SWK Holdings Corporation

Good day and welcome to the SWK Holdings fourth quarter and year-end 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your touchtone phone. To withdraw your question please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jason Rando with T-Brand Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' fourth quarter and year-end 2020 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months ended December 31, 2020. 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 consumer and 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 our 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 file 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 fourth quarter and full year 2020 corporate and financial results.

Winston, go ahead. Thank you, Jason, and everyone for joining our fourth quarter conference call.

The fourth quarter of 2020 closed the book on a strong year for SWK, driven by solid returns from our specialty finance business. Even as the COVID-19 pandemic disrupted the healthcare industry, the segment generated a 16.6% realized yield and an 11.9% adjusted return on our tangible financial book value during the fourth quarter, with income assets of $206 million. a 17.6% increase from the same span last year, and an 11.6% sequential gain from the third quarter of 2020. We believe this reflects the growth potential of SWK business model and our continued success in distinguishing ourselves as a go-to capital provider for small, mid-sized life science companies with differentiated, patent-protected, commercial-stage products. Looking ahead into 2021, we believe that energy dynamics should remain favorable and enable us to not only realize additional gains from our current holdings, but to also enhance our position in the industry. Before I discuss our fourth quarter results and achievements, I'd like to provide a brief update on the ongoing COVID-19 situation, our capital position, and our subsidiary in Terrace Biopharma. In a matter of days, in March 2020, the world, as we know it, was upended by a once-in-a-generation situation. It's no secret. The COVID-19 pandemic has had a far-reaching impact on all aspects of daily life in the broader global economy. As we have previously reported, SWEK has been minimally impacted by the outbreak, thankfully. We communicate regularly with the individual management teams of our portfolio companies and we're pleased to recently report the impressive advances of our partner companies that made despite many challenges. We believe our portfolio's resilience validates our investment approach focused on forging long-term partnerships with companies with strong intellectual property protecting commercial products that offer a compelling value to society by filling demand within the healthcare system. During 2020 and recent weeks, SWK deployed approximately 42 million to close five new transactions that align us with companies and products that we believe have strong upside potential given the market needs they serve and the anticipated trajectory growth of each. In December, a $33 million financing with Melanix Medical included a $10 million loan from SWK. This was preceded during 2020 by three royalty transactions. In December, we purchased the royalties payable to iPoint Pharmaceuticals under its license agreement with Alamira, or Alluvian. In October, we acquired royalty interest paid on a portfolio of products in the Osprey market from Trio Healthcare. Finally, in August, we purchased royalties for Coflix, Kybella, and Zalviso from PDL Biopharma. And most recently, in the last few weeks, we closed a $9 million financing with Sinceris Pharmaceuticals. These were all opportunistic transactions and very much in keeping with our approach to investment. A good deal of this capital was deployed during the past few months. As of now, we have approximately $11.2 million of cash and revolver availability, plus future cash flows in the portfolio to support our partner companies and capitalize on potential investment opportunities. Unlike the business development companies and some investment funds, SFAK's balance sheet is not heavily leveraged. Additionally, we are pleased with the progress through our subsidiary, Interis Biro Pharma. Interis has completed construction on the newly expanded manufacturing facility and expected to be CGMP operational in the coming weeks, potentially providing additional revenue stream to the company. CEO Rajiv Khosla continues to execute a two-pronged growth strategy to maximize the potential of the company's intelligence and pro-perma technologies through external partnerships and advancing its own internal development pipeline. In that regard, we anticipate Antares will initiate several feasibility studies over the coming quarters, with one already secured in 2021. Securing a feasibility study is an important early step towards ultimately securing a license agreement in Antares' technology licensing model. Additionally, Interis expects to soon initiate a clinical program for one of its internal 505B2 products. The potential for Interis' technology platform is sizable and reflected by the ongoing success of the agreement with Kara Therapeutics. During the fourth quarter, Interis announced it received two milestone payments totaling $5 million from Kara for the ongoing development of oral Corsuba, of which SWK received $3 million for the contractual splits to read to in the acquisition agreement. SWK is also eligible to receive additional potential milestone payments for the next several quarters, subject to achievement of certain developed milestones for Oral Corsuma. Receiving these first two milestones from CARE is an exciting moment for SWK and our shareholders. It not only highlights the value proposition that Interest represents, but also illustrates the monetization opportunity that Interest's peptelligence and proprimer platforms offer in the development of oral tablet formulations of peptides and small molecules. Importantly, For future potential partners, we believe this success of CARA program validates the breadth and depth of Antares' comprehensive pharmaceutical capabilities. Turning to our finances, as of December 31, 2020, SWK's portfolio of royalties and structured credit backed by royalties and products totaled approximately $206 million across 25 partners. This compares favorably to $184.5 million as of September 2020. In the fourth quarter of 2020, as we previously discussed, SWK paid $16.5 million to purchase royalties for Alluvium, payable to iPoint under disagreement with Alamara, and deployed another $3.9 million to purchase a royalty interest in the Austin market market from Trio Healthcare. At the end of the fourth quarter, the weighted average projected effective yield of the finance receivables portfolio was 13.8%, which includes non-royal positions.

