SWK Holdings Corporation

Good morning and welcome to the SWK Holdings first quarter 2021 financial results conference call. All participants will be in a 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 telephone keypad. 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 Randow with T. Buran Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' first quarter 2021 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months ended March 31st, 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 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 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 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 Wynton Black, Chairman and CEO of SWK Holdings, who will provide an update on SWK's first quarter 2021 corporate and financial results. Wynton, go ahead.

Thank you, Jason, and everyone for joining our first quarter conference call. The first quarter of 2021 continued what has been a sustained period of strong operating performance for SWK, highlighted by the 16.7% realized yield in our finance receivables segment and continued strong credit trends. We've been able to attain consistent quarter-by-quarter and year-over-year returns due to our focus on investing in small and mid-sized life science companies with differentiated, patent-protected commercial stage products. This business model has proven highly effective for us at SurveyKey for two reasons. There continues to be substantial innovation in healthcare, and this innovation requires capital to bring resulting technologies to market. As a result, there is ample opportunity to leverage our expertise in financial offerings to support these growing companies, which yields benefits to the borrower and positive returns for SWK shareholders. Illustrated of our opportunity, were the last two financings made thus far in 2021. In March, we closed a $9 million loan with Sinceris Pharmaceuticals, a 5x3B compounding pharmacy focused on dermatology customers. And in April, we completed a $5 million synthetic royalty transaction with Ideal Implant, a medical device company focused on the aesthetic space. Looking ahead through the rest of 2021, we believe industry dynamics will remain favorable to our business strategy. and that SVPK remains well-positioned to capitalize on these dynamics as we continue to identify compelling investment opportunities. Currently, we have approximately $30 million in cash and revolver availability to support our partner companies and capitalize on potential investment opportunities. The first quarter also witnessed an important milestone with our subsidiary and terrorist biopharma. Interis announced the completion of the expansion of this manufacturing facility, the launch of its contract development and manufacturing business segment. When we first considered acquiring Interis, we viewed the company's manufacturing capabilities as a significant but under-realized growth driver, with a key opportunity being a build-out of its manufacturing operations to accommodate later stage clinical trial and commercialization needs. With the expansion complete, we Interis now boasts a 32,000-square-foot facility that includes 6,000 square feet of clean room space with approximately 2,500 square feet dedicated to the containment and processing of high-potency API. As a result, Interis has the manufacturing capability to produce clinical trial material through Phase III, as well as products for commercial launch. Moreover, the simultaneous launch of its CDMO business enables Interis to offer custom solutions for the formulation, development, and manufacturing of solid-order dose forms. are difficult to formulate BCS3 and 4 compounds, including peptides and highly potent compounds. These enhanced manufacturing capabilities should enable Interis to deepen its existing manufacturing relationships and bolster its ability to secure new high-value relationships with companies seeking CDMO capabilities in the U.S., regardless of whether the product is a solid oral formulation using the company's proprietary oral formulation technologies, Peptelogen and Propera, or other tablet technologies. It should also be noted that Interis delivered on its construction timetable amid the COVID-19 pandemic. No easy feat, and one that deserves to be congratulated. In addition, its manufacturing business CEO, Rajiv Kultham, continues to execute a dual-arm growth