SWK Holdings Corporation

Good day and welcome to the SWK Holdings first quarter 2022 financial results 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. Please note this event is being recorded. I'd now like to turn the conference over to Jason Rando with T. Burand Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings first quarter 2022 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 March 31st, 2022. Fresh 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. Failure in 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 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 SWAK Holdings 10-K file 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 first quarter 2022 corporate and finance results. Winston, go ahead.

Thank you, Jason, and everyone for joining our first quarter conference call.

The first quarter of 2022's results show increased interest in SWK as a preferred provider of non-dilutive funding for small and mid-sized life science companies with differentiated commercial products. We completed two transactions during the quarter, deploying 18.5 million of capital, with an additional 4.2 million invested with existing borrowers. Though the life science sector is facing capital market challenges at the moment, Our aim remains to selectively fund high-quality assets that are well-positioned to address important patient needs. First quarter's structured debt financing included $12 million to advance oxygen therapy for its U.S. expansion and a $6.5 million secured loan to Acer Therapeutics to support the company as it awaits market approval for a treatment of urea cycle disorders. We are pleased to help these companies meet their growth needs, especially when they can help improve medical outcomes for patients. We believe these transactions, coupled with our quarter-end income yielding assets of $188.4 million, illustrate how our platform remains poised to take advantage of compelling investment opportunities. In the midst of a very difficult investment climate, healthcare and life sciences growth companies generally need financing to support the commercialization of their important medical innovations. We believe our suite of financial offerings can help our clients and future clients improve medical care and transform the lives of patients. This year is shaping up to be an exciting one for SWK, and we are targeting to return to our new deal origination to historic levels. Supporting this effort, we have in excess of $63 million in cash plus for vault to meet opportunities in the market. As we announced last November and reaffirmed in early January, we remain committed to focusing on and growing SWK's core specialty finance business. With our new board directors now in place, we are focused on advancing our work to evaluate and implement strategic measures to improve our focus, growth profile, and capital allocation. As part of this work, as announced in our press release this morning, the board has determined to allow the rights agreement, or NOLPIL, to expire on its termination date at the end of this month. We anticipate further announcements regarding this work in the coming quarters. In 2012, the SME came in and successfully deployed approximately $638 million of capital into 45 investments, with 27 realizations that generated a realized internal rate of return of 20%. I would now like to take time to discuss the steady progress made by our subsidiary and cherished by our farmer. Chair Rajiv Kolza and his team are pursuing a two-pronged growth strategy to maximize the potential of its PEPTelligence and ProPerma technologies. the company's expanded manufacturing facility and its contract manufacturing business. Enteris is set to present two abstracts at the Endo 2022 annual conference in June, highlighting research in the oral formulations of luprolide. The compound incorporates peptelogen technology that enables oral delivery of medications that were traditionally injected or infused. The company is also participating in the CPHI North America conference that showcases drug delivery technology and contract manufacturing services. NTRS has four ongoing feasibility studies that are in a variety of indications that include cancer, women's health, and several nervous system disorders. In these programs, NTRS partners with drug companies to engineer the drug for oral delivery. The goal of this process is to advance the development of the oral peptide or small molecules that could advance to licensing agreements between NTRS and its partners during the medium term, potentially providing these sources of licensing income. Great, SWK's financing, finances, excuse me, As of March 31st, SWK's total investment assets were $195.8 million, a decrease of 10.6% from a year ago. SWK received a $10.7 million cash payment from B&D Dental to resolve a long-running non-cruel position that was carried to $8.3 million. The company also received a $5.6 million cash payment from Asaris Pharmaceuticals in its payoff. Please note that the quarter end figures does not include portfolio movements post-quarter. At the end of the first quarter of 2022, the weighted average projected effective yield of the finance receivables portfolio was 13.9%, including non-accrual positions, and was a slight increase from a year ago. Cash collections were greater than forecast, leading to a realized yield of our finance receivables portfolio of 22.5% versus 16.7% from a year ago period. SWK reported non-GAAP tangible book value per share of $18.39 as of March 31, 2022. an increase of 12.7% from a year ago. That figure excludes the deferred tax asset and tangible assets goodwill and contingent consideration payable. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business. For the first quarter of 2021, SWK reported total revenue of $11.1 million, a 19% increase compared to $9.4 million for the first quarter of 2021. Monetary growth was largely driven by $2.6 million in fees and interest due from the early payoff of the two loans I noted before. The gap in income for the first quarter of 2022 totaled $3.5 million, or $0.27 per diluted share, compared to $3.4 million, $0.26 per diluted share, for the first quarter of 2021. For the first quarter, adjusted non-gap in income generated by special finance business totaled $8.4 million, a 25% increase from the first quarter of 2021. Looking ahead, the remainder of 2022 has the potential to be a fruitful year for SWK, given the synergy between our financial offerings and ongoing capital market needs for small and mid-sized life science companies to fund innovation and build treatments to market. As traditional routes of financing face new challenges in the current investment climate, a combination of a long-term investment strategy, permanent capital base, flexible mandate, A lack of regulatory constraints places SWK in an advantageous position. These dynamics, coupled with growing momentum and interest, offer the potential to foster a sustained period of value creation for SWK. 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 1 on your touch-tone 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. This time, we'll pause momentarily to assemble our roster. Our first question comes from Kyle Bowser from Lake Street Capital Markets. Please go ahead.

