SWK Holdings Corp Q2 FY2022 Earnings Call

Good morning, and welcome to the SWK Holdings Corporation Second Quarter 2022 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Jason Rando, Tiberend Strategic Advisors. Please go ahead.

Thank you, and good morning, everyone, and welcome to the SWK Holdings Second Quarter 2022 Financial and Corporate Results Call. After the market closed yesterday, SWK Holdings issued a press release detailing its financial results for the three months ended June 30, 2022. The press release can be found in the Investor Relations section of swkhold.com along with other 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 the development of consumer and drug product candidates. Financial future potential product candidates and studies, and our expectations regarding capital allocation and cash resources. These statements are based on current expectations. 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, who will provide an update on SWK's second quarter and first half of 2022 corporate and financial results. Winston, go ahead.

Thank you, Jason. Thanks, everyone, for joining our second quarter conference call. As we celebrate our 10th anniversary as a life science-focused specialty finance company catering to small- and mid-sized commercial stage companies. Before I discuss our second quarter results, I'd like to take a moment to thank our employees, Board of Directors, shareholders, and partner companies for the support given to our leadership team as we built SWK to be a partner of choice for small- to mid-sized life science companies seeking non-dilutive financing to fuel the development and commercialization of life-saving and life-enhancing technologies. Reflecting on the last decade, I'm very proud of what SWK has accomplished. We started in May 2012 with a public shell that had no operating business and $38 million of assets as of March 31, 2012. Today, we are a NASDAQ-traded company, a premier life science specialty finance platform that has provided consistent returns on our investments to our shareholders, including a book value per share that has increased at a 10% compound annual growth rate since inception. The SWK team has successfully deployed approximately $676 million of capital into 48 investments, including a $5 million financing completed in July and a $25 million financing that was announced yesterday evening post-quarter. We utilize a deliberate and contemplated approach in identifying investment opportunities that take into consideration of the company and its management team as well as the potential of this technology, intellectual property, and the external factors that could impact our ability to generate a return. Such external factors could entail situations in the vertical industry in which the company competes as well as broader macroeconomic market dynamics. I'm sure everybody on this call appreciates that the first half of 2022 has been a challenging period for the capital markets. Given this, SWK has been focused on the pursuit of compelling opportunities with an eye towards selectively funding high-quality assets positioned to weather the current challenging capital market conditions. We're always selective with where we deploy our shareholders' capital. Our disciplined underwriting philosophy led to new transaction originations dovetailing the repayment of positions in the portfolio over the last 12 months, resulting in a material decline in the size of our aggregate portfolio and a corresponding decrease in revenues year-over-year. I was a little apprehensive but encouraged about our strategy with the successful portfolio payoffs. We believe they provide a strong endorsement of the innovation we support through our investments. Furthermore, we believe our focused stewardship of our shareholders' capital has provided important benefits. We have a well-positioned balance sheet for the current environment, which includes $25 million of cash and an untapped $22 million credit facility as of June 30, 2022. With regard to our status as a NASDAQ-traded company, I'm pleased to note that at the close of the second quarter, SWK was added to the Russell 2,000, 3,000, and Microcap Indexes. Our addition to these indexes should serve to further expand awareness of our company within the investment community, increase the liquidity of our stock, and broaden our shareholder base. In addition to recognizing the value in SWK's equity, during the last quarter, we implemented a 10b5-1 program for repurchase of up to $10 million of stock, which we expect to be accretive to the company. Returning to SWK finances. As of June 30, SWK's total investment assets were $181.4 million, a decrease from $213 million from a year ago, reflecting these recent payments. Please note that the quarter end figure does not include portfolio movements post-quarter. At the end of the second quarter of 2022, the weighted average projected effective yield of the finance receivables portfolio was 14.2%, including non-accrual positions. There's a slight increase from a year ago. Same quarter cash collections were greater than forecast, leading to a realized yield of financial receivables of 15% versus 22.9% from a year ago. SWK reported a book value of $21.15 per share and a non-GAAP tangible book value per share of $18.48 as of June 30, 2022, an increase of 7.2% from the year-ago date. That figure excludes the deferred tax assets and tangible assets, goodwill, and contingent consideration payable. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business. For the second quarter of 2022, SWK reported total revenue of $6.9 million, a 68.8% decrease compared to $22.3 million for the second quarter of 2021. Last year's revenue in the segment was driven in part by a $10 million milestone payment from Cara Therapeutics, which did not recur this year. Net receivables segment revenue decreased to $6.8 million from $11.8 million. The decrease reflects a $3.1 million decline in interest and fees or non-finance receivables that are either paid off or paid down since the second quarter of 2021, and a $4 million decrease in net royalty income primarily due to the achievement of return premiums that caused a step-down in royalty rates, which is similar to the payoff situation. This was partially offset by $2.1 million in interest and fees earned due to new funding. GAAP net income for the second quarter of 2022 totaled $565,000 or $0.04 per diluted share compared to $14 million or $1.09 per diluted share for the second quarter of 2021. The first quarter adjusted non-GAAP income generated by Specialty Finance totaled $4.16 million, a 50% decrease versus the second quarter of 2021, which reflects the recurring nature of the Cara milestones and a smaller portfolio. For the six-month period ended June 22, SWK's GAAP net income totaled $4 million or $0.31 per diluted share compared to $17.4 million or $1.35 per diluted share. Looking ahead, the remainder of 2022 offers significant potential for SWK as we continue to identify companies, technologies, and intellectual property to which our investment vehicles are well-suited and where strong risk-adjusted returns are likely to be achieved. The current environment has expanded our opportunity universe as innovative companies continue to need growth capital amidst the compression of other equity values, creating a great recipe for our structure and non-dilutive solutions. We anticipate several closing financings in the second half of 2022, with the potential for some to occur in the relative near term. Additionally, our work with Enteris BioPharma continues to advance as the company partners with pharmaceutical companies to develop orally delivered peptides and small molecules while maximizing its state-of-the-art manufacturing facility. Just to reiterate, we always aim to be prudent stewards of SWK's capital and continue with our disciplined approach to underwriting. These dynamics combined with the advancement of the tariffs of the potential will foster a sustained period of value creation for SWK. With that, I will now open the call to questions.