strategy to maximize the potential of Interis' PubTelligence and ProPerma technologies through external partnerships and advancing its own internal development pipeline. In that regard, we expect Interis to execute additional feasibility agreements over the coming quarters with one already secured in 2021. Additionally, Antares has initiated a clinical program for one of its internal 505 products. Turning to our finances, as of March 31st, 2021, SWK's portfolio of royalties and structured credit backed by royalties totaled approximately $219 million across 26 partners. That compares favorably with $212.4 million as of December 31st, 2020, and $181 million as of March 31st, During the first quarter of 2021, as we previously discussed, SOBK deployed 7.1 million to Sinceris Pharmaceuticals. On March 31st, 2021, the weighted average projected effective yield of the financial portfolio was 13.8%, including non-accrual positions, versus 13.4% as of the end of the first quarter of the previous year. SMAK reported a book value per share of $19.07 as of March 31, 2021, which also included a $12.5 per share negative impact from the amortization of interest intangibles and a $0.09 per share positive impact from mark-to-market changes on our warrant and equity security portfolio. This compares to $17.96 as of March 31, 2020. Tangible financing book value per share, which excludes the deferred tax asset and tangible assets goodwill in contingent consideration payable, sold $16.31 per share compared to $14.75 per share the prior year. Matter of view is the tangible financing book value per share is a relevant metric to value the company's core specialty finance business. For the first quarter of 2021, SVK reported total revenue of $9.4 million compared to $7.3 million for the first quarter of 2020. Revenue primarily consisted of interest and fees earned on our finance receivables and royalty payments generated by portfolio companies. The increase in revenue is primarily due to higher finance receivables and interest income. Income before taxes for the first quarter of 2021 totaled $4.3 million compared to a $3.4 million loss for the same period of the previous year. The year-over-years The year-over-year $7.7 million increase is primarily driven by a half-million increase in revenue from our pharmaceutical development segment, a $0.1 million reduction in general administrative expenses, a $2.2 million unrealized gain on our derivatives, a $1.8 million unrealized gain on equity investments, a $400,000 decrease in deferred taxes, and a $1.8 million decrease in amortization expenses related to interest and tangible assets. The gap net income for the first quarter ended March 31, 2021, totaled $3.4 million, or $0.26 per diluted share, compared to a loss of $4.7 million, or $0.36 per diluted share, for the first quarter of 2020. For the first quarter of 2021, adjusted net income was $4.7 million, compared to $2.8 million for the first quarter of 2020. In addition, for the first quarter, non-GAAP net income generated by the specialty finance business totaled $6.8 million, which compares to $4.9 million for the prior year's period. Our specialty finance business continues to perform well, and we're working hard to identify new transactions that leverage our areas of expertise and a growing need amongst small and mid-sized life science companies to access the capital for future growth. Lastly, yesterday we announced that we added Marcus Pennington to our board of directors and that Carlson Capital withdrew its offer to acquire the specialty finance portfolio as a role of the conclusion of the special committee process to evaluate the Carlson offer. I welcome Marcus to our board and look forward to working with him and the new strategic review committee of our board that will be focused on exploring strategic alternatives for the company with a view toward maximizing stockholder value. In conclusion, the First quarter of 2021 continued with a sustained period of growth for SWEK. All this would be possible by the diligent efforts of the entire SWEK Holdings team. I once again like to thank our employees for their dedication and loyalty and our stakeholders for your continued support as we evolve and grow SWEK Holdings. With that, I will now open the call to your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're 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.

