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.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone 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. Our first question today comes from Kyle Bowser with Collier's Securities.

Hey, Winston. Good morning. Thanks for all the updates today, and congrats on a great quarter here. Thank you. Maybe just starting on the Antara side of things, following the build-out of operations to support manufacturing of clinical trials and early commercialization of new assets. Has this provided some momentum for new partnerships and collaborations now that you're kind of up and running?

Sure. I definitely believe it has. As we noted in the press release, Interis has recently signed, I think, three new feasibility studies, which I think is a direct result of all the momentum that they have there. I think as we think about the business development pipeline, Rajiv started last year in May right in the midst of COVID, which was a difficult time to come on board and begin to turn around that program. But here we are roughly a year past that, and now we're starting to see the new feasibility agreements starting to ramp and the facilities open. So I think we're starting to see that momentum come together a little bit.

Great. Appreciate that. And you mentioned it in your prepared remarks. I mean, we've got over $30 million of availability in cash in the revolver, but a relatively low leverage ratio compared to your peers. You know, a question I ask every quarter, but how are we thinking about the leverage ratio now and going forward? Any appetite to take out some more debt?

Sure. Great question. And I think the answer is definitely yes. We do have much more capacity to support larger credit facilities. I think we're being patient as the Strategic Review Committee goes through its process and want to make sure that what they recommend and what the board determines to do in terms of next steps to create value for our shareholders. I'm sure that that credit facility question or the appropriate capital structure will come into play there. And so I think we'll have more updates on what that all looks like as they do their work. But I definitely agree, we have much more capacity to deploy leverage and grow the book and we'll see how it all comes together.

Got it. Makes sense. And just staying on the specialty finance side of the business, you've obviously remained very active in investments post Q2 as well. How has the environment been? I mean, you know, maybe compared to six months ago, you know, Are there as many opportunities? Are there less? Are there more? Is it more competitive? Just kind of wondering what the landscape is like right now.

Sure. Great question, Kyle. The landscape definitely ebbs and flows. I think as we came out of COVID and the economy was kind of roaring back in the fourth quarter, there was definitely a lot more activity, it felt like, just generally speaking. We, of course, had lots of opportunities and were able to deploy capital. In the first quarter, I think we saw very similar trends and that kind of continued into the second quarter. From a competition perspective, Our segment of the market continues to be pretty unique in that sometimes we'll see things that are fairly competitive and then other times we'll be the only folks having a look at an opportunity that in some respects has us scratching our head in terms of how come others aren't really paying attention. But I think we're Yeah, we're pleased with the volume of pipeline activities that we have going on and expect to close additional things as we get toward year end.

Great. Great. And then just one more regarding the partnership with CARA. We saw another nice milestone. Remind me, I know you don't disclose the actual milestones, but how many are left – And I think you said in the press release they could come over the next several quarters. And then lastly, are there other milestones we should be keeping an eye on with separate partnerships? Thank you.

Sure. Yeah, I wish I could give you perfect clarity into the remaining care milestones. But as you know, the majority of that is in the economics of those are redacted in the filed agreement. I think actually in that agreement the titles of all the milestones are also redacted. So I think all I can say is there's definitely a handful of milestones that remain outstanding. And as you think about what those milestones would likely be, I think the ones that we have are similar to what other ones you'd see in the industry in terms of advancement of clinical programs and FDA approval and sales milestones, those sort of things. Our agreement is generally not structured all that differently than what other ones you see in biopharma. So I think that's probably all I can say about that. But in terms of new licenses, of course, that is the The whole point of the business development program at Interis, when you think about the progression from meeting a potential partner through actually getting a license, I think as your future partners get to know the technology, the first logical step is really the feasibility studies, and that's really the team working with their potential partner to determine the right formulation using technology and then taking it forward, which of course depends on your partner's development timelines and so forth. So the process does take a while, but that said, we're a year into the rebuilding of that licensing program and we're now getting our first sets of feasibility programs, so I think we can say that there's progress that's ongoing and we'll, you know, want to see how those develop, you know, and assuming those feasibility studies are successful, then, you know, how they progress towards an actual license. But it's good momentum, you know, starting to see that now. That's great.