This compares with 13.2% as of the end of the fourth quarter of the previous year.

Meanwhile, SWK reported a book value per share of $18.80 as of December 31, 2020, which includes a $0.91 per share of negative impact from the amortization of the terrace's intangibles during 2020. The $18.80 compares to $18.31 as of December 31, 2019. Tangible financing book value per share, which includes the deferred tax asset, intangible assets, goodwill, and contingent consideration payable, total $15.94. 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 2020, S3K reported total revenue of $10.9 million, compared to $9.4 million for the fourth quarter of 2019. The $1.5 million net increase in revenue was primarily driven due to the pharmaceutical development revenue generated by Interis. The full year of 2020 revenue was $36.7 million compared to $30.7 million for the full year of 2019. The increase in revenue during 2020 was primarily due to a $1.7 million increase in interest and fees earned on our finance receivables and the $5 million milestone revenue related to the CARA license agreement. Income before taxes for the fourth quarter of 2020 totaled $3.3 million, which compares to $0.6 million for the same period of the previous year. This increase was primarily driven by the increase in revenue, which was partially offset by a decrease in impairment expenses from last year. Well, the full year of 2020 reported gap in net income of $5.2 million. I'd like to point out that this $5.2 million did include $4.4 million expense related to the increase in the contingent consideration value and $11.7 million of amortization expenses related to the tariff intangibles. Just a quick note on the $4.4 million expense. for the re-measurement of the contingent consideration. That actually is a good thing in that it means that we expect the contingent consideration to increase in terms of what's going to be paid out over time. Unfortunately, it results in expense for us, but it's important to point that out. The gap in income for the fourth quarter ended December 31st, 2020, total $4.6 million, or $0.36 per diluted share. which compares to $8.8 million or 68 cents per dilute year for the fourth quarter of 2019. For the fourth quarter of 2020, the adjusted net income was $7.5 million, which compares to $4.8 million for the fourth quarter of 2019. For the fourth quarter of 2020, non-GAAP net income generated by the specialty finance business totaled $6.4 million, which compares to $6.2 million for the prior year. Income producing assets, which again we defined as finance receivables and corporate debt securities, totaled $206 million as of December 31, 2020. This is an increase compared with the income producing assets from December 31, 2019 of $175.1 million. As evidenced by these results, our specialty finance business continues to perform well. We're working hard to identify new transactions that leverage our area's expertise and the growing need among small to mid-sized life science companies to access capital. At Interis, the company's overall growth strategy continues to take shape, bolstered by new personnel and an expanded management team. The company remains committed to its mission to be a leader in the development of orally delivered peptides and small molecule therapeutics. We look forward to what can be accomplished once the expanded manufacturing capabilities go online. Nearly a year after being named CEO, Dr. Kolza continues to make his mark in Interis for the more robust business development program. As I mentioned previously, Pepteligence forms the backbone of CARA's Oral Pursuit Program, which has expanded and now encompasses four separate clinical studies. These were expected to meet important clinical and regulatory milestones in 2021. Meanwhile, Interis is advancing internal product pipeline that could lead to attractive outlasting opportunities. We look forward to being an active and supportive partner as Interest advances its external and internal development programs and pursues new licensing and partnership opportunities that leverage the platform. In conclusion, the 2020 fiscal year continues what has been a sustained period of growth for SWK. All this is made possible by the diligent efforts of our SWK Holdings team. I would once again like to thank our employees for their dedication and loyalty, especially all the hard work during a difficult 2020. And of course, I thank our stakeholders for their continued support as we evolve our model and grow SWK.

