SWK Holdings Corporation

Good day and welcome to the SWK Holdings, Inc. Third Quarter 2021 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 and then one on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Jason Rando from TBRN Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' third quarter 2021 financial and corporate results call. After the close of the market on November 12th, SWK Holdings issued a press release detailing its financial results for the three months ended September 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 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 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-K filed with the SEC and other filings we make with the SEC from time to time. SWK Holdings disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me on today's call is Winston Black, Chairman and CEO of SWK Holdings, who will provide an update on SWK's third quarter 2021 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone for joining our third quarter conference call. The SIPK Holdings business strategy is focused on providing non-dilutive financing opportunities to small and mid-sized life science companies with differentiated commercial stage products. This has been our mission from inception to today, producing solid returns for our company and shareholders during that time. It is an uncomplicated business and one that, when executed with discipline and care, works well because the small to mid-sized companies fueling innovation in the life sciences industry invariably require access to capital to bring the resulting therapies, products, and technologies to market. We have been successful at finding those opportunities where our financing products provide the right capital infusion at the right time, empowering companies to unlock the value of their technologies, and in turn, enable SWK to realize a positive return on our investment. Since 2012, the SWK team has successfully deployed approximately $600 million of capital into 42 investments, with 23 realizations that generated an IRR of 20%. Earlier this year, in partnership with our largest shareholder, SWK formed a Strategic Review Committee to identify, review, and explore strategic alternatives for SWK with a view to maximizing stockholder value. As we announced earlier this month, the committee and its financial and legal advisors completed its review and determined that our specialty finance business, as just described, is a very good business, ideally suited to drive the company's future growth and shareholder value going forward. Board's decision was informed by our own internal evaluation of the company's assets, as well as by an independent third-party evaluation that supported our belief that SWDA's core specialty finance assets have value in excess of our gap-carrying value. Illustrated of this analysis is the third quarter performance of the specialty finance portfolio. It produced an 18.8 realized yield with strong underlying credit trends, despite the overhang of the review process. As you can appreciate, the review's outcome and the team's ability to deliver these results is very gratifying, and for our shareholders, a clear sign that what we are doing works. With the strategic review now completed, SABK is squarely focused on our specialty finance business segment, Though we temporarily paused New Deal originations during the strategic review process, we have continued to closely monitor life science investment environment and expect New Deal originations to return to their historic levels over the next few quarters and foresee multiple opportunities to deploy capital. We will be pursuing opportunities from a position of financial strength with our current liquidity profile of roughly $80 million of cash and revolver availability, further adding to our liquidity muscle. SFPK's Board of Directors has committed to prudently increase leverage as we scale the business to help improve capital allocation and improve returns for stockholders. We now anticipate restoring normalized deployment levels during 2022. The third quarter and recent weeks also marked the continued progress of our subsidiary in Terrace Biopharma, highlighted by advances in the clinical program for one of its internal 505 products and the signing of one more of more Pepteligence feasibility studies. The peptologins and proprimate technologies developed by Antares enable the oral delivery of peptides in BCS class 234 small molecules, respectively. These drugs are typically administered via injections due to poor bioavailability or permeability. The ability to develop safe and effective oral formulations is a game changer that could enhance the commercial markets for myriad drug candidates, reshaping therapeutic categories and treatment paradigms, and provide improved treatment options for patients. Last month, Interis announced the successful completion of a Phase I clinical trial of optimized Peptelgen Scanda oral Luperlide, demonstrating delivery of drug levels comparable or greater to subcutaneous or depo injection. Interis is advancing the program to the next round of clinical development. We will provide additional details when warranted as the program advances. Meanwhile, Interis CEO Rajiv Khosla and his team continue to execute a dual-arm growth strategy to maximize the value of the company's Peptelgen and ProPerma technologies It's a new manufacturing and CDMO business. So far this year, Interis has signed six Pepteligence feasibility studies in which Interis partners with a peptide therapeutics developer to engineer their drug for oral delivery. The goal of this process is to advance the development of the oral peptide to where Interis and the prospective company enter a license agreement for the newly developed oral product. An example of this strategy in action is Care Therapeutics and its Oral Cursiva product, which is developed using Enteris' peptalogen technology across multiple patient populations. Oral Kusuba is now subject to four separate clinical programs, and CARA expects to initiate phase three programs for the treatment of moderate to severe pruritus, both atopic dermatitis and non-dialysis-dependent chronic kidney disease patients during the first quarter of 2022. During the past 12 months, Enteris has received three milestone payments related to Oral Kusuba program. More milestones are anticipated in the quarters to come. Turning to our finances, As of September 30th, 2021, SWEK's portfolio of royalties and structured credit backed by royalties totaled approximately $206.2 million across 26 partners, which compares favorably to $187.1 million for the year-ago period. During the quarter, SWEK did not deploy any capital with existing companies. On June 30th of this year, SWEK did close the $9.5 million financing with Trio Healthcare Limited, with $5.1 million funded at closing. During the quarter ended September 30th, 2021, the company collected $7.1 million of principal payments, and more recently, we collected $31.6 million in facility repayment proceeds from Masonics' $518 million acquisition by BioVentus. We also received $1.9 million in cash and 71,361 shares of BioVentus common stock. The gain on the transaction will be recognized in the fourth quarter. As of November 8th, 2021, SWK had $6.4 million of unfunded commitments. SWK reported a book value per share of $20.36 as of September 30, 2021, which includes a $0.05 per share of negative impact from the amortization of interest intangibles and $0.08 per share of negative impact from legal and financial consulting expenses associated with our strategic review. This compares favorably to $18.44 as of September 30, 2020. Tangible financing book value per share, which excludes the deferred tax asset and tangible assets, goodwill, and contingent consideration payable, totaled $17.50 a share, a 12.7% increase over $15.52 per share from the same period last year. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business. For the third quarter of 2021, SVK reported total revenue of $9.6 million compared to $10.6 million for the third quarter of 2020. The decrease in revenue is primarily due to a $2.6 million decrease in revenues on our pharmaceutical development segment due to a milestone payment from CARE in the third quarter of 2020. This is partially offset by a $1.5 million increase in interest and fees earned on our finance receivables. Gap-bent income for the third quarter ended September 30, 2021, totaled $2.2 million, or $0.17 per diluted share, compared to 4.3 million or 34 cents per dilute share for the third quarter of 2020. For the third quarter of 2021, non-GAAP adjusted net income was 4.3 million compared to 6.7 million for the third quarter of 2020. Lastly, for the third quarter of 2021, non-GAAP net income generated by the specialty finance business totaled 7.7 million as compared to 6.6 million for the prior period. SWK remains well positioned to harness our expertise to deploy capital for compelling value-adding investment opportunities. The prudent addition of leverage will, we believe, optimize SWK's capital structure. Further going forward, SWK will evaluate other measures to improve shareholder returns, including a dividend policy. As for interest, Rajiv and his team continue to work on partnership agreements in advancing its 505 pipeline. In conclusion, The 2021 fiscal year has so far continued what has been a period of consistent performance for SWK. All this is made possible by the diligent efforts of the SWK Holdings team. I once again like to thank our employees for their dedication and loyalty and our stakeholders for their continued support as we evolve our model and grow SWK. With that, I will now open the call to your questions.