And the first question today will come from Kyle Vosser with Collier Securities. Please go ahead.

Great, thanks. Hi, Winston. Thanks for all the updates. Thanks, Kyle. Just, sorry, I didn't catch it. Can you talk about, I think you said 30 million in capacity on the revolver, given you've completed some. Can you just talk about... what the capacity is. I think it expires soon and kind of plans thereafter. Sure.

Sure. Great, great question. And, uh, appreciate the opportunity to clarify that statement. So, yeah, so we said we had roughly 30 million of, of kind of dry powder, if you will. And the, the revolver remains 20 million. And so, you know, we roughly have 10 million of cash as well. In the release, we noted that we had a couple of rebounds, credits repaid, the HARO position, and 10X, and so that plus our portfolio flows has led us to this $30 million of liquidity. Regarding going forward plans for the facility, our existing lender has agreed to, if we need it, to extend the facility to the end of September. Um, you know, as you can probably appreciate the, you know, the special committee process that we're going through made it a little bit challenging to to complete the new facility. And now that that that process is concluded, we're, you know, we're kind of back working full steam ahead to get the facility replaced, which were. hoping to have something in place over the next quarter or so. But we're also grateful that our current lender has extended the timeframe if we need it to continue utilizing the facility.

Okay, got it. That makes sense. Appreciate that. And appreciate that there was distractions that kind of pushed that out, but good to hear the revolver is good until the end of September. In terms of the strategic review committee, I know it's going to be three people on that and we'll be reviewing strategic alternatives, but to the extent you're able to share or know, is there a priority list? Is there some alternatives that maybe have legs as opposed to some of the others? Can you just talk about what what you've learned in the last, I guess, quarter, what sort of options remain on the table and seem more compelling than others. I guess any color there would be helpful.

Sure. I would love to give you all sorts of insights into everything that we're going to be looking at and how it's all going to play out. But, you know, unfortunately, I really, really can't – And I think as you just kind of comment on the process that we went through, I think that the special committee of our board and Carlson kind of came to an agreement that there were probably better ways to maximize shareholder value than to sell a portfolio at 90 cents. And so, you know, I'm grateful for that conclusion, and I totally agree that there's a lot more that we can do on behalf of our shareholders. There's a whole bunch of ideas that I have to do that, but it would probably be mature for me to speculate about what those are and how it's all going to unfold. I think that this new strategic review committee is going to be moving forward with kind of a clean slate, if you will, of all the alternatives that are available to the company. As you know, we have a fantastic specialty finance business that is growing and is undercapitalized. And so we see a tremendous opportunity to grow that. And within Terrace, there's certainly a ton of really interesting things we can do with the business, particularly now that the manufacturing facility is complete. we're kind of getting through COVID now and everyone in the industry is getting back to work. So I'm really excited about the, you know, the future for the business and think we can really deliver for our shareholders.

I appreciate that. And, and, um, regarding the interest business. So, um, now that the facility is finished and there's, um, some other opportunities out there. I mean, can you talk about how you think the addressable market has increased? I mean, um, There's been minimal value assigned to that business, and we've seen some pretty nice takeouts in the oral formulation space. So I'm just wondering, from a valuation standpoint, how you look at Interis, how the addressable market has maybe increased over the last couple months, and what you think the opportunity is there over the next, call it, 12 to 24 months.

I appreciate that question. I'm chuckling because of the comment about the valuation of Interis. I don't think anyone within SWK or Interis would say that there's very little value ascribed to it, although I appreciate that comment relative to where the stock trades. I think that's one of the issues that the Strategic Review Committee will be looking at. But we certainly see a lot of value in in the platform there, you know, in terms of, you know, yeah, I guess public comps, you know, there, you know, there are myriad public, um, you know, formulation comps that are out there that, you know, that suggest that the technology is, you know, worth more than the 21 million, 21 and a half million that we paid for it. Um, you know, certainly, and I don't want to, sort of throw down numbers about what that is, but it's certainly well north of that. Just on the technology platform alone, I think the continued execution of CARA continues to demonstrate that that technology does indeed work and does deliver, in that case, a Corsuba into the bloodstream. So I think its progress is a great de-risking event for us. And on the technology side, In terms of the addressable market, you know, the oral peptide market is sufficiently large to extremely large that, you know, just, you know, for example, as you know, MS Greer was taken out for about $1.8 billion for its single royalty on one oral peptide. So, you know, there's a tremendous amount of white space with respect to what that platform itself can be worth. but of course adding the, the, the active, you know, the more fully developed CMO platform, um, to the business, um, you know, does to start getting into the, um, you know, the oral manufacturing space and, you know, and, and we're, you know, I don't have a figure to speculate on what that is, but it's, uh, you know, it's, it's, you know, sufficiently, uh, you know, um, but much greater than the, you know, again, what we paid for, but the, Yeah, I think the important part about that, which we haven't really spent a whole lot of time talking about or thinking about, but I think the manufacturing shortages that we're seeing due to COVID and a lot of manufacturing facilities being dedicated to vaccines and other related treatments, I think it really demonstrates the great timing for this facility to be coming online, particularly in the U.S., this pharma in the U.S. continues to look for domestic manufacturers. So we're pretty excited about that. But given that it's so nascent in that facilities just turned on and we're getting the kind of sales process there to obtain new customers, that it's a little premature to probably say what that looks like. But as we think about the next 12, 24 months, The other part of the Interis story where I think we're going to be able to start seeing some value creation is on the owned internal pipeline. As I mentioned briefly in the call, Interis has begun a clinical program for one of its own internal assets. I know everyone wants to know a lot more about it, but as you know us, we're probably conservative to a fault in terms of talking about the progress that the company is making, and we only want to talk about it when we know there's things of strong substance there from a quantitative perspective. And so, yeah, I think as that program continues and we get to kind of understand its value, we'll begin communicating later this year about it.

