SWK Holdings Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited. SWK had sold substantially all of its former software business in 2009 and reported that it had no material operating business during the quarter; its principal asset was cash while it evaluated acquisitions and investments.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / prior balance |
|---|---|---|
| Revenue | $0 | $0 |
| General and administrative expense | $300,000 | $377,000 |
| Interest and other income, net | $45,000 | $85,000 |
| Gain on asset sale | $0 | $167,000 |
| Net loss | $256,000 | $126,000 |
| Operating cash flow | $(301,000) | $(378,000) |
| Cash and cash equivalents | $37.902 million | $38.203 million at Dec. 31, 2011 |
| Total liabilities | $153,000 | $250,000 at Dec. 31, 2011 |
Amounts are as reported; the filing presents statements in thousands. Operating margins are not meaningful because SWK had no revenue. The company reported no outstanding debt commitments. Working capital was approximately $37.9 million. It estimated its resources would fund limited operating activities for 12 months from March 31, 2012.
Changes, outlook, and risks
- Net loss increased year over year despite G&A expense falling about 20%. The prior-year quarter included a $167,000 asset-sale escrow gain that did not recur, and interest income declined from $85,000 to $45,000 amid lower rates and lower average cash.
- Management said it did not expect income other than interest until a business combination or other income source was established. It cautioned that interest was not expected to cover administrative expenses and that losses could rise now that asset-sale escrow funds were exhausted.
- After quarter-end, SWK announced hires of a CEO and managing director to build a specialty-finance and asset-management business, initially focused on monetizing commercialized life-science products. It signed a conditional agreement to acquire contracts from PBS Capital Management, which the new executives control, for $150,000 plus earnouts. SWK estimated annualized revenue of $100,000–$200,000 for the next several years; the agreement had not yet closed.
- The filing describes employment compensation for the new executives, including annual salaries of $200,000 each, bonus potential, and stock options. Interim executives also had announced severance arrangements and equity awards. These post-quarter developments may affect costs and share dilution.
- SWK sought to preserve its net operating loss carryforwards and said it could not assure either finding suitable acquisition candidates or using the NOLs. A shareholder rights agreement intended to protect NOLs was extended through February 3, 2015.
- An IPO-related lawsuit names SWK only as a nominal defendant and seeks no relief from the company. The Supreme Court reversed a ruling on the limitations issue and remanded for further proceedings on equitable tolling. SWK warned that litigation costs could affect results and cash flows.
Important facts for investors to verify
- Whether the PBS Capital contract acquisition closes, its actual economics and revenue, and how the related-party relationship is managed.
- Whether SWK identifies and completes an investment or acquisition, and the resulting cash use, operating costs, and financing needs.
- Cash burn, interest income, and the adequacy of liquidity as the company transitions to a new business model.
- Potential dilution and compensation costs from executive options, restricted shares, bonuses, and severance arrangements.
- Progress and potential costs of the litigation, and whether the NOL carryforwards can ultimately be used.