SWK Holdings Corporation

Good day and welcome to the SWK Holdings fourth quarter and full year 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 a touch-tone phone. To answer your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Jason Rando with T. Moran Strategic Advisors. Please go ahead.

Good morning, everyone. Thank you for joining SWK Holdings' fourth quarter and year-end 2021 Financial and Corporate Results Call. Before the market opened this morning, SWK Holdings issued a press release detailing its financial results for the three months ended December 31st, 2021. 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 strategies. future operations, and the development of our 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, followed with the SEC, and other filings you 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 year-end 2021 corporate financial results. Winston, go ahead.

Thank you, Jason. And thanks, everyone, for joining our fourth quarter conference call. The fourth quarter of 2021 and recent weeks have been a busy time for SWK Holdings. We seek to capitalize on market and industry dynamics, which we believe could drive increased interest in SWK as a preferred provider of non-dilutive funding for small and mid-sized life science companies with differentiated commercial-ready products. In December, we deployed $12 million in senior secured debt financing to Viatricity, medical technology company developing remote biometric monitoring solutions, as well as close a $10 million senior secured debt facility to Moleculite, a privately owned medical imaging company, commercializing its proprietary fluorescent imaging platform technology, funding $8 million up front. And most recently, we closed a $6.5 million senior secured loan in March to Acer Therapeutics. We believe these transactions coupled with our last 12-month 14.4% adjusted return on invested capital and year-ending income, producing assets of $181.7 million, illustrate how our platform remains poised to take advantage of the compelling opportunities in front of us and validate the strength of S2BK's business model and our continued ability to establish ourselves as the go-to provider of capital for small to mid-sized life science companies. These types of companies generally need financing to fund the commercialization of their important medical innovations. That need has grown substantially due to the extended equity market sell-off in the life science sector, which has placed a premium on the ability for both public and private companies to access capital. We believe our suite of financial offerings are well positioned to meet this rising demand. Given these dynamics, 2022 is shaping up to be an exciting year for SWK. and we are targeting to return our new deal origination to historical levels. Reporting this separate, our current liquidity profile is excess of $60 million of cash and availability on Revolver, and SWK's board of directors is committed during the fourth quarter of 2021 to prudently increase leverage to help improve our capital allocation and increase financial flexibility to pursue investment opportunities. As a recent example of our ability to partner with innovative companies and deliver returns, one of our borrowers, Masonics, was acquired by Bob Mentis in the fourth quarter for $518 million. Upon closing the transaction on October 21, Masonics paid us $31.6 million to cover principal accrued interest and exit fees, and we tendered our Masonics stocks at $28 per share for $1.9 million of cash and 71,000 shares of Bob Mentis' common stock, which are freely tradable. This transaction is a great example of our ability to partner with companies and grow our investment as our partners grow. We closed the initial 12 million facility in 2015 and grew it to 30 million to support Soluble Systems and then its successor, Masonix, resulting in approximately 1.7 times cash-on-cash return with a 15% IRR. Masonix is but one example of our ability to identify investments that yield favorable returns for SWK. Since 2012, the SWK team has successfully deployed approximately $638 million of capital into 45 investments, with 27 realizations that generated a realized internal rate of return, or IRR, of 40%. Operationally, SWK also enters 2022 from a position of strength, with the prior special committees having concluded their strategic review process and its review of the non-binding proposal from Carlson Capital. We have clarity on the direction of the company. And importantly, we are very pleased to announce the reconstitution of our board of directors, bringing on three new, talented, independent directors, Wendy DeCicco, Robert Hatcher, and Lori Dotter, to join Marcus Bennington and me. Ms. DeCicco, Ms. Dotter, and Mr. Hatcher each bring extensive financial, investing, and operational experience, which will be critical to our growth and long-term success. The SWK team is also encouraged by the steady progress made by our subsidiary, Interis Bioforma. CEO Rajiv Khosla and his team are pursuing a two-pronged growth strategy to maximize the potential of his peptelligence and pro-permanent technologies in the company's expanded manufacturing facility and contract manufacturing business. In 2021, Interis signed six peptelligence and pro-permanent feasibility studies involving peptide and small molecule drug targeting a variety