SWK Holdings Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in thousands of dollars unless noted.
Business context
After selling substantially all of its former software business in 2009, SWK held cash while evaluating ways to redeploy it. In May 2012, the company announced a strategy to finance life-science companies through royalty purchases, financings and synthetic revenue interests, initially targeting transactions below $50 million. It also planned to provide investment-advisory services. At September 30, cash was its only material asset. The filing checked the box indicating the company was a shell company.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $54 | $0 | $54 | $0 |
| General and administrative expense | $846 | $364 | $1,857 | $1,051 |
| Operating loss | $(792) | $(364) | $(1,803) | $(1,051) |
| Net loss | $(749) | $(296) | $(1,672) | $(665) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.04) | $(0.02) |
- Revenue and margins: Revenue came from an interest in three client contracts acquired during Q3. The filing does not provide a clear gross-margin measure; operating losses exceeded revenue in both 2012 reporting periods.
- Cash and liquidity: Cash and cash equivalents were $37.0 million at September 30, versus $38.2 million at December 31, 2011. Working capital was $36.9 million. Management estimated resources were sufficient for limited operations for 12 months from the balance-sheet date.
- Cash flow: Nine-month operating cash use was $1.152 million, compared with $875,000 in 2011. Investing cash use was $4,000, compared with $167,000 of proceeds in 2011. Cash declined by $1.156 million during the 2012 nine-month period.
- Debt and liabilities: Total liabilities were $203,000, including $137,000 of current liabilities. The filing reports no debt balance. Stockholders’ equity was $36.9 million.
- Other: Interest and other income was $44,000 in Q3 and $134,000 for nine months, down from $69,000 and $223,000, respectively, in 2011, mainly because of lower interest rates and cash balances. There was no 2012 asset-sale gain; 2011 nine-month results included a $167,000 gain.
Changes, outlook and risks
- G&A expense rose 132% year over year in Q3 and 73% for the nine-month period. The filing attributes the increases to stock-based compensation, severance and professional fees. Stock-based compensation was $410,000 in Q3 and $516,000 for nine months, versus $23,000 and $63,000 in 2011.
- In Q3, SWK paid $150,000, treated as compensation expense, for an interest in three revenue-producing contracts from PBS Capital Management, controlled by the current CEO and Managing Director, plus earn-out payments through 2016. The seller may repurchase SWK’s interest for $1 if the executives’ employment contracts are not renewed.
- Management expected additional income from the acquired contracts, but warned that interest income was not expected to cover administrative expenses for the foreseeable future. Future cash generation depends on originating income-producing investments; timing and suitability are uncertain.
- Risks include market liquidity and interest-rate changes, dependence on client confidence and financing availability, potential prepayments reducing cash flows, and uncertainty about deploying capital or generating fee income. The company said it might be unable to use its approximately $431 million of federal and $50 million of state net operating loss carryforwards; most expire between 2012 and 2021 if unused, and deferred tax assets were fully reserved.
- The company reported no off-balance-sheet arrangements. A longstanding IPO-underwriter lawsuit naming SWK only as a nominal defendant concluded after the plaintiff voluntarily dismissed it in June 2012. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the royalty-finance and advisory strategy produces completed investments and sustainable revenue beyond the $54,000 reported.
- The terms, performance and related-party implications of the PBS Capital Management contract interest, including future earn-outs and the repurchase provision.
- Cash burn, administrative costs and the assumptions supporting management’s 12-month liquidity estimate.
- Potential dilution and compensation costs: 1.68 million options and 1.65 million restricted shares were outstanding at September 30; the filing also reported 42,894,894 common shares outstanding as of November 1, 2012.
- Whether the company can generate taxable income and preserve or use its expiring tax-loss carryforwards.