SWK Holdings Corporation (SWKH) Q3 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the SWK Holdings Inc. Third Quarter 2021 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Jason Rando from Tiberend 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 12, SWK Holdings issued a press release detailing its financial results for the three months ended September 30, 2021. The press release can be found on 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, plan, 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 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. He'll provide an update on SWK’s third quarter of 2021 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone for joining our third quarter conference call. SWK Holdings business strategy is focused on providing non-dilutive financing opportunities to small and mid-sized bioscience companies with differentiated commercial stage products. This has been our mission from inception to today because installed 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 life sciences industry, and barely 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 complete its review in terms of that our specialty finance business, I just described, is a very good business, ideally suited to drive the company's future growth and shareholder value going forward. Board’s vision was informed by our own internal valuation, the company's assets, as well as by an independent third party valuation that support our belief that SW is core specialty finance assets have value in excess of our GAAP carrying value. Illustrate of this analysis is that third quarter performance of a specialty finance portfolio, it produced an 18.8 realized yield was strong our line credit trends, despite the overhang of the review process. As you can appreciate the views 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 this strategic review now completed, SWK squarely focused on our specialty finance business segment that we temporarily paused new deal originations during the strategic review process. We have to do closely monitor life science investment environment and expect new deal originations returned through our surrogate levels over the next few quarters and foresee multiple opportunities to deploy capital. We'll be pursuing opportunities from a position of financial strength with our current liquidity profile over up of roughly 80 million of cash and revolver availability for the adding to our liquidity muscle, SWK Board of Directors has committed to prudently increased leverage as we scale the business to help improve capital allocation improve returns for stockholders. We anticipate restore normalized deployment levels during 2022. The third quarter in recent weeks also marked the continued progress of our subsidiary in Enteris BioPharma, highlighted by advances in the clinical program for one of its internal 505b2 products in the signing of one more Peptelligence feasibility studies. The Peptelligence and ProPerma technologies developed by and Enteris enabled the oral delivery of peptides and BCS class II, III, IV small molecules respectively. These drugs are simply administered via injections if the poor bioavailability or permeability. The ability to develop safe and effective oral formulations is a game changer that could enhance the commercial markets for Marriott drug candidates, reshaping therapy, categories, and treatment paradigms, and provide improved treatment options for patients. Last month, Enteris announced successful completion of the Phase I clinical trial of optimized Peptelligence Oral Leuprolide, demonstrated delivery of drugs levels comparable or greater to subcutaneous or depo injection. Enteris’ advancing the program, the next round of clinical development, we will provide additional details or more into as the program advances. Enteris, CEO, Rajiv Khosla and his team continued to execute a dual arm growth strategy to maximize the value of the company’s Peptelligence and ProPerma technologies as new manufacturing and CDMO business. So far this year Enteris has cited six Peptelligence feasibility studies, in which Enteris 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 Enteris and their respective company, enter license agreements for the newly developed oral product. Example of this strategy in action is Cara Therapeutics and its Oral KORSUVA product, which is developed using Enteris’s Peptelligence technology across multiple patient populations. Oral KORSUVA has now four separate clinical programs and Cara expects to initiate Phase II programs for the treatment of moderate to severe pruritis, both atopic dermatitis and non-dialysis dependent chronic kidney disease patients during the first quarter of 2022. During past 12 months, Enteris’ received three milestone payments related to Oral KORSUVA program, more milestones are anticipated in the quarters to come. Turning to our finances. As September 30, 2021, SWK’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, SWK did not deploy any capital with existing companies, on June 30, of this year SWK do closing 9.5 million financing with Trio Healthcare Limited with 5.1 million funded to closing. During the quarter ended September 30, 2021, the company collected 7.1 million of principal payments. So more recently we collected 31.6 million in facility repayment proceeds from Misonix 518 million acquisition by Bioventus. We also received 1.9 million in cash and 71,361 shares above and just common stock, again on the transaction will be recognized in the fourth quarter. As of November 8, 2021, SWK had 6.4 million of unfunded commitments. SWK report a book value per share of $20.36 as of September 30, 2021, which includes a $0.05 per share negative impact from the amortization of Enteris tangibles and and $0.08 per share 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 assets, tangible assets, goodwill, and contingent consideration payable totaled $17.50 per share, a 12.7% increase over $15.52 per share for the same period last year. Management views tangible financing book value per share as relevant metric to value the company's core specialty financed business. For the third quarter of 2021, as SWK 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 a pharmaceutical development segment, due to a milestone payment from Cara in the third quarter of 2020. This is partially offset by $1.5 million increase in interest and fees earning on our finance receivables. GAAP net 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 $0.34 per diluted share for 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 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 talk recently deploy capital for compelling value adding investment opportunities. The prudent addition of leverage will be believed optimize SWK’s capital structure and further going forward, SWK gave about a other measures to improve shareholder returns, including a dividend policy. As for Enteris, Rajiv and his team continue to work on partnership agreements and advancing its 505 (b)(2) 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. And once again, I’d like to thank our employees for the dedication and loyalty and our stakeholders for their continued support as we evolve our model and grow SWK. With that, I want to open the call to your questions.