of therapeutic indications that include cancer, women's health, and disorders of the central nervous system. In these programs, Enteris partners with drug companies to engineer their drug for oral delivery. The goal of this process is to advance the development of the oral peptide or small molecule where Enteris and the company enter a license agreement for the new developed oral product, potentially providing new sources of revenue for Enteris and SWK. The value that Interis is capable of generating for SWK has been demonstrated by the milestone payments from CARE Therapeutics for the development of its oral Coursiva, which was engineered using Pepteligence for multiple therapeutic indications. In December, CARE paid Interis a $5 million milestone payment related to the program, of which Interis retained $3 million. And during the year, CARE paid Interis $15 million in aggregate and license fees, of which Interis retained $6.9 million. Turning to our finances, as of December 31st, 2021, SBK's portfolio of royalties and structured credit backed by royalties sold approximately 181.7 million across 23 partners. This is an 11.3% decrease compared with income-producing assets of 204.8 million as of December 31st, 2020. Note that the year-end figures here do not include portfolio movements executed post-quarter. At the end of the fourth quarter of 2021, the weighted average projected effective yield for the finance receivables portfolio was 13.8%, including non-accrual positions. This is flat versus prior year. SWK reported a book value per share of $20.82 as of December 31, 2021, which includes a $0.27 per share negative impact from the amortization of the interest's intangibles. and a $0.17 per share negative impact from the costs associated with last year's strategic review. This compares to $18.80 as of December 31, 2020. Tangible financing book value per share, which excludes our deferred tax asset, the tangible asset's goodwill, and contingent consideration payable, totaled $18 per share. 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 2021, SABK reported total revenue of $15 million, a 38% increase compared to $10.9 million for the fourth quarter of 2020. Revenue primarily consisted of interest and fees earned on our financial receivables and royalty payments generated by our portfolio companies, as well as revenue generated by Interis. The increase in revenue was primarily due to an increase in fees and interest from the early payoff of two-term loans and the CARE milestone received during the quarter. For the full year, 2021 revenue was $56.2 million compared to $36.7 million for the full year of 2020. The increase in revenue during the year was primarily due to an increase in interest and fees earned on our financial receivables portfolio and due to milestones earned related to the CARE license. Income before taxes for the fourth quarter of 2021 totaled $8.4 million compared to $3.4 million for the same period of the previous year. The increase is driven in part by our greater revenues during the quarter, plus a decrease in expenses, driven by less amortization of intangible expenses, as well as a decrease in the change in the fair value of the acquisition-related contingent consideration. For the full year of 2021, we reported an income before taxes of $33 million. This compares favorably to an income before taxes of $3.7 million, with the positive variance driven by the same factors noted a moment ago. The gap in net income for the fourth quarter ended December 31st, 2021, totaled $6.3 million or 49 cents per diluted share, compared to $4.6 million or 36 cents per diluted share for the prior year period. For the fourth quarter of 2021, adjusted net income was $9.5 million, compared to $7.5 million for the fourth quarter of 2020. For the fourth quarter, Non-GAAP net income generated by the specialty finance business totals $6.9 million as compared to $6.4 million for the prior year period. For the full year of 2021, we reported GAAP and non-GAAP net income of $25.9 million and $34 million, respectively. This compares favorably to GAAP net income of $5.2 million and non-GAAP net income of $21 million for the full year of 2020. Income producing assets is defined as finance receivables and corporate debt securities totaled $181.7 million as of December 31st, 2021. This is a decrease compared with income producing assets of $204.7 million as of December 31st, 2020. Looking ahead, 2022 has a potential to be a very fruitful year for SWK given the synergies between our financial offerings and ongoing need for small and mid-sized life science companies to raise capital to fund innovation. As noted earlier in the presentation, with traditional routes of financing potentially less available due to market uncertainties, a combination of a long-term investment strategy, permanent capital base, flexible mandate, and lack of regulatory constraints places SWK in an advantageous position. These dynamics, combined with growing momentum and interest, offers potential to foster a sustained period of value creation for SWK. 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 1 on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press Star then 2. Once again, ladies and gentlemen, that's Star then 1 if you have a question. Today's first question comes from Michael Diana at Maxim Group. Please go ahead. Thank you.

