SWK Holdings Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The financial statements are unaudited; amounts below are in millions except per-share data and where noted.
Business context
SWK had no material operating business following its 2009 sale of substantially all assets and reported no revenue in Q2 or the first half of 2012. On May 15, 2012, it announced a strategy to invest in pharmaceutical and biotechnology royalty transactions, initially targeting commercial-stage products and transactions under $50 million. It was seeking opportunities to redeploy its cash.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| General and administrative expense | $0.711 | $0.311 | $1.011 | $0.687 |
| Net loss | $0.667 | $0.243 | $0.923 | $0.369 |
| Net loss per share | $0.02 | $0.01 | $0.02 | $0.01 |
| Interest and other income, net | $0.045 | $0.069 | $0.090 | $0.154 |
At June 30, cash was $37.649 million, total assets $37.685 million, total liabilities $0.479 million, and stockholders’ equity $37.206 million. Working capital was approximately $37.3 million. The company reported no outstanding debt commitments. Cash declined $0.554 million from year-end 2011.
For the first half, operating cash use was $0.552 million versus $0.612 million in 2011; investing cash use was $0.002 million versus $0.167 million of inflows in 2011. There was no financing cash flow in either period. Profit margins are not meaningful because the company had no revenue.
Material changes and unusual items
- First-half net loss increased to $0.923 million from $0.369 million. G&A rose 47%, driven by severance, professional fees related to the strategy change, and higher stock-based compensation; lower cash board fees partly offset the increase.
- The prior-year six-month results included a $0.167 million gain from asset-sale escrow collections; no escrow funds remained at June 30, 2012.
- Shares issued and outstanding increased from 41.647 million at December 31, 2011 to 44.377 million at June 30, 2012. The company granted 1.5 million options and 1.23 million restricted shares during the first half; first-half stock-based compensation was $0.106 million.
- CEO J. Brett Pope was appointed June 29, replacing interim CEO John Nemelka, who remained on the board. Interim CFO Paul Burgon gave notice of resignation effective in 60 days.
- A lawsuit naming SWK only as a nominal defendant was voluntarily dismissed by the plaintiff on June 11, 2012, concluding the matter.
Outlook, risks, and contingencies
Management estimated that existing capital resources would fund limited operating activities for 12 months from June 30, 2012. It did not expect income beyond interest until it created income-producing assets, and said low interest rates were unlikely to cover administrative costs for the foreseeable future. Management cautioned that it might not find suitable investments or be able to use its net operating loss carryforwards; a full valuation allowance was recorded against deferred tax assets.
For Q3 2012, SWK intended to purchase three revenue-producing client contracts from PBS Capital Management, LLC, for $150,000 plus earnout payments through 2016. The company estimated annualized revenue of approximately $100,000 to $200,000 for the next several years. The seller is controlled by SWK’s CEO and Managing Director. SWK also disclosed a lease costing approximately $2,000 per month through January 2015, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Cash deposits exceeded federally insured amounts.
Important facts for investors to verify
- Whether the proposed contract purchase closed, its related-party terms and earnout obligations, and whether projected revenue was achieved.
- Progress in deploying cash into royalty investments, including investment economics, timing, and resulting income.
- Cash-burn trends, administrative costs, and the adequacy of liquidity if investments are delayed.
- Potential dilution from outstanding options and restricted shares, and the conditions under which performance-based awards vest.
- Leadership transition and the company’s ability to realize tax benefits from its NOL carryforwards.