SWK Holdings Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; financial statements are unaudited. SWK had sold substantially all operating assets in December 2009 and was operating as a shell company seeking an acquisition or investment.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| General and administrative expenses | $311,000 | $352,000 | $687,000 | $1.016 million |
| Net loss | $243,000 | $283,000 | $369,000 | $800,000 |
| Net loss per share, basic and diluted | $0.01 | $0.01 | $0.01 | $0.02 |
| Operating cash flow | Not separately presented | Not separately presented | $(612,000) | $(851,000) |
At June 30, 2011, cash and cash equivalents were $38.814 million, versus $39.259 million at December 31, 2010; working capital was $38.8 million. Total liabilities were $179,000, and the company reported no debt commitments. Cash declined by $445,000 in the first half. Investing activities provided $167,000, including escrow proceeds from the asset sale; financing cash flow was zero. Operating margins are not meaningful because the company had no revenue or operating business.
Changes and unusual items
- First-half G&A fell 32% year over year, primarily because 2010 included higher audit and professional fees following the asset sale. Q2 G&A decreased 12%, with lower professional and director expenses.
- First-half 2011 included a $167,000 gain from collecting asset-sale escrow funds; no such gain occurred in Q2. No escrow funds remained, and no further material proceeds were expected.
- Interest and other income, net, was $69,000 in Q2 2011 and $154,000 for the first half. Management attributed lower interest income year over year to lower rates on approximately equal average cash balances.
- The warrant liability was $2,000 at quarter-end, down from $30,000 at year-end; fair-value decreases were recognized as other income.
Outlook, risks and contingencies
Management said it was evaluating U.S.-based acquisition and investment candidates, with the aim of using net operating loss carryforwards against future taxable income or capital gains. It gave no assurance that a suitable transaction would be found or that the NOLs could be used. SWK did not expect income beyond interest until it acquired or invested in a business or developed another income source. Management estimated available capital would fund limited operations for 12 months from June 30, 2011, but said low interest rates meant interest income would not cover administrative expenses and losses could rise without an investment.
The company disclosed no off-balance-sheet arrangements. Cash deposits exceeded federally insured limits. A long-running securities class action settlement, for which the insurer had agreed to assume SWK’s entire payment obligation, remained subject to appeal. Separately, in a related IPO underwriter short-swing trading matter naming SWK only as a nominal defendant, the Supreme Court granted the underwriters’ certiorari petition and denied the plaintiff’s petition on June 27, 2011. The filing noted litigation outcomes and defense costs could affect results and cash flows. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts to verify
- Cash burn, expense run rate, and the stated 12-month funding estimate, particularly given that escrow proceeds have ended.
- Whether an acquisition or investment is pursued, its terms, funding needs, and potential ability to use NOL carryforwards.
- Developments and potential costs relating to the securities litigation and the Supreme Court proceedings.
- Cash custody and exposure above federally insured limits, and the status of the $92,000 uncertain-tax-position liability.