SWK Holdings Corp Q4 FY2021 Earnings Call

Good day, and welcome to the SWK Holdings Fourth Quarter and Full Year 2021 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. I would now like to turn the conference over to Jason Rando with Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings’ fourth quarter and year-end 2021 financial and corporate results call. Before the market opened this morning, SWK Holdings issued a press release detailing its financial results for the three months ended December 31, 2021. The press release can be found in the Investor Relations section of swkhold.com under News Releases. Before beginning today’s call, I would like to make the following statement regarding forward-looking statements. Today, we’ll be making certain forward-looking statements about future expectations, plans, events, and circumstances, including statements about our strategy, future operations and development of our drug product candidates, plans for future potential product candidates, and studies and our expectations regarding our capital allocation and cash resources. These statements are based on current expectations and you should not place undue reliance on these statements. Actual results may differ materially due to our risks and uncertainties, including those detailed in the Risk Factors section of SWK Holdings’ 10-K filed with the SEC, and other filings we make with the SEC from time to time. SWK Holdings disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. Joining me on today’s call is Winston Black, Chairman and CEO of SWK Holdings. He’ll provide an update on SWK’s fourth quarter and year-end of 2021 corporate and financial results. Winston, go ahead.

Thank you, Jason, and thank you all for participating in our fourth quarter conference call. The fourth quarter of 2021 and recent weeks have been quite active for SWK Holdings. We are looking to take advantage of market and industry trends that we believe will increase interest in SWK as a leading provider of non-dilutive funding for small and mid-sized life science companies with unique commercial-ready products. In December, we provided $12 million in senior secured debt financing to Biotricity, a medical technology firm focused on remote biometric monitoring solutions, along with nearly $10 million in senior secured debt to MolecuLight, a medical imaging company that is enhancing its proprietary imaging platform, with $8 million funded upfront. More recently, we finalized a $6.5 million senior secured loan with Acer Therapeutics in March. We believe these transactions, along with our last fall's 14.4% adjusted return on invested capital and year-end income-producing assets totaling $181.7 million, demonstrate how our platform is well-positioned to seize the exciting opportunities ahead and affirm the strength of SWK’s business model as we establish ourselves as the preferred capital provider for small to mid-sized life science firms. These companies typically require financing to support the commercialization of their critical medical innovations, a need that has grown significantly due to the prolonged sell-off in the equity markets affecting the life science sector, making it more challenging for both public and private companies to secure capital. We believe our range of financial products is well-suited to address this increasing demand. Considering these factors, 2022 is set to be an exciting year for SWK. We aim to return our new deal origination to historical levels. Additionally, our current liquidity is over $60 million in cash and available credit. SWK’s Board of Directors is committed to responsibly increasing leverage during the fourth quarter of 2021 to enhance our capital allocation and financial flexibility for investment opportunities. A recent example of our ability to partner with innovative firms and generate returns is our borrower, Misonix, which was acquired by Bioventus in the fourth quarter for $518 million. Upon closing the deal on October 21, Misonix repaid us $31.6 million for principal, accrued interest, and fees, and we exchanged our Misonix shares at $20 each for $1.9 million in cash and 71,000 shares of Bioventus’ common stock, which are easily tradable. This transaction exemplifies our capability to collaborate with companies and enhance our investment as our partners expand. Since our initial $12 million investment in 2015, we have increased that to $30 million to back cyber systems and its successor, Misonix, yielding an approximate 1.7 times cash-on-cash return with a 15% IRR. Misonix serves as one illustration of our strength in identifying investments that deliver favorable returns for SWK. Since 2012, the SWK team has effectively deployed about $638 million in capital across 45 investments, with 27 successful exits generating an internal rate of return of 20%. Operationally, SWK enters 2022 from a strong position. Following the conclusion of earlier special committees' strategic review and its evaluation of the non-binding proposal from Carlson Capital, we have a clear vision for the company's direction. We are excited to announce the reconstitution of our Board of Directors, welcoming three talented independent members: Robert Hatcher and Laurie Dotter join Marcus Pennington and me. Mr. Hatcher, Ms. Dotter, and Mr. [indiscernible] each bring extensive experience in finance, investing, and operations, which will be vital for our growth and long-term success. The