Hey, Winston. Hey, Michael. In your core finance receivables business, how, if at all, do you think rising rates will impact that business?

Good question. Thank you for it. Well, I think we'll probably see it in a couple ways. One, just with the associated equity market volatility, I think we've commented on that in the prepared remarks before. And so that's obviously the first way in terms of generating potential new opportunities. From a cost to the cost of our facilities to our borrowers, given the LIBOR floors that most of our loan agreements have in them, I think at least initially there won't be that much of an increased cost associated up with our facilities for those portfolio companies, at least initially, but then, of course, as the extent that things continue, then there will be an increase in our overall interest income associated with those positions. Yeah, I think on, then I think lastly, of course, the same factor that is potentially driving new opportunities for us meeting the equity market volatility, to the extent that any of our portfolio companies do need to finance in the near term, then that, of course, will impact ultimately the cost of the equity with which to raise capital. So I think those will be impacted at that point, potentially. And I think those are the primary ways we see it impacting the portfolio. right and as you do make new loans will you be able to command a higher rate on them do you think um yeah interesting question it probably depends on the bigger circumstances and which I guess it always does but what I mean by that yeah I think the the segments where we compete that have been the most competitive I think as this volatility continues, some of the marginal capital providers, potential for them to exit and potentially not be as aggressive as they were before. So we may see it lighting up in those segments, which are primarily the official venture-backed opportunities. But I see less kind of... impact in that segment than other areas where we see capital, mainly companies that have non-traditional equity sponsors or high net worth funded or potentially founder bootstrapped. I think in those cases there'll be less competition and we'll be able to negotiate better deals on behalf of the company.

Okay, great. Thanks. And on Interis, you say in your release that the six feasibility agreements could advance to licensing agreements over the medium term. Did you put any sort of bracket on that? I mean, you're talking about two to five, three to six, one to four?

Yeah. I would say in the one to three-year range, the reason for the wide range is is a couple-fold. One, the timing depends on, of course, our partners' internal development timeline. And so to the extent that that timeline involves a very robust phase one program, for example, that could take a year to complete. And so there's that. And then the second biggest factor on that is you know, it's kind of striking the optimum time to, you know, to actually seek the license because as the pharmaceutical development candidate gets more and more de-risked, then the value of that license gets, you know, potentially gets greater and greater. And, you know, I think it's one of the things that we're working on with management there is that, you know, what's the kind of optimal point to negotiate that license? So, you know, just by way of example. The CARE agreement, the license agreement was inked right at phase two where CARE had seen some indications of efficacy and the program from their perspective was more dressed particularly since their injectable formulation had such great clinical success. In the case of a pharmaceutical company that is perhaps earlier in their development stage, say they're somewhere in phase one, the program is not all that de-risked from their perspective, so they may not be willing to pay as much for a potential license. And so there's a little bit of titrating kind of the optimal time frame to actually strike that license. And so that language, because it's

little bit uncertain but it's really more promising now than it was before okay great thank you very much sure and ladies and gentlemen as a reminder to ask a question please press star than one our next question today comes from Scott Jensen a private investor please go ahead thank you good morning Winston um great quarter uh

So I have a couple questions on the financing side, or I mean on the financial side. You said your costs for 2021 for Interis were $3 million higher, and I see that you've started to recruit for phase two of your Luperlide trial. Expected results, they say, on the site May. What is the plan for phase three, and what would the cost maybe be in the back half of the year if you move on to phase three? And is that a decision SWK controls alone?