Our first question will come from Kyle Bauser of Lake Street Capital Markets.

Maybe I'll just start with the capital deployment. So obviously, subsequent to the quarter, I think you made a $5 million investment in Telo and then another nearly $4 million in unfunded commitments. And I think based on your prepared remarks, you're confident to be able to deploy a decent amount of financing in the second half of this year. Are you able to quantify how large your pipeline is perhaps over the balance of the year or maybe the next 12 months? Just trying to get a sense of where we think the invested assets can get to over the next 12 months or so?

Great question, Kyle. I appreciate it. I want to mention that last night, our partner announced $25 million in financing, with $21 million funded upfront. We are actively working on this. While we don't usually disclose the total value of the pipeline, it has increased from a small amount to several hundred million by the end of July. To put it simply, it's over $300 million in transactions we are considering. We are confident in our ability to deploy our existing capital. As stated in the press release, we are looking to increase our debt capacity on the balance sheet and exploring other strategies to continue expanding the Specialty Finance business. I believe we will have the existing capital invested over the next couple of quarters, and potentially more depending on the available liquidity.

Got it. I appreciate that. And just kind of curious about the dynamics playing out in the marketplace for potential targets that you're evaluating. Have you circled back with any that now appreciate the cost of debt being cheaper than the cost of equity? I guess this may apply more to public comps. But just curious if that dynamic has changed where these targets are reevaluating how they want to fund their growth, whether that be through debt or equity?

