SWK Holdings Corp (SWKH) 2022 Q2 法說會逐字稿

Good morning, and welcome to the SWK Holdings Corporation second-quarter 2022 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, Tiberend Strategic Advisors. Please go ahead.

Thank you, and good morning, everyone. Welcome to the SWK Holdings second-quarter 2022 financial and corporate results call. After market closed yesterday, SWK Holdings issued a press release detailing its financial results for the three months ended June 30, 2022. 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 the development of 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 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 second quarter and first half of 2022 corporate and financial results, Winston, go ahead.

Thank you, Jason, and thanks, everyone, for joining our second-quarter conference call as we celebrate our tenth anniversary as a life science-focused specialty finance company, catering to small and mid-sized commercial-stage companies.

For a discussion of our second-quarter results, I'd like to take a moment to thank our employees, Board of Directors, shareholders, and partner companies for the support you've given to our leadership team as we built SWK to be a partner of choice for small to mid-sized life science companies seeking non-dilutive financing to fuel the development and commercialization of life-saving and life-enhancing technologies.

Reflecting on the past decade, I'm very proud of what SWK has accomplished. We started in of May 2012 with a public shell that had no operating business and $38 million of assets as of March 31, 2012.

Today, we are a NASDAQ-traded company, a premier life science specialty finance platform that has provided consistent returns on our investments to our shareholders, including a book value per share that has increased at a 10% compound annual growth rate since inception.

The SWK team has successfully deployed approximately $676 million of capital into 48 investments, including a $5 million financing that's completed in July and $25 million financing that was announced yesterday evening post quarter.

[Utilize] a deliberate and contemplated approach for identifying investment opportunities takes into consideration the company, its management team, [high] potential of this company [in offshore property], as well as external factors that could impact our ability to generate a return.

Such external factors could entail in situations in the vertical industry in which the company competes as well as broader macroeconomic market dynamics. I'm sure everybody on this call appreciates the first half of 2022 has been a challenging period for the capital markets.

Given this, SWK has been focused on the pursuit of compelling opportunities with an eye towards likely funding high-quality assets positioned to weather the current challenging capital market conditions.

We're always selective with where we deploy our shareholders' capital. Our disciplined underwriting philosophy led new transaction originations, [undertaking] the repayment of positions in the portfolio over the last 12 months, resulting in a material decline in the size of our aggregate portfolio and a corresponding decrease in revenues year over year.

I was little counterintuitive and encouraged about our strategy with the successful portfolio payoffs, we believe they provide a strong endorsement of the innovation we support through our investments.

Further, we believe our focused stewardship of our shareholders' capital have provided an important benefit. We have a well-positioned balance sheet for the current environment, which includes $55 million of cash, an untapped $20 million (sic - see Press Release, "$22 million") credit facility as of June 30, 2022.

With regard to our status as a NASDAQ-traded company, I'm pleased to note that the close of the second quarter, SWK was added to the Russell 2000, 3000, and Microcap indexes. Our addition of these indexes should serve to further expand awareness of our company within the investment community, increase liquidity of our stock, and broaden our shareholder base.

In addition to recognizing the value in SWK's equity, during the last quarter, we implemented a 10b5-1 program to repurchase up to 10 million of stock, which we expect to be accretive to the company.

Turning to SWK's finances, as of June 30, SWK's total investment assets were $181.4 million, a decrease from $213 million from a year ago. Reflecting these recent payments, please note that the quarter-end figure does not include portfolio movements for this quarter.

At the end of second-quarter 2022, the weighted average projected effective yield on finance receivables portfolio was 14.2%, including non-accrual positions. There is a slight increase from a year ago. Same-quarter cash collections were greater than forecast, leading to a realized yield of financial receivables of 15% versus 22.9% from a year ago.

SWK reported book value of $21.15 per share and non-GAAP tangible book value per share of $18.48 as of June 30, 2022, an increase of 7.2% from the year-ago date. That figure excludes the deferred tax asset intangible assets, goodwill, and contingent consideration payable. Management views tangible financing book value per share is a relevant metric to value the company's core specialty finance business.