Great. I appreciate that. And then just lastly, on the specialty finance side of things, glad to see you had a couple of investments in the quarters in Ceres and Ideal. Just curious what the environment is like out there. Has it been more of a competitive process as you're looking at new transactions, or is it about the same as pre-COVID? Just kind of wondering... how some of these investments have shaken out in terms of other investors out there?

Sure. Yeah, that's a great question. It's something that we hear from folks all the time. And, you know, our business is definitely unique in that we're, you know, we're not going head to head, you know, solely trying to go after, you know, loans to venture-backed companies. And, you know, I think that's probably, you know, pre-COVID that was the most competitive part of the market. And I think post-COVID, you know, it remains so. When we think about our transaction sourcing, we of course will look at deals that are intermediated by some broker or someone representing the company. And of course, we go out and we hunt for our own deals. And then through our network of folks in the industry, we get deals from there as well. I think I will say, if you look at the last handful of deals that we've executed, They've really been transactions that have come from our internal efforts, from outreach and our network. And so, of course, we're looking at some of the broker transactions that are out there and we'll participate to the extent that makes sense for us. But, yeah, I think that's one of the ways we've been very effective and continue to find attractive opportunities is by just doing our part. They're doing the hard guns to work, if you will, to go find good opportunities. There's definitely competition out there, and there's a lot of investors that find our space interesting, but I think also the unique skill set that's required to really understand the intricacies of the regulatory and intellectual property matters that we really diligence on a day-to-day basis. It does provide us with a pretty interesting boat, and I think there's a lot of reasons why we continue to be pretty excited about what we see going forward.

That's great. Well, I appreciate you taking my questions, and I'll jump back in queue here.

Thanks, Scott. I appreciate the questions, too.

Once again, if you have a question, please press star, then 1. The next question comes from Michael Diana with Maxim Group. Please go ahead.

Okay, thank you. Hi, Winston. Hey, Mike.

Hey, Mike, how are you?

Fine, thanks. So more on specialty finance, somewhat what you were just talking about. So the good news, bad news on making good loans and specialty finances, when you make good loans, they get repaid. I mean, to good companies. And that seemingly is what's happened partly in the second quarter. So I guess based on what you've disclosed for the second quarter, your one origination, your two takeouts, that would put you down about $13 million, I think, in the second quarter for the size of the portfolio. Yeah. So just, I know, obviously, you can't predict what happens quarter by quarter, but for the year, do you expect portfolio growth and, you know, and into next year as well?

I appreciate the question, Mike. Very astute and really the driver of earnings there for sure. Yeah, so... The answer depends in part on ultimately the size of the career facility that we're able to execute. The 20 million revolvers that we've had, of course, it's worked out fine, but it is really insufficient relative to the size of the portfolio, particularly having dry capacity for funder commitments. We're really just undersized. If we're successful getting something in the 40, 50 or more million range, then I think we'll be much better positioned to grow this portfolio. In terms of getting the portfolio back to being fully invested, I certainly believe that we can do that this year. But in terms of growing it, we'll of course have to have a larger facility I guess that said, we will have the cash flow from the portfolio to keep investing, but to meaningfully move the portfolio up is going to depend on an upsized facility and any other capital strategies that our strategic review committee perhaps is able to help us identify and execute. But to the extent that we do have additional capital, I am confident that we'll be able to grow the portfolio through year end and into next year.

