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.