Great. Thank you. Hey, Winston. Thanks for all the updates. Hope you're doing well. Hey, Kyle. So maybe we can just chat on the activity out there, I mean, with things as depressed as they are, debt is becoming, you know, more attractive, I think, than equity, particularly in this mid-cash space. For a lot of different players, to the extent that's true, have you seen kind of more activity in your realm of things as people kind of contemplate ramping up their operations and either financing through debt or equity?

Sure. Good question, Kyle. I think certainly your observation is accurate. As equity values have been compressed, it really highlights just really how creative our non-dilutive debt financings can be for companies. And also, you're right. These companies do need to finance as they look to grow. And that kind of puts us in a very good spot. Yeah, I'd just say, generally speaking, the pipeline activity is definitely brisk, and we are seeing a good amount of deals get done between ourselves and, of course, the rest of the market. So I think it's a pretty robust period out there.

And I appreciate that. It sounds like I think you said you've got access to about 63 million that you could deploy. So you're probably pretty good for a while. But, you know, is there, I think, an appetite for eventually taking on more leverage in your business? Or do you think you're kind of good for the interim and there's plenty of activity and capital at your disposal? that you don't need to do that. I'm just kind of curious how you're thinking about kind of leverage going forward.

Sure. Yeah, we've talked about this in the past, and I kind of made an indirect reference to this during my prepared remarks today. So, yeah, but we're definitely evaluating kind of what our optimal capital structure should look like. You know, going back to November, Last year and early this year, we had made some public comments about the desire to kind of build out our capital structure as we think about growing this business and enhancing our returns profile for the benefit of stockholders. And now that we're basically five, six weeks in with our new board, we're squarely focused on looking at this issue as well as kind of all other issues to make sure that we are well positioned for the business going forward. We don't have anything to announce right now regarding what that quantum of debt capital may potentially look like that we're considering putting on, but suffice to say we are evaluating that and expect to be able to make some announcements in the coming months.

Appreciate that. And, you know, if you were to potentially kind of scale up by taking more leverage, how do you anticipate needing to kind of expand your internal organization? I mean, do you feel like you've got quite a bit of bandwidth still? Or, you know, are you at capacity and so you maybe want to add a member or two to your investment team? Or, Just kind of try to understand if you do kind of scale up, what sort of resources would you need internally?

Sure. Again, another insightful question, Kyle. From the internal resources perspective, we definitely have capacity to do more. Everyone works very hard. But to your point, we actually did add a director-level investment professional toward the end of the quarter. Yeah, the first quarter. I think GAD started on March 1st. And as part of this, we also implemented a dedicated business development kind of function at SWK. So I think we're well-positioned, and I think we're always looking for for, you know, exceptional investment professionals. So, you know, we'll definitely be on the lookout for additional resources as we look to grow. But, you know, at this point, we're not currently hiring someone from that perspective.

Sure. Got it. No, I appreciate that as well. And maybe just lastly, on the interest business, you mentioned, of course, the four feasibility studies. Maybe you could talk a little bit more about kind of how you envision your internal kind of development playing out? So, you know, you've got four feasibility studies. Is the plan that kind of licensed them or do you want to kind of bring them through the FDA internally on your own? Just try to kind of understand what the playbook is for your internal assets.

Yeah, sure. So, yeah, I guess, you know, one, a clarification there, the, The feasibility studies are actually work that the terrorist team is doing with third-party pharmaceutical partners. So those aren't our assets. Those are our partners' assets that we're evaluating using our technology to make oral versions of those assets. And that business development pipeline continues to build and that can potentially be a very important revenue driver for us because those sorts of feasibility agreements are the things that turn into a license agreement like the CARE license agreement. On the internal pipeline, we've talked about the one program that we're really focused on and we're, at this point, that's really kind of what the primary focus on is getting that through its current clinical trial. The team is continuing to look at additional opportunities to leverage our technology and I think as the year goes on, we'll hopefully have some more things to say about that.