[Operator Instructions] Our first question today will come from Kyle Bauser with Colliers Securities. Please go ahead.

Maybe -- you mentioned the review committee also independently valuing the specialty finance business, which jibe with your own internal analysis of a larger carrying value. But just a kind of curious what the committee -- what their thoughts were on the biopharma business? And what sort of valuation they calculated for Enteris? And kind of any thoughts on how that fits in?

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

Got it. No, it makes lot sense. And so it sounds like you've got the green light to lever up as necessary, and I think he said 60 million 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 it kind of puts you in line with some of your peers, just kind of curious how you're looking at adding onto that?

Sure. So it gets first to clarify, we do roughly have 60 million of cash and with our revolver, that takes us about 80 million of just general liquidity. So it’s the answer that first question. Regarding debt levels 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. It was 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 is there one here it also knows they can also turbocharge losses if you don't -- if you don't scale that, right. So yes, I think there's definitely a lot more room to deliver our portfolio, but we also want to be kind of prudent and measured in our steps to do that.

And just lastly, I guess, following up on that, if I may. So assuming you did lever up and take on more debt and utilize existing cash you have. Are you seeing a lot of activity out there still and 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 deploy it all right away?

Sure. 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 we will -- nothing will be different from that perspective. Just regarding the deal environment, I think it remains very active out there, we -- even though we haven't been putting much capital work over the past couple of quarters, we certainly have been watching things and continue to develop our pipeline of opportunities. And 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 they continue to be really attractive and we'll look to execute where it is -- that we're seeing the best risk adjusted returns.

Our next question today will come from Michael Diana of Maxim group.

I also going to ask about the leverage too, I think that opportunity is very interesting. In relation to that and we'll really also, I guess, in relation to Enteris, you mentioned that you're evaluating the dividends. My guess is more leverage could be good for dividend, keeping in Enteris could mean -- you want to use any earnings to drive growth in Enteris. Do you have any comment on that?

Sure. We do have a lot of opportunities to deploy capital, and yes, 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 1, regarding the SRC process conclusion, that's someone that requires Carlson's consent and we don't quite have that yet. So, I very much liked to have the state of dividend policy and what we're working to implement that. So, stay tuned there, unfortunately I don't have any, just share that about that. And you're exactly right regarding Enteris and just transactions out there kind of regular way finance transactions that we look at. 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 with Enteris. I think on one hand, we want to make sure our shareholders are participating in the success of the business and between buybacks and dividends those are two very typical things for us, for companies to do with respect to that. And then on Enteris, I think one thing that we're thinking about and we've talked a little bit about is, it’s how we go about financing our own assets 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 flows. 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 of work we're trying to be measured with the amounts that we are dedicated to that. And so, I think we'll -- our goal is to have some more former guidance on that is as we get into the New Year to help shareholders understand how about kind of what our formal capital allocation policies are going to be.

And then you mentioned you now have 71,000 shares of buyback stocks. Do you have a policy about what you do when you receive stock? Like you saw it right away or you keep it and look for an opportunistic exit or do you have any policy or whatsoever?

Yes, great question. Because it doesn't apply just to the Bioventus equity that we have. It also applies to any warrants that we have in public companies as well, right. We do the first thing depends, do we have any material non-public information that we have to be kind of cleansed up and so once we determined that were cleansed to that, we are in position to actually sell an equity or exercise of warrants. Just like any investment that we have in our portfolio, we'll evaluate it, we think it's worth and then kind of determine the right time to exit based on kind of 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 mark it, is that right or wrong?

Yes. That’s right, just like the Misonix equity that we had. We mark-to-market because we're public of observable inputs. That's also how we mark our public warrants, because 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 expend my sincere wishes of good health and wealth.

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