SWK Holdings Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are with FY 2012. SWK had shifted in 2012 to specialty finance and asset management focused on financing commercial-stage life-science products, royalty streams and related cash flows.
Financial performance and condition
| Metric | FY 2013 / Dec. 31, 2013 | FY 2012 / Dec. 31, 2012 |
|---|---|---|
| Revenue | $6.447 million | $0.637 million |
| Operating income (loss) | $4.700 million | $(1.603) million |
| Income (loss) before tax | $4.491 million | $(1.445) million |
| Income tax benefit | $9.841 million | $0.024 million |
| Net income (loss) attributable to SWK shareholders | $12.862 million; diluted EPS $0.31 | $(1.421) million; diluted EPS $(0.03) |
| Cash and cash equivalents | $7.664 million | $24.584 million |
| Working capital | $8.7 million | $26.0 million |
| Total assets / total liabilities | $61.575 million / $5.658 million | $45.320 million / $1.132 million |
| Credit facility borrowings | $5.0 million outstanding | None reported |
- Revenue consisted primarily of $3.090 million in finance-receivable interest and fees, $2.779 million in equity-method income from an unconsolidated investment, $0.412 million in management fees and $0.166 million in marketable-investment interest.
- Operating cash flow was positive $1.344 million, while investing cash flow was negative $20.068 million and financing cash flow was positive $1.804 million. Net cash declined $16.920 million.
- Finance receivables were $29.286 million and investments in unconsolidated entities were $10.425 million at year-end. SWK reported no impaired or non-performing assets and no allowance for credit losses.
- The $9.803 million deferred tax asset valuation-allowance release was a major non-cash contributor to reported net income. The filing reports $433 million of federal NOL carryforwards, with most expiring by 2021.
Material changes and portfolio activity
- Revenue rose substantially from 2012 as SWK expanded its new strategy and deployed capital; general and administrative expense fell 22%, to $1.747 million from $2.240 million.
- SWK reported nine transactions and approximately $57.5 million deployed under its strategy. This included $11 million in royalty purchases or financings, $40.5 million in secured debt backed by royalties, and $6 million in an indirect pharmaceutical-product investment.
- The $22.5 million Nautilus loan was repaid in December 2013. SWK recognized $1.591 million of 2013 interest income on its share, including $0.578 million from exit-fee accretion.
- Subsequent to year-end, SWK funded a further $2 million to Tribute and participated in a $25 million Parnell loan, of which SWK funded $10 million. These are post-year-end transactions, not year-end balances.
Liquidity, outlook and risks
- At year-end, $5 million was drawn under a related-party credit facility; $10 million of additional borrowing was available within the initial facility commitment. The facility permits up to $30 million of borrowing subject to conditions, including at least $10 million of net equity proceeds to access the expanded amount. It is secured by substantially all company assets and matures in September 2017.
- Management said liquidity was adequate for operating needs for the twelve months after the balance-sheet date. It expected existing portfolio income to exceed operating expenses in 2014, but cautioned that timing and completion of new investments could affect cash generation.
- SWK filed a registration statement for a planned $12.5 million rights offering; completion would make an additional $15 million of facility capacity available. The filing does not establish that the offering was completed.
- Key risks include the limited history of the new strategy, small and concentrated portfolio, borrower and royalty-product performance, dependence on third-party product marketing, competition, limited access to capital, leverage and restrictive covenants, reliance on key executives, and regulatory risk under the Investment Company Act. Three partners accounted for 78% of 2013 revenue.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Separate recurring portfolio earnings and cash generation from the $9.803 million deferred-tax benefit and $2.779 million equity-method income; check the underlying cash distributions and sustainability.
- Review the terms, collateral, payment performance and concentration of the royalty-backed loans and investments, including the large revenue contribution from three partners.
- Confirm subsequent borrowing, rights-offering status, related-party terms and remaining facility availability; reconcile the $5 million year-end draw with the $11 million outstanding reported as of March 21, 2014.
- Assess the realizability, expiration schedule and potential ownership-change limitations of the NOLs, as well as the assumptions supporting the partial deferred-tax valuation-allowance release.
- Monitor portfolio performance, liquidity after deployment, and the impact of facility covenants and the lender’s security interest over substantially all assets.