Thank you. And we will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. And to withdraw your question, please press star and then two. Once again, it is star and then one to ask a question. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Kyle Bowser with Collier Securities. Please go ahead.

Ray, good morning. Thanks, Winston, for all the updates. Maybe you mentioned the review committee also independently valuing the specialty finance business, which jived with your own internal analysis of it at a larger carrying value. But just kind of curious what the committee – what their thoughts were on the biopharma business and what sort of valuation they calculated for in tariffs and kind of any thoughts on, you know, how that fits in. Thank you.

Sure. I appreciate the question, pal. So yeah, you know, the committee and supervisor definitely evaluated in tariffs alongside the specialty finance business. I think the one thing I'd point out is we, as we think about, you know, just our book value, for example, And Terrace is currently $1.10 a share, only 5% of the book value. So while we see a tremendous opportunity within Terrace, I think as we've communicated kind of the value in the business and where our capital is majorly deployed now, I think we wanted to be conservative as we always have been with respect to the value of our assets and the potential within them. So we continue to see a lot of upside there. But, you know, given it's a 5% position, you know, we also didn't want to, you know, to be overly promotional about that business. So, you know, I think just having perspective about it is how we thought about that. And, of course, you know, it could deliver a tremendous amount of value, but we also, I think you'd appreciate, like I said earlier, we do definitely want to be conservative about how we communicate value and how you know, the business performs, we'll be able to demonstrate that and talk more about it.

Got it. No, that makes sense. And so it sounds like you've gotten the green light to lever up as necessary. And I think you said you had either 60 or 80 million in cash currently available. What sort of debt levels do you think would make sense for the business or would maybe ask another way to kind of put you in line with some of your peers? Just kind of curious how you're looking at adding on some debt.