SWK team is also optimistic about the steady progress from our subsidiary, Enteris BioPharma. CEO Rajiv Khosla and his team are executing a dual growth strategy to maximize the potential of its Peptelligence and ProPerma technologies alongside the company's expanded manufacturing facility and contract manufacturing business. In 2021, Enteris entered into six feasibility studies involving Peptelligence and ProPerma in peptide and small molecule drug development for various therapeutic uses, such as cancer, women’s health, and central nervous system disorders. In these initiatives, Enteris collaborates with pharmaceutical companies to optimize oral delivery of their drugs. The goal is to advance oral peptide or small molecule product development for Enteris and guide the company toward licensing agreements for these newly developed oral products, potentially generating new revenue streams for both Enteris and SWK. Enteris's capacity showcased to SWK is underscored by milestone payments from Cara Therapeutics for the development of its oral KORSUVA, engineered using Peptelligence for various therapeutic uses. In December, Cara made a $5 million milestone payment to Enteris, of which Enteris retained $3 million. Over the year, Cara disbursed a total of $15 million in license fees to Enteris, retaining $6.9 million. Looking at our financials, as of December 31, 2021, SWK’s portfolio of royalties and structured credit backed by royalties was approximately $181.7 million across 23 partners, reflecting an 11.3% decrease from income-producing assets of $204.8 million reported on December 31, 2020. Please note that these year-end figures do not account for portfolio changes executed this quarter. By the end of Q4 2021, the weighted average projected effective yield for the finance receivables portfolio stood at 13.8%, including non-accrual positions, unchanged from the previous year. SWK reported a book value per share of $20.80 as of December 31, 2021, which incorporates a negative impact of $0.27 per share from the amortization of Enteris’ intangibles and $0.17 per share related to costs from last year’s strategic review. This contrasts with a book value of $18.80 as of December 31, 2020. Book value per share from financing does not include our deferred tax assets, tangible assets goodwill, or contingent consideration payable at $18 per share. Management considers the tangible financing book value per share a pertinent metric for evaluating the company’s core specialty finance operations. For Q4 2021, SWK reported total revenues of $15 million, marking a 38% increase from $10.9 million in Q4 2020. The revenue primarily stemmed from interest and fees on our finance receivables, royalty payments from our portfolio companies, and revenue from Enteris. The revenue growth was largely a result of increased fees and interest from the early payoff of two term loans, along with the milestone payment from Cara received during the quarter. For the entire year of 2021, revenue amounted to $56.2 million, compared to $36.7 million in 2020. The annual revenue increase was primarily driven by higher interest and fees from our finance receivables portfolio as well as milestones earned from the Cara license. Income before taxes for Q4 2021 reached $8.4 million, relative to $3.4 million in the same quarter the previous year. This increase was fueled by improved revenues during the quarter, alongside reduced expenses due to less amortization of intangible costs, and a decrease in the change of fair value for contingent consideration related to acquisitions. For the full year of 2021, we reported an income before taxes of $33 million, showing a notable improvement from $3.7 million in the previous year, bolstered by the same factors mentioned earlier. The GAAP net income for the fourth quarter ending December 31, 2021, was $6.3 million, or $0.49 per diluted share, compared to $4.6 million, or $0.36 per diluted share in the same quarter last year. For Q4 2021, adjusted net income totaled $9.5 million, exceeding $7.5 million from the fourth quarter of 2020. In the fourth quarter, non-GAAP net income from the specialty finance business was $6.9 million, compared to $6.4 million in the prior year period. For the entire year of 2021, GAAP and non-GAAP net income was reported at $25.9 million and $34 million, respectively, a significant rise from GAAP net income of $5.2 million and non-GAAP net income of $21 million for the full year 2020. Income-producing assets, defined as finance receivables and corporate debt securities, totaled $181.7 million as of December 31, 2021, down from $204.7 million as of December 31, 2020. Looking forward, 2022 has the potential to be a very productive year for SWK, considering the synergies between our financial services and the ongoing necessity for small and mid-sized life science firms to secure funding for innovation. I would like to point out that traditional routes of financing may be limited due to market uncertainties. Our combination of a long-term investment strategy, permanent capital base, flexible approach, and absence of regulatory constraints places SWK in a beneficial position. These factors, along with the continued progress at Enteris, could lead to a promising period of value creation for SWK. Now, I am happy to take your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. Today’s first question comes from Michael Diana at Maxim Group. Please go ahead.