That sounds good. Well, thank you, Winston, for all the updates, and I'll jump back to you here.

Appreciate it, Kyle.

Again, if you have a question, please press star, then 1. Our next question comes from Scott Jensen, a private investor. Please go ahead.

Hey, good morning, Winston, and a good uneventful call in this tape is well appreciated. Kind of to follow on some of Kyle's areas of questioning, in the space now that you're seeing more opportunities and obviously interest rates are going up, are you able to adjust the prices that you get from your clients in kind of lockstep with the market?

Yeah, it's a very interesting question. On one hand, our structured debt transactions are typically a index to LIBOR. And so we are getting that benefit from, you know, across the portfolio as well as on new deals from changes in LIBOR. And, you know, obviously at some point we'll be moving to a new reference rate. So we do see the benefit, you know, from that perspective. And on overall pricing, you know, I think things have remained relatively constant, you know, The market hasn't moved, I think, all that much. Generally speaking, I would say it's probably plus or minus 25, 50 basis points, either way. That said, the thing that will be interesting to see is that these capital market terminal conditions continue into the second quarter and perhaps throughout the rest of the year, how that actually looks. We certainly will be looking to see take price where we can. I think with the idea also that we do want to be mindful of not overburdening our borrowers and kind of creating an issue, if you will. So, of course, we'll look at other levers within our investment structures to try to enhance our returns for stockholders.

Excellent. That answers my question. Now, as far as the Luperlide trial, which is recruiting according to the clinicaltrials.gov, what is the timeframe we could expect to get that phase two data, since you're kind of looking at a month cycle? Do we have like second half of this year, first half of next year? Do we have any kind of guidance for when that might be?

Sure. I personally would hope that we would be able to talk about it at some point this summer, but the recruitment is taking a little bit longer. The issues that we're seeing on patient recruitment are not all that dissimilar from what other pharmaceutical companies have noted over the last couple of quarters. I think we're... eyeing some time later, the second half of this year, to be able to have some results. But at this point, it really just depends on the pace of patient recruitment. And the team is very focused on that and has been looking to expand the number of trial centers and implementing additional measures to make sure that we can get the trial done as expeditiously as possible. But we'll see, because that's really the gaining factor on the timing. Okay.

And then to kind of follow on Kyle's point about, you know, the phase three, which usually have a larger cost component, are you thinking that you would be interested or you'd be open to partnering with somebody to go to a phase three or this, or would you get more value by doing it yourself?

Sure. I kind of see that. Yeah, there's definitely an art on the licensing side in terms of do you license preclinical phase one, phase two, phase three, post-approval, and with that kind of sliding science scale as you advance, generally with the royalty rates and so forth kind of increasing, you of course have to spending more of your own money and go more at risk to get to those higher levels. I think, frankly, it depends on how the data is shaped up and what we think from a regulatory perspective is required to actually get an asset across the line. I think those sort of things will inform what Phase three costs would be, and then we'll, you know, essentially make that decision at that time. You know, I think, though, to the extent we are able to, you know, to demonstrate in patients that we're having the desired effect, you know, for a 505B2 type program, that may be the optimal time to license it, but we would, of course, you know, consider all the factors I just mentioned as part of that analysis.

Excellent. And my final question for you is, is the board considering a buyback, considering there sometimes are optimal times where the market isn't there to maybe catch a stock? Are you thinking that maybe you guys could be one of those people to catch a stock?

Yeah. Well-timed question. Referring back to what I noted to Kyle.

Is that just my friend and myself who might have caught it?

Sure. Yeah, so we're definitely thinking about that. I think we all had hoped that we would have been in a position earlier this year to make some more announcements on some of these capital allocation type decisions. But I think now with our new board really getting to work now for what we've been together five weeks, six weeks, something like that, we're definitely looking at that. We're looking at everything, of course, from dividends, capital structure, and so forth. And I think the first part of that was the determination to allow the rights agreement to expire at the end of this month. and we'll be doing additional analysis to be able to make more announcements about buybacks and so forth in the coming months.

Great. Thank you. That's it, and I'll hop off.

No, I appreciate the interest, Scott.

There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Winston Black for any closing remarks.

Thanks, Jason. In closing, I appreciate everyone's time and attention and look forward to future updates as we continue to advance SWK holdings. I would also like to extend my sincerest wishes to good health to all. Thank you. The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.