With that, I'll now open the call to questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Kyle Bouser of Collier's Securities. Please go ahead.

Great. Thanks. Hey, Winston. Thanks for all the updates today.

Hey, Kyle.

Hey. So, I didn't quite catch it. How much is left in terms of capacity on the revolver?

The thing we just said is 11.2 million of cash and availability on the revolver. There is roughly 10, I forget exactly what the number was, but a little over 10 million drawn toward the end of March.

Okay, got it. And then I think that expires in June. Any kind of update there, plans for that? renewing it, expanding it, maybe other methods you might take that down? Just any call there.

Sure. Yeah, no, that's a great question. We did talk a little bit about it in the K. We are exploring increasing that line, and we'll hopefully have something to announce about that here in the near future.

Okay, got it. And I appreciate the updates on... and terrorist pipeline and various feasibility studies are going to be kicking off here. Could you talk a little bit about how we should anticipate milestone cadence for this year, maybe non-care-related milestones first?

Sure. Well, in terms of the actual license agreement milestones, the only material ones that we'll be receiving would be related to CARA. So in terms of other milestones for the business, just as a business advancement kind of measurement, we'll be looking for additional feasibility studies this year as well as advancements that we can talk about on the internal pipeline. And then lastly, any sort of updates that we can provide on the manufacturing facility in terms of any sort of outsourced work that the team is able to secure. So those are the main things we're going to be watching.

Got it. Appreciate that. And then just lastly on depreciation amortization expense, I think I was modeling a little bit less than the current run rate for some reason in the subsequent quarters here. Should we anticipate – depreciation and amortization to be about similar levels to what we've seen over the last couple quarters? I'm just kind of wondering.

Yeah, that's a great question. So the pace of the amortization and intangibles will be slowing down quite a bit this next year. And we do have a table in the K that kind of lists what that expected amortization is. And I'm just seeing if I can flip here quickly to tell you what it is. But I think the number is closer to like $4 million or so for the year. But don't quote me on that. Yeah, that's what I was thinking. Yeah, it's in the K. We list out kind of what it is by year. So, yeah, the amortization expense should slow down materially.

And that'll kind of –

slow down over time here so it won't drop down to that right away or would it right in Q1 here it should slow down I think kind of right away but I would need to go back and check because I don't have that at the tip of my fingers but it should be coming down pretty quickly I'll dig into that as well great

Thanks so much for the updates and congrats on the progress here.

Appreciate it, Tom.

The next question is from Michael Diana of Maxim Group.

Hey, Winston. Hey, Mike. You mentioned in the release that you continue to source and evaluate numerous loan and royalty opportunities on your finance side. Can you talk about that some? Obviously, you're not going to. not specifics and also sort of the opposite of the pipeline, which is prepays. Can you, again, you can't predict it, but you know, just any comments on both those topics.

Sure. So we're, you know, our, our investment team remains, remains going to work and kind of flat out on new opportunities, which, you know, which is great. You know, the, I think our, our pace of seeing new opportunities continues to be pretty robust with us seeing new companies weekly. So from a pipeline perspective of new opportunities, that does continue to be robust, which we're very encouraged by. And I think the quality of new opportunities that we continue to see remains good. So everybody we remain optimistic about, you know, about the new transactions.

And does that include royalties too? Cause I know you, you like the duration of royalties, right?

Yeah. No, that's exactly right. Um, you know, it's hard to predict, um, if, if the new transaction is going to be, be a royalty or a, or, or a loan, um, and the mix definitely changes a little bit over time. Obviously last year we saw more royalties than we liked and executed on than we did on loans. I think I would expect generally that our current portfolio mix of loans and royalties will be what we execute going forward in terms of the weight between loans and royalties.

Yeah, and then on prepays.

