Description

SWK Holdings is a Company that trades at cash with large federal and state net operating loss carry-forwards (NOL's).  SWKH was formerly a software company known as Kana Software.  In January of 2010 the company divested all of its operating assets and was left with a shell company with approximately $39 million in cash and over $400 million in federal and $100's of millions of state NOL's (California is one of the states).   SWKH is currently burning about $200K per quarter in maintaining its public listing and search for an acquisition.  SWKH has a poison pill in place to make sure that they don't lose the utilization of the NOL for technical reasons.  Generally, the NOL would begin to be limited if more than 50% of the 5% or greater shareholders change in any three year rolling period.  The recapitalization transaction done in January caused about 40% of the shares to change hands for counting purposes.  Therefore, any transaction SWKH enters into will not have a meaningful equity component at the parent level.

The Company has stated publicly that it is looking to purchase an operating business to utilize these NOL's.  I have created a model to show the value of this NOL, which is not currently being reflected in SWKH's share price.  The value I come up with for SWKH including the NOL is $2.29 per share.  The assumptions below are simple and are as follows:

• 1. Purchase of an operating business at 8x EBIT utilizing 50% cash and 50% debt.
• 2. EBIT growth of 3% per year
• 3. Cash taxes of 5%
• 4. Discount rate 8%
• 5. Terminal multiple of 10X EPS

OTHER INFORMATION

SWKH's hired John Nemelka as interim CEO to identify potential merger or acquisition transactions.  SWKH's largest shareholder is Carlson Capital with about 28% of the equity.  The Company has indicated that they are actively looking for a transaction.  Management has said that they are looking for recurring revenue businesses that generate stable growing cash flows.  They would prefer that the initial acquisition target serve as a platform for additional companies so that they can utilize as much of the NOL as possible.

Catalyst