SWK Holdings Corporation (SWKH) Earnings Call Transcript & Summary

Good day, and welcome to the SWK Holdings Third Quarter and Full Year 2021 Financial Results Conference Call. [Operator Instructions] 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 3 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 the 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, who'll provide an update on SWK's fourth quarter and year-end 2021 corporate and financial results. Winston, go ahead.

Thank you, Jason, and thanks, everyone, for joining our fourth quarter conference call. Fourth quarter of 2021 and recent weeks have been a busy time for SWK Holdings. We seek to capitalize on the market and the industry dynamics, which we believe could drive increased interest in SWK as a preferred provider of nondilutive funding for small and midsized life science companies with differentiated commercial ready products. In December, we deployed $12 million in senior secured debt financing to Biotricity, a medical technology company developing remote biometric monitoring solutions as well as close to a $10 million senior secured debt facility to MolecuLight, a privately owned medical imaging company, commercializing its proprietary fluorescent imaging platform technology, funding $8 million upfront. And most recently, we closed a $6.5 million senior secured loan in March with Acer Therapeutics. We believe these transactions, coupled with our last 12-months 14.4% adjusted return on invested capital and year-ending income producing assets of $181.7 million illustrate how our platform remains poised to take advantage of the compelling opportunities in front of us and validate the strength of SWK's business model and our continued ability to establish ourselves as a go-to provider of capital for small and midsized life science companies. These types of companies generally need financing to fund the commercialization of their important medical innovations. That need has grown substantially due to the extended equity market sell-off in the life science sector, which has placed a premium on the ability for both public and private companies to access capital. We believe our suite of financial offerings are well positioned to meet this rising demand. Given these dynamics, 2022 is shaping up to be an exciting year for SWK, and we are targeting to return our new deal origination to historical levels. Putting this effort, our current liquidity profile is in excess of $60 million of cash and availability on revolver and SWK's Board of Directors is committed during the fourth quarter of 2021 to prudently increase leverage to help improve our capital allocation and increase financial flexibility to pursue investment opportunities. As a recent example of our ability to partner with innovative companies and deliver returns, one of our borrowers, Misonix was acquired by Bioventus in the fourth quarter for $518 million. Upon closing of the transaction on October 21, Misonix paid us $31.6 million to cover principal accrued interest and excess fees, and we tendered our Misonix stocks at $28 per share for $1.9 million of cash and 71,000 shares of Bioventus' common stock, which are freely tradable. This transaction is a great example of our ability to partner with companies and grow our investment as our partners grow. We closed the initial $12 million facility in 2015 and grew it to $30 million to support Soluble Systems and then its successor at Misonix, resulting in approximately 1.7x cash-on-cash return with a 15% IRR. Misonix is but one example of our ability to identify investments that yield favorable returns for SWK. Since 2012, the SWK team has successfully deployed approximately $638 million of capital into 45 investments with 27 realizations that generated a realized internal rate of return or IRR of 20%. Operationally, SWK also enters 2022 from a position of strength. With the prior special committees having concluded their strategic review process and its review of the nonbinding proposal from Carlson Capital, we have clarity on the direction of the company. And importantly, we are very pleased to announce the reconstitution of our Board of Directors, bringing on 3 new talented independent directors, Wendy DiCicco, Robert Hatcher and Laurie Dotter, who'll join Marcus Pennington and me. Ms. DiCicco, Ms. Dotter and Mr. Hatcher, each bring extensive financial, investing and operational experience, which will be critical to our growth and long-term success. The SWK team is also encouraged by the steady progress made by our subsidiary, Enteris BioPharma. CEO, Rajiv Khosla, and his team are pursuing a two-pronged growth strategy to maximize the potential of its Peptelligence and ProPerma technologies and the company's expected manufacturing facility in contract manufacturing business. In 2021, Enteris signed 6 Peptelligence and ProPerma feasibility studies involving peptide and small molecule drug, targeting a variety of therapeutic indications that include cancer, Women's health and disorders of the central nervous system. In these programs, Enteris partners with drug companies to engineer their drug for oral delivery. The goal of this process is to advance the development of the oral peptide or small molecule where Enteris and the company entered a license agreement for the new developed oral product, potentially providing new sources of revenue for Enteris and SWK. The value that Enteris is capable of generating for SWK has been demonstrated by the milestone payments from Cara Therapeutics for the development of its Oral KORSUVA, which was engineered using Peptelligence for multiple therapeutic indications. In December, Cara paid Enteris a $5 million milestone payment related to the program, of which Enteris retained $3 million. And during the year, Cara paid Enteris $15 million in aggregate and license fees, of which Enteris retained $6.9 million. Turning to our finances. As of December 31, 2021, SWK's portfolio of royalties and structured credit backed by royalties totaled approximately $181.7 million across [ 23 ] partners. This is an 11.3% decrease compared with income-producing assets of $204.8 million as of December 31, 2020. Note that the year-end figures here do not include portfolio movements executed post quarter. At the end of the fourth quarter of 2021, the weighted average projected effective yield for the financial receivables portfolio was 13.8%, including nonaccrual positions. This is flat versus prior year. SWK reported book value per share of $20.80 as of December 31, 2021, which includes a $0.27 per share negative impact from the amortization of Enteris' intangibles and a $0.17 per share negative impact from the costs associated with last year's strategic review. This compares to $18.80 as September 31, 2020. Tangible financing book value per share, which excludes our deferred tax asset, intangible assets, goodwill and contingent consideration payable totaled $18 per share. Management views the tangible financing book value per share as a relevant metric to value the company's core specialty finance business. For the fourth quarter of 2021, SWK reported total revenue of $15 million, a 38% increase compared to $10.9 million for the fourth quarter of 2020. Revenue primarily consisted of interest and fees earned on our financial receivables and royalty payments generated by our portfolio of companies as well as revenue generated by Enteris. The increase in revenue was primarily due to an increase in fees and interest from the early payoff of 2 term loans and the Cara milestone received during the quarter. For the full year 2021, revenue was $56.2 million compared to $36.7 million for the full year of 2020. The increase in revenue during the year was primarily due to an increase in interest and fees earned on our finance receivables portfolio and due to the milestones earned related to the Cara license. Income before taxes for the fourth quarter of 2021 totaled $8.4 million, compared to $3.4 million for the same period of the previous year. The increase was driven in part by our greater revenues during the quarter plus a decrease in expenses, driven by a less amortization of intangible expenses as well as a decrease in the change in the fair value of the acquisition-related contingent consideration. For the full year of 2021, we reported income before taxes of $33 million. This compares favorably to net income before taxes of $3.7 million, with the positive variance driven by the same factors noted a moment ago. The GAAP net income for the fourth quarter ended December 31, 2021 totaled $6.3 million or $0.49 per diluted share, compared to $4.6 million or $0.36 per diluted share for the prior year period. For the fourth quarter of 2021, adjusted net income was $9.5 million, compared to $7.5 million for the fourth quarter of 2020. For the fourth quarter, non-GAAP net income generated by the specialty finance business totaled $6.9 million as compared to $6.4 million for the prior year period. The full year of 2021 reported GAAP and non-GAAP net income of $25.9 million and $34 million, respectively. This compares favorably to GAAP net income of $5.2 million and non-GAAP net income of $21 million for the full year of 2020. Income-producing assets as defined as a finance receivables and corporate debt securities totaled $181.7 million as of December 31, 2021. This is a decrease compared with income producing assets of $204.7 million as of December 1, 2020. Looking ahead, 2022 has a potential to be a very fruitful year for SWK given the synergies between our financial offerings and an ongoing need for small and midsized life science companies to raise capital to fund innovation. As noted earlier in the presentation, with traditional routes of financing potentially less available due to market uncertainties, combination of our long-term investment strategy, permanent capital base, flexible mandate and lack of regulatory constraints places SWK in an advantageous position. These dynamics, combined with growing momentum at Enteris offers potential to foster and create value creation for SWK. With that, I will now open the call to your questions.

