, competition, intellectual-property disputes, and drug pricing could also affect portfolio performance.
- SWK identified funding access and leverage as risks. Rising interest rates could increase borrower debt-service burdens and, if SWK draws on its facility, raise its own funding costs. Many portfolio loans reference LIBOR; its planned phaseout after 2021 could require contract changes.
- Use of NOLs may be restricted by ownership changes under tax law, and SWK may fail to use substantial carryforwards before expiry. Carlson-affiliated funds owned 70.5% of combined issued and outstanding shares, unvested restricted stock, and shares underlying a warrant at year-end and had significant influence over company matters.
- SWK is not registered as an investment company and relies on statutory exclusions and regulatory interpretations; a change in interpretation could require restructuring or asset sales. The company also disclosed ordinary-course legal matters but said none then expected to have a material effect.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Current repayment and recovery status for ABT, B&D, Cambia, and other nonaccrual or impaired exposures, including the assumptions supporting collateral and royalty valuations.
- Actual portfolio receipts, new investment deployment, and credit performance relative to management’s 2019 outlook.
- Availability and covenant headroom under the revolving credit facility, as well as the conditions attached to the $5.8 million of unfunded commitments.
- Progress on subsequent investments and the final economics of the EyePoint repayment and Cheetah loan syndication.
- Potential limits on NOL utilization, expiry timing, and any ownership changes; also the governance and control implications of Carlson-affiliated ownership.