SWK Holdings Corporation

Good morning and welcome to SWK Holdings Corporation second quarter 2021 financial results. 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 touch tone 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 Maureen McEnroe, EVP of IR at Tiburon Strategic Advisors. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining SWK Holdings' second quarter 2021 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months entered June 30th, 2021. The press release can be found in the Investor Relations section of swkhold.com under News Releases. Before beginning today's call, I'd like to make the following statement regarding forward-looking statements. Today, we will 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 details in the risk factors section of SWK Holdings, 10 , 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 2021 corporate and financial results. Winston, go ahead.

Thank you, Marie, and everyone for joining our second quarter conference call. Having closed the book on our second quarter on June 30th, 2021, SBK Holdings had ended the first half of 2021 on solid footing. The developments during the second quarter in recent months, as well as the robust returns generated by our finance receivables segment and continuing strong credit trends led to a realized yield of 22.9% for the quarter ended June 30th, 2021. The engine behind these returns remains our unique investment strategy focused on small and mid-sized life science companies with differentiated, patent-protected, commercial state products. This business model remains highly effective for SWK given the continued innovation in healthcare aimed at addressing unmet medical needs and a need for capital to fund the development of these innovations and bring the resulting technologies to market. Added to that, life science companies continue to make a strong recovery from the COVID-19 pandemic's widespread effects. We remain well-positioned to benefit from managing the healthcare-focused specialty finance sector. we find growth opportunities for small and mid-sized commercial stage life science companies through the creation of unique financing structures. These deals include structures debt, traditional royalty monetization, synthetic royalty transactions, and asset purchases, and typically range in size from $5 million to $20 million, a market segment often ignored by other structured finance companies. Illustrated as a business strategy was the financing made thus far in 2021. In March, we closed a $9 million loan with Sinceris Pharmaceuticals. a 503B compounding pharmacy focused on dermatology customers. More recently, in April, we completed a $5 million synthetic royalty purchase with Ideal Implant, a medical device company focused on the aesthetic space. Followed in July by a $9.5 million financing with Trio Healthcare to support the company's UK and international launch of its innovative stoma bag, Genie. These transactions are very much keeping with our investment strategy, and we continue to seek, source, and assess numerous loan and royalty opportunities. As of now, we have $32 million of cash and revolver availability to support our partner companies and capitalize on potential investment opportunities. And unlike other business development companies, VDCs, and some investment funds, S&PK's balance sheet is not heavily leveraged. The second quarter was also a period of solid progress at our subsidiary in Terrace Bar Pharma. Highlighted by the expansion of its manufacturing facility and the launch of its new CDMO business segment, these enhanced capabilities allowed in Terrace CEO Dr. Rajiv Khosla and his team to seek deeper development and manufacturing relationships with partners by providing custom solutions from bench to market, including the containment and processing of high-potency API. When we first considered acquiring Interis, we viewed expanding the company's manufacturing capabilities as an important component of our technology licensing strategy and believe the expanded capability of the facility will facilitate the business going forward. Exemplifying this opportunity is the ongoing success of Interis' relationship with Kera Therapeutics and the company's development of Oral Coursiva. In June, Interis earned an additional $10 million milestone from Kera, marking the third milestone payment in the last 12 months. Oral Coursiva is now the subject of four separate clinical programs, including an anticipated phase three trial for the treatment of pruritus in patients with stage three and four chronic kidney disease. We anticipate additional payments for the next several quarters, subject to achievement of development milestones. In May, S&PK's Board of Directors announced the formation of a Strategic Review Committee to identify, review, and explore strategic alternatives for the company with a view to maximizing stockholder value. While the Strategic Review Committee continues to work diligently on this initiative, at this time it has not made any decision to enter any transaction. and there can be no assurance that the exploration of strategic alternatives will result in any transaction being announced or agreed upon. Now turning to our finances. As of June 30th, 2021, SFPK's portfolio of royalties and structured credit backed by royalties totaled approximately $213 million across 25 partners, which compares favorably to $182.3 million from the same period last year, representing a 16.8% increase year-over-year. In the second quarter of 2021, in recent weeks, as we previously discussed, SBA closed a $5 million synthetic royalty transaction with Ideal Implant with $3 million funded at close. On June 30th, 2021, the weighted average projected effective yield of the finance receivables portfolio was 13.9%, including on accrual positions, versus 13.2% as of the end of the second quarter in the previous year. Also, after the close of the quarter on June 30th, SBK closed at $9.5 million financing with Trio Healthcare, of which $5.1 million was advanced to close. At the end of the quarter, SBK reported a book value per share of $20.18, which included a $0.06 per share negative impact from the amortization of interiors and tangibles, and a $0.07 per share positive impact from market-to-market changes on warrant and equity securities. Compared to $18.06, as of June 30, 2020. This is approximately a 12% year-over-year increase. Tangible financing book value per share, which includes the deferred tax asset, intangible assets, goodwill, and consideration payable, totaled 17.23 cents per share, which increased 14.5% from the same period last year of $15.05. 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 2021, SREK reported a total revenue of $22.3 million compared to $7.9 million for the second quarter of 2020. The $14.4 million net increase in revenue was primarily due to a $4.1 million increase in interest and fees earned on our finance receivables and a $10.3 million increase in revenues added in tariffs primarily related to Interest's licensing agreement with CARA, which included $6.1 million that was paid to the former Interest owner. Income before taxes for the second quarter of 2021 totaled $17.5 million, compared to a $125,000 loss for the same period the previous year. The year-over-year approximately $18 million increase is primarily driven by the $14.4 million increase in revenue, plus a $2.6 million decrease in amortization of intangible assets, and a $1.9 million decrease in the change in the fair value of the contingent consideration related to Ontario's acquisition. This is partially offset by a $1.3 million increase in general administrative and pharmaceutical manufacturing expense. The gap net income for the second quarter ended June 30, 2021, totaled $14 million, or $1.09 per diluted share, compared to $876,000, or $0.07 per diluted share, for the second quarter of 2020. For the second quarter of 2021, adjusted net income was $17.2 million compared to $4 million for the second quarter of 2020. The second quarter non-GAAP net income generated by the specialty finance business totaled $10.6 million as compared to $7.7 million for the prior year period. As evidenced by these results, 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 among small to midlife science companies for access to capital to fund future growth, and by doing so, yield benefits to the borrower and positive returns for SBK shareholders. Industry dynamics should, we believe, remain favorable to our business strategy. SBK remains well-positioned to harness our expertise to opportunistically deploy capital for compelling value-adding investment opportunities. As for interest, as we discussed, Rajiv and his team continue to execute a dual-arm growth strategy to maximize the potential of its new manufacturing and CDMO business and the company's PEP intelligence and pro-perma technologies. In that regard, Interis continues to work hard towards partnership agreements. In conclusion, the 2021 fiscal year has so far continued what has been a period of substantial development for SWK. All this is made possible by the diligent efforts of our SWK Holdings team. I once again like to thank our employees for the dedication and loyalty and our stakeholders for the continued support as we evolve our model and grow SWK Holdings. With that, I will now open the call to your questions.