Well, thanks for all the updates. I'll jump back into you.

Thanks, Kyle. Appreciate it.

Our next question comes from Michael Diana with Maxim Group.

Okay, thank you. Hi, Winston. Hey, how are you? Good. First on the finance side, you mentioned you have $6.4 million of unfunded commitments. Are those to existing borrowers or new ones?

Yeah, so those are to the deals that we recently closed. The the ideal implant and the TRIO loan facility. So those are existing deals, though they're new, and we'll fund them to the extent that our partners want those drawings, and then, of course, that they meet the performance milestones that are typically associated with those.

Okay, great. Thanks. On the Interis side, your CDMO business, Do you have any sort of pipeline there yet?

The pipeline is building, and I think similar to the PEPtelligence licensing pipeline, that's a process that will take a little bit of time to kind of move through as you think about any potential RFPs that they may be working on. It's hard to do a whole lot of work potential customer to do a whole lot of work in the facility until it's really up and running so they can really see the capabilities and they can adequately market those capabilities. With the facility now being turned on, I think that those conversations are beginning to build. There's definitely been interest in it. I think that the company has had a couple of inquiries actually from potential partners who are seeking capacity. We'll see how that develops and also, of course, how that helps facilitate the licensing business as well.

Okay, thanks. And on your strategic review committee, I understand it's ongoing. Do you have any expected or completion date or, you know, any idea when – the process might, quote, end, even though it would probably go on forever, but just this iteration of it?

Sure. No, that's a very fair question. I guess to state the obvious, boards should always be looking at maximizing value for shareholders, and ours definitely has been. Yeah, I think in May, and so we're – approaching the end of the third month of them doing their work. I don't have any timeline to announce, but I think that the committee and their advisors are definitely making progress and have come up with some interesting things for the business. We'll see ultimately how that unfolds. I wish I had a material update to provide and a timeline to provide, but I think I think suffice to say that everyone's working hard and is very interested in making sure that the shareholders are rewarded for their trust in us.

Okay, great. Thank you very much.

Thank you.

Our next question comes from Matt Stewart with NAS Capital.

Hi, Winston. Thanks for taking my questions.

Sure.

Hey, Matt. How are you? Good. Congratulations on a lot of tremendous progress this quarter and for the first half of the year. My first question is a bit related. Sure. My first question is very closely related to Kyle's last question, but I figured I'd ask again in case there's some more details because I'm trying to understand better the process of the feasibility studies. Obviously, These licensing agreements, if you're able to hit some new ones that are good, they can be tremendously valuable. So I'd like to kind of better understand what the process is there. And like I said, you already touched on this, but also the timeline. And also if kind of in the meantime with those feasibility studies, if there's much in the way of revenue opportunities there.

Sure. So the timeline generally is, you know, you have your business development discussion and that, you know, will progress to wanting to sign a CDA between the parties which, you know, the CDA to protect our technology and then, of course, our partner would want a CDA to, you know, protect their know-how and their, you know, and their molecules that they're looking to develop an oral formulation of and, you know, that process could be quick in terms of from first meeting to the actual CDA or perhaps there's a couple meetings. If you think about a group like a large pharma, that process may take weeks, months, quarters, which I don't think would be surprising. And then you think about a small biotech that may move more quickly and more aggressively, that could be in just a couple weeks. So you have that kind of first timeframe. And then once you get to the point where the parties are working with one another, the feasibility studies will generally be preclinical type. One of the models that we typically use is like a dog study, for example. So from a revenue opportunity, there are 100,000 to a couple hundred thousand depending on the scope of work and the number of iterations that the team has to do and of course what all the farm partner is looking to achieve. And then as that process goes on, that can lead to additional clinical work that can lead to a license kind of right away or the farm partner may want to actually see some some clinical results before taking a license, and there's kind of puts and takes all along the way when you're doing that, meaning that the kind of further you are in clinical development, the better economic terms will be on a license, which is not dissimilar from what you see in the industry generally. And of course, earlier, it is in development, and of course, the less valuable the potential economics are. In terms of going from the feasibility studies to an actual license, that can be a couple quarters or it can be a couple of years. It just depends on the overall process. All along the way, there is opportunities to earn economics on the formulation work, on the manufacturing to support your partner and so forth. The whole goal is to build as big of a licensing funnel as we can and increase the number of shots on goal and keep building and building so that as we get into periods over the next 12 months, the next 24 months, we'll have a building of that pipeline that will eventually turn into licenses and really build a pipeline what we hope to be a very valuable portfolio of milestones and royalties out of that technology.