[Operator Instructions] Today's first question comes from Michael Diana at Maxim Group.

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. Well, I think we'll probably see it in a couple of ways. One, just with the associated equity market volatility, I think, we've commented on that in the -- in my prepared remarks before. And so that's obviously the first way in terms of generating potential new opportunities. From a cost to -- the cost of our facilities to 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 up with our facilities with -- for those portfolio companies, at least initially, but then of course, as -- to the extent that things continue, then there will be an increase in our overall interest income associated with those positions. Yes, I think on -- then I think lastly, of course, the main factor that is potentially driving new opportunities for us, beating the equity market volatility to the extent that any of our portfolio companies do need to finance in the near term, then that, of course, will impact there because, ultimately, the cost of the equity with which [indiscernible] to raise capital. So I think that will be impacted at that point, potentially. And I think those are the primary ways we see it impacting the portfolio.

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

Yes, interesting question. It probably depends on the particular circumstances, which, I think, as I said, always does, but what do I mean about that? I think the segments where we compete, that have been the most competitive, I think as this volatility continues, some of the marginal capital providers, there's a potential for them to do the exit and potentially not be as aggressive as they were before. Because -- so what we may see lightening up in those segments, which are primarily traditional venture-backed opportunities. But I see less kind of impact in that segment than the other areas where we receive deployed capital, mainly companies that have nontraditional equity or sponsors or high-net worth funded or potentially founder bootstrap. I think in those cases, there will be less competition and we'll be able to negotiate better deals on behalf of the company.

Okay. Great. And on Enteris, you say in your release that your -- the 6 feasibility agreements could advance to licensing agreements over the medium term. Could you put any sort of bracket on that? I mean you're talking about 2 to 5, 3 to 6, 1 to 4?