Okay, great. Thanks. Appreciate it, Mike. Once again, if you'd like to ask a question, please press star then 1.

Again, pressing star then one will allow you to ask a question.

And the next question is from Scott Jensen, a private investor.

Please go ahead.

Hey, good morning, Winston. Nice quarter again. Thank you. My two questions are, first, have you guys now thought about reinstating the buyback? And the second would be that Tara has been very adamant after this last data to move into phase three for oral Kusuva by the end of 2021. Do you get a milestone when they file or do you have a milestone at all for that phase? And how does it compare to like a phase two payment?

Sure. I appreciate the questions. You know, first on the buyback. Yeah, I, I agree. I would love for us to put one in place. The, the company has really not been in a, positioned to be able to put one in place given the special committee process that has been going on. I think now that we have a break in it, I think that's something definitely that we are going to be evaluating if we can legally put it in place as quickly as possible. I definitely agree that except we're able to buy stock below book value, it remains a great way to deploy capital on behalf of our investors. That said, If we're not buying from Carlos, we certainly don't want to keep increasing their concentration of ownership. So there's a little bit of a Goldilocks solution, if you will, in terms of that we can buy back from a prudent perspective. But from an allocation of capital, I totally agree that it's great for us to do, and we're definitely looking at it. On the care side, you know, I really wish that these milestones were public out there so we could talk a little more freely about them. I mean, I know it's frustrating for you guys, and it's frustrating for me as well, because I certainly would love to kind of say, yep, they do this, we're going to get this, and they do that, and we're going to get Y. But, you know, I think what I can say is that the agreement is very typical for, you know, an out-licensed, you know, technology out-licensed agreement where there are milestones that are related to, you know, pre-approval, you know, efforts and, you know, successes. And then, of course, you know, once an asset's approved and commercialized, there's, you know, there's royalties and additional milestones that are associated with that. Yeah, so that's probably the best I can do to help answer that. But, you know, I think, you know, given their progress, you know, you'll see whether or not we get milestones associated with their end of May 2 meeting and their starting phase 3 and so on and so forth as time goes on. But we're very pleased with their progress and think that their advancements continue to de-risk the peptide intelligence technology.

Okay, great. And then one final one, and that is on Veru and their attempt to sell their female healthcare division. Sure. Morgan Stanley. And it appears from the documents that you have, you would have to give approval. Is there any reason you would not want them to sell that business?

Um, yeah, the, you're, you're right that we would have to approve it. We stuck around, but the, um, I think the important thing to note is that the agreement is public, so you can go read it. But they essentially have to buy us out on a change of control, and there are two components to the transaction. There's a synthetic royalty that we get today that we call it roughly 20%. There's a couple of tiers, and so that varies over time throughout the year. But the And so we get that until we've received a cumulative 1.7625 times, you know, multiple of our invested capital. And so, you know, we're working through that, you know, and may be in a position to hit that this year or early next year. It really depends on how quickly that product continues to grow, which, you know, has been a fantastic grower. And then the second component of the deal is, you know, is a 5% residual royalty. And to take that royalty out, we basically get five times the amount of royalty or five times 5% times the LTM revenue. So on a change of control, that'll be a fairly material payment for us, which I think when you look at it compared to where it sparked at the end of the quarter, it would be a substantial gain over that.

Great. Thank you for that. Keep up the good work. Thanks.

Ladies and gentlemen, 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. Appreciate that. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK holdings. I'd also like to extend my sincerest wishes of good health to all. Be well.

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