Sure, and on prepays, you're exactly right. It's very difficult to predict that. We do have a couple of positions in the portfolio that do actually mature in the coming quarter or two. So, yeah, I think we do expect to get those back. In terms of any sort of other prepays, it is very difficult to predict that. You know, that's one thing that we did over the last couple of years. We've been trying to continue to invest in the portfolio with our partners. We have been trying to structure the loans so that they, you know, so we were able to keep them out longer and prevent, you know, some early prepays so we can keep our capital deployed. So, you know, I don't know that we're anticipating a bunch of loans to come back early, but of course you never know.

Okay. And then on Terrace's manufacturing facility, would you say your high-potency suite's going to be operational in the next few weeks? And your remark in the release that that's a capacity-constrained segment. Could you just comment some on that?

Sure. It is a, I guess in manufacturing in the U.S. in particular, it's our understanding that the availability of high-potency suites is fairly limited. We have had a little bit of kind of reverse inquiry actually regarding the facility and its capabilities from some pharmaceutical partners, and so, you know, you know, as that facility opens up and the team begins to, you know, to, uh, utilize it, you know, we'll, we'll have more to, more to share about it, but, um, you know, we're, it's not something that we were initially all that, uh, you know, you're focused on as opportunities were really focused on the licensing opportunities there, but, uh, it may be that, that, that is actually pretty interesting for us.

Okay. And in, in regard to the licensing, that's just, uh, You've talked, since you made the acquisition, I've been curious about Pepteligence. And I see you mentioned a ProPerma. Is that something new or is that just a sort of variation of Pepteligence?

Yeah, it's really kind of separating the peptide and small molecule kind of platforms. They are a little bit different. I think in the past we really just kind of talked about it all generally. But the company is is marketing, it's different capabilities. They're now making that distinction, and so that's reflected in our commentary.

Okay, great. Thank you.

Appreciate it, Matt.

The next question is from Nat Stewart of NAS Capital.

Hi, Winston. Thanks for taking my question.

Absolutely. Thanks, Nat.

I had a chance to review the 10K last night. It looks really great. I'd like to see the progress with the credit portfolio. Looks very strong. The royalties, some of them came in higher than I expected. I thought some of them I expected a decline. They went up. So I congratulate you on the strong performance there. Thank you. My question is, you know, people have asked a lot of what I wanted to ask, but If you think about the pipeline of opportunities and also the performance you've kind of generated for a few years, very solid with the credit portfolio, kind of a different way of asking a similar question. If you were just kind of looking from an ideal circumstance, like what type of leverage ratio you think this business could prudently support, to boost return on equity. I'm not saying it's the deal you're going to find, but what do you, what do you think would be ideal if you could kind of, if you could kind of give this the kind of leverage profile you wanted, if you're able to find the right agreement, is there, is there kind of a range you think would be ideal? Do you think it's mostly a cash investment business? Could it support a lot substantially more leverage if you could find it? You know, what do you think about that?

Sure.

Yeah. So the, uh, I've been in this business for a long time. I think the one thing about leverage is obviously it can turbocharge your returns, but it also can turbocharge losses if things don't go well. So we're certainly always going to be prudent about the quantum of leverage that we put on the business. In terms of the kind of next credit facility, the amount of capital that we can deploy and leverage the company with, I think something that's in the 50 to 100 range, as we think about the pace of capital employment as well as just being prudent, I think that definitely makes sense for us. Getting towards one-to-one is probably too much for us, and I think it's not necessarily that I'm worried about the credit quality of our portfolio generally, but I think this is a is a board and a company where, you know, we tend to be more conservative on, on, on over-levering situations and kind of reflect in how we look at, at our borrowers, you know, that we partner with where, you know, we, we try to make sure we don't over-level those situations because that's when, when you get into trouble. But yeah, I, I think, think that, you know, that 50, 100 ranges would be, would be very comfortable. Um, and, and then as, as we kind of grow from there, and demonstrate that that works and think we'll evaluate anything further.

So maybe if it's almost like 100 would be a stretch and 50 would be a real comfortable level and you could kind of work within that range. Is that kind of my understanding?

Yeah, I think that's right. But I think if we just had 100 right now, we would be, I think, a little overcapitalized for probably what our pace of deployment is. And so, you know, we just sort of wouldn't just race to there. But, yeah.