You're definitely onto something there, Kyle. That's certainly what's happening. We're definitely seeing some reverse inquiry from opportunities that we've had discussions with in the past. As we consider what our pipeline looks like, there's a good amount of new leads as well. The dynamics generally in our space are quite interesting. Sometimes transactions come together very quickly with totally new situations. Sometimes they can take years to develop the relationship so that the counterparty and SWK are ready to transact. But obviously, we're seeing both scenarios play out. I think one reason the pipeline has grown so much is the current environment, coupled with the ending of the strategic processes last year, which has been very helpful in engaging with the market again.

Great. And maybe lastly, just on the Enteris business. I know it's hard to predict milestones and such, and some are confidential. But to the extent you can share, what sort of catalysts should we be watching for the Enteris business?

Sure. The obvious catalysts, of course, are going to be additional milestones from our partner Cara. I really wish I could provide a lot more clarity into that agreement, but as we discussed before, we have to keep the terms of those milestones confidential. In the recent past, we have said we do expect additional wins in the next couple of quarters. I don't think much has changed from that perspective. On other catalysts, there's some pipeline development that we're pursuing so that there may be some readouts in the second half of the year that may inform how we keep moving the pipeline program forward. We are also looking for significant advancements on the feasibility side as the development pipeline continues to grow. One interesting aspect there is that the team is now engaging with some larger companies, which is great, but that results in timelines that can compete with everything else these big companies have going on. So it can be difficult to pinpoint exactly when things will happen, but those are the key factors we're focused on that could drive additional licenses in the future.

Our next question is from Scott Jensen, a private investor.

Great continued progress. A couple of things that I picked out of the Q, and I just wanted to figure out how they go through the income statement. That is, you had a payoff of the Teladoc at $4.3 million and on your balance sheet at GAAP at $4.2 million. How does that come through as well as the economy, which you got paid $6.1 million for a $3.9 million on the GAAP, which should be a net $2.2 million roughly. One, I think that's obviously a good thing that you got paid in some way so quickly. I'd just be interested in your comments on how you see that as well. So I guess those are my first two.

Great questions as well. Just from an accounting perspective, we talked about this a little in the past. We recognize income core into advanced receipts in our forecasts. In the case of Teladoc, we had always known there was a milestone payment that was going to be hit at some point. So that was factored into the carrying value and how we recognize income over time. So that's why the payment received was relatively close to what the carrying value was. From your question, you'd assume that there isn't a big gain in the quarter from that payoff. Does that make sense?

Yes.

Okay. Whereas on the Ostomy royalty, we definitely didn't expect to get that payback so quickly. It's always great getting your money back because it indicates that you executed well with the underwriting. In this case, we didn't expect it as quickly, and it will translate into a payoff gain in the third quarter. I don't have the exact math on that. I don't think it will be exactly the $2.2 delta, but it will definitely be above the threshold of zero in the quarter.

Okay. Great. And then the other question I had is on now that you have Washington coming in on buybacks. It's a pretty low percentage number, 1%, at least it appears in the bill for the buyback tax. Does that influence you at all about how you see the buyback or where you see the value? I haven't seen any development. I know you have the program out there, but just how you see the buyback in general?

Sure. I think it always depends on where you're able to essentially buy back the portfolio relative to its carrying value or intrinsic value. As we think about different levels and how much we want to buy relative to market to various discounts, we would just factor in the taxes as if we were paying more per share. Just to provide more obvious context, we certainly would want to buy back a significantly larger amount of stock at a 50% discount compared to how the market is performing. Although I'm not trying to give guidance on where those preferred levels are, that's probably how we should be thinking about it because whether we're buying it from the market or paying tax to the government, it's all cash going out to acquire the shares.

This concludes our question-and-answer session. I would like to turn the conference back over to Winston Black for any closing remarks.

Thank you. In closing, I appreciate your time and attention and look forward to future updates as we continue to advance SWK Holdings. I also extend my sincere wishes of good health to all. Thanks.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.