um basically question scott so yeah yeah that there were you know increased expenses last year associated with this with this program and you know and we are in the midst of uh of recruiting that phase two uh yeah but the timing will you know hopefully that that ends up being being exactly what it is but the I guess with respect to ownership of that program, we do have full control of the program. So the timing of advancing is largely up to us, but of course also depends on timing with the FDA in terms of having to end a phase two meeting and those sort of things. In terms of the phase three cost, we haven't announced what that is yet, but And so I don't want to comment on it here. I think as we think about developing our internal assets generally, we're currently contemplating the best way to finance those. To what extent do we want to finance internally? Do we have opportunities to finance them externally? What are those? And then, of course, there comes a question of the optimal time to seek an out-license of the program to have another partner finish development. So I think those are all things that we're considering as we look at that phase three. To the extent that our phase two results are, you know, continue to be robust and as we expect, you know, there may be an opportunity to license it at that point. But, you know, again, I don't want to make any promises here because we're still waiting for, you know, the data to come in and make sure we understand what the phase three path is before, you know, comment on the on the timing and costs.

Excellent. That answers all the questions I was going to ask there. The next one is on the BND dental loan, which I'm sure you're happy to half off your sheets after a number of years. How will that flow through the first quarter? Does it all flow through? Yeah.

Since the payment was in excess of our carrying basis, that increase will come through as income in the quarter.

Excellent. And then going on to Flonix, I saw that it went into non-accrual status, which is a little interesting because you had raised so much money between yourself and the $23 million led round by Farallon Capital. So is there anything going on there or is that just a company choice on their side?

Yeah, and this is always the difficult part of being a public specialty lender. When these sensitive matters come up when we're dealing with confidentiality, we're kind of limited in how much we can say. I mean, certainly a position going on... That's why I asked it. Yeah, is not an indication of all things going exactly as planned. So... I think I can say that we are actively working with the company and Fairlawn to figure out exactly what we're going to do there. We're definitely disappointed that things have been as challenging for the company as they have been, and we're optimistic we'll have a pretty good idea in the next probably two, three weeks, outside maybe five, six weeks of them. in terms of what the actual direction for working that position out will be. We're actively talking with them literally every couple of days. So I hope to have an update on that in the not too distant future.

Appreciate it. And then just thinking about, as you said, there was a 17-cent hit last year for the special committee, and amortization is going to drop about, two and a half million this year from last year, both, of course, helping. Are there any further costs from the special committee that will show up in the first quarter?

Yeah, there will be some, mainly because the last Carlson offer was still being considered by the special committee. And then so as a result, even though it was only the very beginning of January, that there will be some costs associated with it. I think certainly those sort of expenses will be much less than they were last year. It was fairly robust amount and pursuing the various things and we will have some in the first quarter at this point anticipating any thereafter.

Okay. And then the last one is just on CARA as they reported another good news announcement this morning on the oral from phase two. of the ones that are in phase three, just that they got a good anti-itch versus the placebo. So it looks like that's all heading in the right direction. They talk often on their presentations about it having such, that Corsuva has such a potential in pain management, both because it's non-addictive, as well as they've seen such a great response. Are any of those, if they go in any direction, is enterosclerosis under any of those? Do they have the exclusive right with Corsuba if they went in an oral direction for a trial like that? Or is it a dare option?

No, no, great question. So the license that CARA has taken is, I guess one way to think about it is basically kind of freedom to operate with an oral version of Corsuba kind of wherever they want to take it. the indications aren't carved up, you know, because it's a carousel molecule, and so they own it, they can do what they want with it. But, you know, any sort of, you know, when we get to the royalty portion of that agreement, you know, sales are sales, and so whether they're from any sort of puratus-related indication or however else physicians may use it, you know, we would be royalty on that.

Okay, great. Thank you. I'll let somebody else ask. Appreciate it. Thanks, Corey. Appreciate it.

And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you, Operator. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK Holdings. I'd like to extend my sincerest wishes of good health to all. Bye-bye.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.