oh, I think I get it now - your asking if SWKH is a good investment? Well maybe, but it can't be both ways either this deal was good for SWKH or RGDX, not both. I think we know the answer...
great DD dairy but I fail to see your logic, this was a debt not equity investment by SWK so investors in RGDX are in no way buying into SWK. as far as I can see this was a debenture granted at a high rate of interest secured against assets. I'm thinking these boyz will eventually end up owning RGDX unless they can turn around the top line fast and I'm afraid the market realizes it, hence the precipitous drop in share price. Am I missing something here?
Thanks much for all this digging. I'm guessing those royalty streams are mostly for low revenue approved products. There's plenty like that out there that only sell a few million $ (or even less) per year.
Bottom line is that someone was willing to put up $8.5 million initially to help RGDX move forward.
Perhaps they could have went with a BDC (Business Development Company) for this type of loan. I hold some OEDV (small oil driller) that obtained a $20 mil loan from AINV (Apollo Investment) at an even higher interest rate.
That's what i'm hoping will see in a couple of days I want to know what happened to that contract
Checked the website.....6 jobs are open. Things picking up?
Also encouraged that SWK is willing to put a decent amount of $$ ($8.5 million now) on the line to support this company. Do you think they'd do that if things weren't improving?
Yeah, this has turned into pure junk sadly. I had hoped with the new coverage they had with 5 new insurance companies in March that Q2 might have turned around. But people seem to be jumping ship.
If there is NO new contract of SIGNIFICANT proportion or buyout in the next few days then you might indeed get your wish in spades. This is ABSURD at this point.
SWK Holdings (SWKH) was originally a shell company sitting on cash and a massive hoard of NOLs. Last year they found an operating biz for this shell. They hired two Dallas hedge fund managers to essentially run a specialty healthcare finance biz and put the cash to work.
SWKH generates money in 1 of 2 ways:
1. They use their balance sheet to make loans to pharma companies and buy pharma royalty streams. This is the core of their business.
2. They generate fee income form external clients. I.e. they might make a loan for $10mm to a pharma co. SWKH might provide $6mm and they might raise an additional $4mm from external clients. Those external clients will pay SWKH mangement and incentive fees on that loan (or royalty). The remaining $6mm would just be a receivable on SWKH's balance sheet. The advisory business allows them to run a more diversified portfolio and have more purchasing power than they would otherwise.
Back of the napkin valuation
Current market cap is about $45mm. They have $17.8mm of cash on the balance sheet. Through the last 10-q they had put $21.75mm of capital to work (will discuss in more detail). So in a sense you are paying $45mm to own $39.6mm of cash and royalties and loans.
The magic question are:
What is the NPV of the loans/royalties? What is the earnings power of the company once they are fully invested? How much can the fee biz generate once they are fully invested? How good is management at buying royalty streams and underwriting these loans? How incentivized is management?
Let me start off talking about management. It is managed by Brett Pope and Winston Black. They use to run a hedge fund called PBS Capital here in Dallas that employed a similar strategy, but I think also invested in public equities. I have seen past letters from the fund and from what I can recall it was successful. Additionally, Carlson Capital owns a large stake in SWKH, so they probably recruited these guys. Previously, they were employing a similar strategy for Highland Capital here in Dallas. I have a good resource to learn more about these guys, so I will dig into this more at a later time. Regarding their compensation, they both are paid a base salary of $200k and get a carry on pre-tax profits. They also have a butload of options struck a different prices that would be very material to them if they could get there. Right now the stock is at $1.11. 20k are outstanding at $1.24 / 10k at $2.65 / 20k at $2.67 / 90k at $2.95 / 20k at $3.5. They are fairly young / value investors / and def. financially motivated to make this work.
Regarding their current investments. I don't know how to discount each investment and have no expertise in this space. My recommendation would be to assign your own discount rate to each and see if it is interesting.
First investment - 12/5/2012 - Term loan to a private neurology co. SWK provided $6.5mm and external clients (fee payers) $16mm. The loan matures on 12/5/2017. The loan shall acrrue interest at either a base rate of Libor + applicable margin with a minimum floor of 16% interest. They also are entitled to a exit fee ($2mm max potential), which gets accreted to interest income over the life of the loan.
Second investment - 12/20/2012 - They acquiried the marketing rights to a beta blocker for hypertension from Holmdel. They sourced $6mm of this investment to SWK and $7mm to external clients. SWK will recieve quarterly distribution of cash flow generated by the drug according to a tiered scale. Until SWK receives 1x cash on cash return, it will receive approx 87% of the products cash flow. As the cash on cash return multiple increases their interest will decline, but it will never go below 45%. (note this is accounted for using the equity method on their BS if you look it up everything else is considered a finance receivable)
Third invesment - 4/2/2013 - Purchased a royalty stream on the net sales of Besivance for $6mm. Besivance is marketed by Baush & Lamb. They own 40.13% of the stream and the remainder is owned by Bess Royalty LP. nder the agreement, whent he purchasers receive a 1x cash on cash return of the toal purchase prices, InSite will be entitled to retain 25% of the royalty stream received about $4.2mm annually. The royalty stream will be returned to InSite if the purchasers receive a 2.75x cash on cash return. Insite recorded $1.2mm and $2.1mm in royalties for the years 2011 and 2012. Patent protection extended to mid-2021.
Fourth investment - 6/12/2013 - SWK purchased two royalty streams from Tissue Regeneration Therapeutics. The initial purchase totaled $2mm. Additional contingent consideration includes (i) $1.25mm payable upon aggregate royalty payments reaching a certain theshold and (ii) annuall sharing payments due to TRT once aggregate royalty payments received by the Company exceed the purchase price paid.
Fifth investment - 8/8/2013 - this is not in my original numbers as it occured during the 3rd quarter. SWK Funding LLC provided Tribute a term loan in principal of $6mm, which may be increased by an additional $2mm at Tribute's request on or before 12/31/2014. The loan matures on 8/8/2018 and accrues interest at an annual rate of 11.5% plus Libor, with Libor beign subject to a floor of 2% (i.e. min interest is 13.5%). Tribute entered into a guaranty and collateral agreement granting the SWK a security interest in substantially alll of the co's assets. In connection with the loan, Tribute issued SWK Funding 755,794 common share purchase warrants with each warrant entitling SWK Funding to acquire one share at $0.5954, exercisable at any time prior to 8/8/2020.
Long story short - assuming they were strong underwriters this could be a valuable portfolio. Furthermore, they have only deployed about 1/2 their capital base. If they can continue to deploy the capital base and bring in outside partners that pay fees the earnings power will grow.