Thank you. Hey, Winston.

Hey, Michael.

In your core finance receivables business, how, if at all, do you think rising rates will impact that business?

Good question. Thank you for it. Yeah. I think we’ll probably see it in a couple of ways. One, there’s associated equity market volatility, and we commented on that in the prepared remarks before. That’s the first way in terms of generating potential new opportunities. From a cost perspective, for our borrowers, given the LIBOR floors that most of our loan agreements have in them, I think at least initially, there won’t be that much of an increased cost associated with our facilities for those portfolio companies, at least initially. But then, of course, to the extent that things continue, there’ll be an increase in our overall interest income associated with those positions. So, yeah, I think those are the primary ways we see it impacting the portfolio.

Right. And as you make new loans, will you be able to command a higher rate on them, do you think?

Yeah, interesting question. It probably depends on the bigger circumstances in which, like I said, it always does. But what I mean by that is, I think the segments where we compete that have been the most competitive may experience a slowdown, and some of the marginal capital providers, it’s natural for them to exit and potentially not be as aggressive as they were before. So you may see the lightening up in those segments, which are primarily visual venture-backed opportunities. I see less impact in that segment than in other areas where we receive capital in companies that have nontraditional sponsors, or are high-net-worth funded or potentially founder-bootstrapped. I think in those cases, there’ll be less competition, and we’ll be able to negotiate better deals on behalf of the company.

Okay, great. Thanks. On Enteris, you mentioned in your release that the six feasibility agreements could advance to licensing agreements over the medium term. Can you put any sort of bracket on that, like two to five, three to six, one to four?

I would say in the one to three-year range. The reason for the wide range is a couple of fold. One, the timing depends on our partners’ internal development timeline. To the extent that timeline involves a very robust Phase 1 program, for example, that could take a year to complete. And so there’s that. The second biggest factor on that is tracking the optimal time to actually seek the license. Because as the pharmaceutical development candidate gets more and more derisked, the value that license could potentially achieve increases. One of the things we’re working on with management there is determining the optimal point to negotiate that license. As an example, the Cara agreement’s license was present right at Phase 2, where they had seen indications of efficacy. The program, from their perspective, was more risky, especially since their injectable formulation had such successful clinical results. In the case of a pharmaceutical company that is perhaps earlier in their development stage, say, they’re somewhere in Phase 1, the program is not all that derisked from their perspective, and they may not be willing to pay as much for the potential license. So, there’s a bit of titration regarding the optimal timeframe to actually strike that license. Because of that uncertainty in language, I would say it’s more promising now than it was before.

Okay, great. Thank you very much.

Sure.

Our next question today comes from Scott Jenson, a private investor. Please go ahead.

Thank you. Good morning, Winston. Great quarter. I have a couple of questions on the financing side, or I mean, on the financial side. You said your costs for 2021 for Enteris were $3 million higher. I see that you’ve started to recruit for Phase 2 of your Leuprolide trial, expected results you’ve stated on the site in May. What is the plan for Phase 3? And what would the costs maybe be in the back half of the year if you move on to Phase 3? And is that a decision SWK controls alone?