Okay, yeah, that's great. That's very helpful. In terms of the strategic review, and this is a little related, my findings, and certainly this will be more true as you sign more licensing agreements, but the interest probably has a lot more value I think, than even when you bought it with the developments you've already had and the milestone payments. Is the feasibility study including any options that might be something like raising some money at the interest level or anything like that, or is that anything you can reveal? I don't know if that would be a worthwhile thing to do or not, but is that the kind of thing being considered or no?

Well, sure. That's a great suggestion, Matt, and in terms of what all the Strategic Review Committee is considering, I think they're considering anything and everything, and that's definitely a conversation that's been had in the past. Again, I would very much like to tell everyone exactly what all is being considered and so forth, but I think we can leave it that the SRC will, we'll definitely be, uh, be apprised of your suggestion and, and, uh, we'll, we'll see exactly how it's determined to, uh, to, to move that forward.

Okay, great. Um, just one last kind of minor thing, but I was kind of looking, I was looking at the warrant and equity portfolio. You have a few things that have had a pretty decent return there. I was just curious how you're managing those. Are you kind of reviewing them quarter to quarter? Are you consider them longterm buy and hold positions? Just, uh, It looks like some could end up being home runs potentially, or are these things you just kind of assess quarter to quarter?

Sure. It's a little bit of both, Matt. I think one of the challenges with monetizing those positions is that in most cases we remain lender to our partner that we actually have a warrant position in. And as a result of that, we're somewhat limited from a material non-public information perspective and being able to monetize those. And so I think historically, you probably noticed that we've typically been able to monetize those when there's a change of control of the partner company. But when you think about a loan where we get refinanced and then our cleansing period, so to speak, completes, I think at that point we're able to determine whether we're going to monetize or wait. It's something that we look at on a quarterly basis, but we're also limited in terms of what we can do with some of these positions until we're were cleared from NMPI.

Okay. Well, that's great. Keep up the good work. I'm really enjoying seeing all the progress.

Appreciate that. Thank you for the support.

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

Hey, good morning, Winston. Another great quarter. Thank you. So my question is a little bit of minutiae, but When I looked at the Narcan revenue for this quarter and I looked at the underlying sales of Narcan, can you go over again how you get paid? Is it like a quarter off or delayed? Because the Narcan sales were fantastic and were out. So how does that work?

Yeah, great question. I think it's good to clarify for everyone to make sure that everyone understands how these work. So we recognize revenue on our royalties and arrears. Since we don't have very good information on actual sales of a product on which we get paid royalties, we really have to wait to see what we get to be able to recognize that revenue. So in the case of Narcan, the payment that we would have received during the second quarter is derived off of sales from the first quarter. And that's pretty typical for all royalties where, just generally speaking, Royalty payments are due anywhere from 45 days to 60 days or kind of industry norms for those royalties to be paid post-quarter. So you're absolutely right. Emergent announced a blockbuster quarter, if you will, for it. And then so our royalty payment associated with that from the second quarter will be paid during the third quarter. And that's when we'll recognize that as revenue.

Great. Well, thanks for that. And I'll go back and cue.

If you have any additional questions, please press star then one to join our queue. And at this time, I'm showing no further questions, so I'd like to turn the call back over to Winston Black for any closing remarks.

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

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