I would say in the 1- to 3-year range and the reason for the wide range is a couple fold. I guess, one, the timing depends on, of course, our partners' internal development timeline. And so to the extent that timeline involves a very robust Phase I program, for example, that could take a year to complete and there's that. And then the second biggest factor on that is it's kind of striking the optimal time to actually seek the license because as a pharmaceutical development candidate get more and more derisked, then the value of that license could potentially get -- gets greater and greater. And I think it's one of the things that we're working on with management there is that at what point was the kind of optimal point to negotiate that license. So I guess by way of example, the Cara agreement, the license agreement was inked prior to Phase II where Cara had seen some indications of efficacy and the program from their perspective was more addressed, particularly since their injectable formulation had such great clinical success. And in the case of a pharmaceutical company that is perhaps earlier in their development stage, say they're somewhere in Phase I. The program is not all that derisked from their perspectives that may not be willing to pay as much for potential license. And so there's a little bit of titrating kind of the optimal time frame to actually strike that license. And so that language because it's a little bit uncertain, but it certainly is more promising now than it was before.

[Operator Instructions] Our next question today comes from [ Scott Jensen ], a Private Investor.

Great quarter. So I have a couple of questions on the financing side or I mean on the financial side. You said your cost for 2021 for Enteris were $3 million higher. And I see that you've started to recruit for Phase II of your leuprolide trial, expected results, they say, on the site, May. What is the plan for Phase III? And what would the cost maybe be in the back half of the year if you move on to Phase III? And is that a decision SWK controls alone?

To answer your question, Scott. So yes, there were increased expenses last year associated with this program. And we are in the midst of recruiting that Phase II -- yes. But the timing will -- hopefully, that ends up being exactly what it is. But the -- I guess with respect to ownership of that program, we have -- we do have full control of it -- on the program. So the timing of advancing is largely up to us, but of course, also depends on having with the FDA in terms of having end of Phase II meeting and those sort of things. In terms of the Phase III cost, we haven't announced what that is yet, but -- and so I don't want to comment on it here. I think as we think about developing our internal assets generally, we're currently constantly in the best way to finance those, to what extent do we want to finance internally, do we have opportunities to finance them externally, what are those? And then, of course, there comes a question of the optimal time to seek and out-license of the program to have another partner finish development. So I think all -- those are all things that we're considering as we look at that Phase III, I mean to the extent that our Phase II results are -- continue to be robust and as we expect, there may be opportunity to license it at that point. But again, I don't want to make any promises here because we're still waiting for the data to come in and make sure we understand what the Phase III path is before comment 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 happy to have out of your sheets after a number of years. How will that flow through the first quarter? Does it all flow through the...

Yes, it will -- since that -- the payment was in excess of our carrying basis, that increase will come through as income in the quarter.

Excellent. And then going on to Flowonix. I know -- I saw that it went into nonaccrual status, which is a little interesting because you had raised so much money between yourself and the $23 million led around by Farallon Capital. So is there anything going on there? Or is that just a company choice on their side?

Yes. And this is always the difficult part of being a public specialty lender when these sensitive matters come up, when we're dealing with confidentiality, we're kind of limited on how much we can say. I mean certainly competition going on.

That's why I asked it.

Yes, it is the -- this is not an indication of all things going exactly as planned. So I think I can say that we are actively working with the company and Farallon to figure out exactly what we're going to do there. Yes, we're definitely disappointed that the things have been as challenging for the company as they have been. And we're optimistic we'll have a pretty good idea in the next probably 2, 3 weeks, outside maybe 5, 6 weeks of them, in terms of what the actual direction for working that position out will be. We're actively talking with them, literally, every couple of days. So I'd hope that will be in not-too-distant future.

Appreciate it. And then just thinking about, as you said, there was a $0.17 hit last year for the special committee and 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?

Yes, there will be some. That mainly because the last Carlson offer was still being considered by the special committee. And then so the -- as a result, even though it was on the very beginning of January, that there will be some costs associated with it, I think certainly, those sort of expenses will be much less than they were last year. It was fairly a robust amount spent in pursuing the various things. And we will have some in the first quarter, now at this point, not anticipating any thereafter.

Okay. And then the last one is just on Cara as they reported another good news announcement this morning on the oral from Phase II, of the ones that are in Phase III, just that they got a good anti-itch versus the placebo. So it looks like that's all heading in the right direction. They talk often on their presentations about it having such -- that KORSUVA has such a potential in pain management, both because it's nonaddictive as well as they've seen such a great response. Are any of those if they go in any direction, 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 bare option?

No, no, great question. So 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 kind of wherever they want to take it. So the indications aren't that carved up because it carries a molecule. And so they own it, they can do what they want with it. But the -- any sort of -- when we get to the royalty portion of that agreement, sales or sales and so, whether they're from any sort of pruritis-related indication or however else physicians may use it there will be royalties on that.

Ladies and gentlemen, this concludes our 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 sincerest 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.