That’s a good question, Scott. We’re seeing increased expenses last year associated with this program, and we’re in the midst of recruiting for Phase 2. But the timing will hopefully align accordingly. With respect to ownership of that program, we do have full control of it. Hence, the decision to advance is largely up to us, but it also depends on having discussions with the FDA regarding our Phase 2 meeting and other related matters. In terms of the Phase 3 costs, we haven’t announced what they will be yet, but I don't want to comment on them here. As we think about developing our internal assets, we’re currently contemplating the best way to finance them. We have internal opportunities and external potential partners, and then of course, there’s the question of the optimal time to seek out-licensing of the program to develop it further. Those are all factors we are considering as we look at Phase 3. To the extent that, our Phase 2 results are as robust as we expect, there may be an opportunity to license it at that point, but again, I don’t want to make any promises here because we’re still awaiting the data to come in and will ensure we fully understand what the Phase 3 path entails before commenting on the timing and costs.

Excellent. That answers all the questions I was going to ask there. The next one is on the B&D Dental loan, which I’m sure you’re pleased to finally have off your sheets after a number of years. How will that flow through the first quarter?

Yeah, it’ll – since that the payment was in excess of our carrying basis, the increase will flow through as income in the quarter.

Excellent. Then going on to flow next, I know I saw that it went into non-accrual status, which is a little interesting because you had raised so much money between yourself and the $23 million led round by Farallon Capital. Is there anything going on there? Or is that just a company choice on their side?

Yeah, this is always the difficult part of being a public specialty lender, in the sense that matters come up when we’re dealing with confidentiality. Certainly, there is activity occurring.

That’s why I asked.

Yeah, it’s not an indication that everything is going exactly as planned. I can say that we are actively working with the company and Farallon to figure out exactly what we’re going to do there. We’re definitely disappointed that things have been challenging for the company as they have been. We’re optimistic we’ll have a pretty good idea in the next few weeks—probably in about five to six weeks—regarding the actual direction for working that position out. We’re actively talking with them every couple of days, so I’ll keep them updated in the not too distant future.

I appreciate it. And then just thinking about, as you said, there’s a $0.17 hit last year for the special committee. Amortization is going to drop about $2.5 million this year from last year, both of course, helping. Are there any further costs from the special committee that will show up in the first quarter?

Yeah, there will be some, mainly because the last Carlson offer is still being considered by the special committee. As a result, even though it was at the very beginning of January, there will be some costs associated with it. I think certainly, the sort of expenses will be much less than they were last year, which was fairly robust in pursuing various things. We will have some in the first quarter at this point, anticipating it will be after.

Okay. The last one is just on Cara, they reported another good news announcement this morning on the oral from Phase 2 of the ones that are in Phase 3, just that they got a good anti-age versus placebo. It looks like that’s all heading in the right direction. They talk often on their presentations about it having such potential in pain management, both because it’s non-addictive, as well as they’ve seen such a great response. Are any of those – if they go in any direction, or is Enteris under any of those? Do they have the exclusive right with KORSUVA? If they went in an oral direction for a trial like that? Or is it a better option?

No, that’s a good question. The license that Cara has taken is, I guess one way to think about it, is basically kind of freedom to operate with an oral version of KORSUVA wherever they want to take it. The indications aren’t like carved up, because it just carries on as a molecule. They own it and can do what they want with it. However, any sort of royalties from that agreement, whether for related indications or however else physicians may use it, we will be benefiting from that.

Okay, great. Thank you. I’ll let somebody else ask. Appreciate it. That’s cool.

I appreciate it.

And ladies and gentlemen, this concludes your question-and-answer session. I’d like to turn the conference back over to the management team for any final remarks.

Thank you, operator. In closing, I appreciate everyone’s time and attention and look forward to future updates as we continue to advance SWK Holdings. I’d like to extend my sincere wishes of good health to all. Bye-bye.

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.