Sure. So it gets first to clarify, you know, we do roughly have 60 million of cash and with our revolver that takes us about 80 million of just general liquidity. So to answer that first question, regarding debt levels, you know, there's there's Of course, two ways we'll look at it. The first is the maximum amount of debt that we could take on per the 2014 Stockholders Agreement with Carlson, which basically lets us get up to one to one. I think as we look to scale the amount of leverage, we would look to be in the 25 to 50% type range, and then we'll look to grow from there depending on how it goes. On one hand, leverage is great because it can help turbocharge returns, but, you know, as everyone here also knows, they can also turbocharge losses if you don't scale that right. So, you know, I think there's definitely a lot more room to lever our portfolio, but we also want to be, you know, kind of prudent and measured in our steps to do that.

Got it. And just lastly, I guess following up on that, if I may, so, you know, assuming you did lever up and, you know, take down more debt and utilize the existing cash you have. Are you seeing a lot of activity out there still? In other words, would you be able to put it to work relatively quickly? Just kind of trying to understand what the environment is like out there for deal flow and if you'd be able to kind of deploy it all right away. Thank you.

Sure. Well... I guess first to address that, we don't want to have this money burning a hole in our pockets, so to speak. We're always very diligent and measured in deploying our stockholders' capital. So nothing will be different from that perspective. But just regarding the deal environment, I think it remains very active out there. Even though we haven't been – pretty much a capital work over the past couple quarters. We certainly have been watching things and continue to develop our pipeline of opportunities. I think we expect to get back to what we normally have done historically sometime next year. There are some pockets of the market that are kind of more competitive and there's others that continue to be really attractive. And we'll look to execute where we're seeing the best risk-adjusted returns.

That's great. Thanks so much, Winston. I'll jump back in queue.

Thanks, Kyle.

Our next question today will come from Michael Diana of Maxim Group. Please go ahead.

Thank you. Hi. Yeah, I was going to ask about the leverage, too. I think that opportunity is very interesting. In relation to that, and really also, I guess, in relation to interest, you mentioned that you're evaluating a dividend. my guess is more leverage could be good for dividend. Keeping in tariffs could mean you want to use any earnings to drive growth in tariffs. Do you have any comment on that?

Sure. I appreciate your astute observation there. We do have a lot of opportunities to avoid capital and Yeah, I think the first thing just to address the dividend, that's something that we've been considering for a while, but as noted in our release on November 1st regarding the SRC process conclusion, that's something that requires Carlson's consent, and we don't quite have that yet. So I'd very much like to have a stated dividend policy, and we're working to implement that. So stay tuned there. Unfortunately, I don't have anything to share today about that. But you're exactly right regarding tariffs and just transactions out there, kind of regular way finance transactions that we look at. I think there are a lot of opportunities for us to deploy capital. And whether we're paying a dividend or not, I don't necessarily think – we'll say whether we see opportunities to deploy capital within tariffs. I think on one hand, we want to make sure our shareholders are participating in the success of the business and, you know, between, you know, buybacks and dividends, you know, those are two very typical things for us, you know, for companies to do with respect to that. And on tariffs, you know, I think one thing that we're thinking about, and we've talked a little bit about it, is, you know, it's how we, you know, We go about financing our own asset development pipeline because you can go nuts and spend a ton of money on that, and that certainly isn't very helpful to a business that is trying to compound book value and generate cash flow. So I think we've been taking a measured approach with respect to the development that we're doing because we do see a tremendous amount of value in that. But that said, we're trying to – be measured with the amounts that we are dedicating to that. And so, you know, I think we'll, our goal is to have some more formal guidance on that as we get into the new year to, you know, to help shareholders understand, you know, kind of what our formal capital allocation policies are going to be.

Okay. And then, thank you. And then you mentioned you now have 71,000 shares of Bioventus stock. Do you have a policy about what you do when you receive stock, like you saw right away, or you keep it and look for an opportunity to take exit? Or do you have any policy whatsoever on that?

Yeah, that could be a great question, because it doesn't apply just to, you know, the bio-ventus equity that we have. It also applies to any of the warrants that we have in public companies as well, right? So, you know, we do, you know, the The first thing depends, do we have any material non-public information that we have to be cleansed up? Once we determine that we're cleansed of that, I think we're in position to actually sell an equity or exercise a warrant. Just like any investment that we have in our portfolio, we'll evaluate it, determine what we think it's worth, and then determine the right time to exit based on market prices and liquidity. That said, we're also not looking to speculate in public equities. So we certainly aren't going to be looking to get the last cent out of our calculated value for a position. So we'll use that general framework to look to exit positions when it's appropriate.

Okay. And while you hold it, you have to market. Is that right or wrong?

Yeah, that's right. Just like the Masonics equity that we had, we marked it to market because we're public observable inputs. That's also how we mark our public warrants because they're our public observable inputs. So we do mark those as well at each quarter end.

Okay, great. Thank you.

Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Mr. Black for any closing remarks.

Thank you. 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.

The conference has now concluded, and we do thank you for attending today's presentation, and you may now disconnect your lines.