Okay. Yeah, that makes sense. That's probably about what I would have guessed. In terms of the ongoing expenses at NTERAS, I don't know if some of the expenses in 2020, some of it might have been related to building out the facilities. What do you see as, you know, I was looking at the manufacturing research development cost and the DNA. Would you expect that to be somewhat similar just at the interest level next year or is that going to be growing more or, you know, some of that cost isn't going to be there? What are you expecting?

Sure. From an overall headcount perspective and what's happening at the business, we're not anticipating that changing all that materially. The one thing that will change is kind of the shorter amounts that we end up spending on the internal pipeline. So we did spend some last year on some R&D and we will be spending some more this year. So the expense base will be relatively similar. There's always one-offs and things that happen from period to period, but when you look at the aggregate amounts, it should be relatively the same.

Relatively similar. Okay. In terms of, I think, if I remember right, the The share repurchase was either used up or expired. I don't remember, actually. But is there any additional thoughts on capital return going forward? It sounds like you have plenty to reinvest in. But will there be a reauthorization for a repurchase agreement or anything like that this year?

Sure. Great question. It's something that the board keeps looking at, particularly given where the stock Talking in trading, it would be very agreeable to book to keep buying shares. And so the program did expire, and it was basically exhausted as well. So that would need to be renewed, and that's something that the board continues to look at. And so I don't have anything specific to update you on, but just to agree that mine stock here is accretive, and the board continues to look at it.

Okay, well, that sounds good. I like seeing the progress, and I think the business is at an exciting point right now. So keep up the good work.

Thank you, sir. I appreciate it.

The next question is from Steve Hale of Hale Partnership.

Hey, Steve. Hey, Winston.

Can you hear me? Yes, sir, I can.

Hey, good, good, good. Sorry, I'm down on spring break, but I just want to dial in. Congrats on another good year fundamentally operationally, and that just hit one of my questions, which is the capital return. So understanding and just wanting to highlight, I mean, you guys have made a lot of progress fundamentally positioning the book and then generating fundamental returns, so kudos to you and Jody and the whole team on the management and operational side. On the capital allocation side, I just echo Nat's thoughts, and I know you guys are aware of it, but The discount that the company is trading at now probably largely arises from structure, not from fundamentals, being NASDAQ listed and being profitable for a couple years. So anything that can be done on a capital return program, share repurchase authorization, systematic return, we'd strongly encourage. But my question is, aside from that comment, is on the NOLs in the K, it shows there's $289 million, the majority of which is prior this year. Looking at the DTA that's booked on the balance sheet, have you pretty much booked everything that doesn't expire this year? Can we take that away from those two data points?

I'm sorry, Steve. I didn't quite hear the question regarding the NOLs. You kind of broke up after you said the quantum of 286. Would you mind repeating? I'm sorry. 289.

Yeah, Winston, if there's 289 on the balance sheet and then 27 million booked – sorry, 289 in the footnote and 27 million booked on the balance sheet with a majority expiring this year, have you guys booked everything that doesn't expire this year?

Oh, I'm not sure what booked everything that doesn't expire. So on the 289, yeah, I think it's – the language is majority, but call it roughly half is what expires by – this year. So they're still going to be a pretty material NOL asset going forward. In terms of the amount on the balance sheet, that's, I think, a conservative view of what we expect the business to actually use. So the way that works, it's not a... you know, a booking of the DTA on the balance sheet of what's expiring and all that. It's really looking at what we expect the business to use.

Yeah, understood. I guess I'm just saying if you've got $289 and $145 expire this year and you've got $145 less at a 21% tax rate, that's $30 million, and you've got $27 million on the balance sheet. I was just confirming. You guys have booked almost everything. Onto the balance sheet, did you expect to utilize under the gap rules that doesn't expire this year? It's really close. There might be $3 million left to book. But just as we think about the upside of what's not on the balance sheet from here relative to that footnote, there's not a lot left.

Just wanted to confirm that. Yeah, your math is right. We kind of get to it a different way, but from the way you described it, I think that's right.

Perfect. Thank you, Weston. Keep up the good work. Thanks, sir. Appreciate it.

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

Thank you. In closing, just want to say I appreciate everyone's time and attention. I look forward to future updates as we continue to advance our civic aid holdings. I'd also like to extend my sincerest wishes of good health to everyone.

Appreciate it.

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.