For the second quarter of 2022, SWK reported total revenue of $6.9 million, a 68.8% decrease compared to $22.3 million for the second quarter of 2021. Last year's revenue in this segment was driven in part by a $10 million milestone payment from Cara Therapeutics, which did not reoccur this year.

Net receivables segment revenue decreased to $6.8 million from $11.8 million. The decrease reflects a $3.1 million decline in interest and fees earned on finance receivables that are either paid off or paid down since the second quarter of 2021.

A $4 million decrease in net royalty income, primarily due to the achievement of return premiums that caused a step down in royalty rates, which is actually somewhat similar to the pay-off situation -- this was partially offset by $2.1 million in interest and fees earned due to new funding [options].

GAAP net income for the second quarter of 2022 totaled $565,000 or $0.04 per diluted share compared to $14 million or $1.09 per diluted share for the second quarter of 2021. The first-quarter adjusted non-GAAP net income generated by Specialty Finance -- this is a total of $4.16 million, a 50% decrease from the same quarter of 2021, which again reflects the non-recurring nature of the Cara milestones and small portfolio.

For the six-month period ended June 22, SWK's GAAP net income totaled $4 million or $0.31 per diluted share compared to $70.4 million or $1.35 per diluted share.

Looking ahead, the remainder to 2022 offers significant potential for SWK as we continue to identify companies, technologies, intellectual property, to which our investment vehicles are well suited and where strong risk-adjusted returns are likely to be achieved.

The current environment has expanded our opportunity universe as innovative companies continue to need growth capital amidst compression of other equity values, a great recipe for our structured non-dilutive solution. Anticipate several closings of financings in the second half of 2022 with the potential for some to occur relative near term.

Additionally, our work with Enteris Biopharma continues to advance as the company partners with pharmaceutical companies to develop orally delivered peptides and small molecules, advance its product pipeline, and maximize state-of-the-art manufacturing facility.

Just repeating myself, we always aim to be prudent stewards of SWK's capital and continue with our disciplined approach to underwriting. These dynamics, combined with the advancement of Enteris, have the potential to foster a sustained period of value creation for SWK. With that, I will now open call the questions.

(Operator Instructions) Kyle Bauser, Lake Street Capital Markets.

Great, thank you. Hey, Winston, thanks for all the updates today.

[Hey, Kyle.]

Maybe I'll just start with the capital deployment. So obviously, subsequent to the quarter, I think you made a $5 million investment in Exeevo and then another nearly $4 million in unfunded commitments. And I think based on your prepared remarks, you are confident to be able to employ a decent amount of financing in the second half of this year.

Are you able to kind of quantify I guess, how large your pipeline is, perhaps over the balance of the year, maybe the next 12 months? Just trying to just get a sense of where we think the invested assets can get to over the next 12 months or so.

A great question, Kyle. I appreciate it. I did want to also note that last night, I mentioned at the very beginning, we did announce -- well, I guess our partner announced a financing with Aziyo with its $25 million financing with $21 million funded upfront. So we're -- we are at work on this. We typically don't highlight what the total value of the pipeline is, but I think, suffice to say, it's grown from a small amount to just [several million dollars] by end of July.

Yes, I guess I'd say it is north of $300 million in terms of transactions we're looking at. And so, we're -- I think we're confident we'll be able to deploy our existing capital. And as noted in the press release, we are working on adding some debt capacity to the balance sheet, as well as thinking about other ways to keep growing the specialty finance business.

So I think we'll feel comfortable saying that we'll get the existing capital invested in the next couple of quarters and potentially more, depending on available liquidity.

Got it. I appreciate that. And I'm just curious about the dynamics playing out in the marketplace for potential targets that you're evaluating. Have you circled back with any that now appreciate cost of debt being cheaper than the cost of equity?

I guess this might apply more to public comps, but just curious if that dynamic has changed where these targets are re-evaluating how they want to fund their growth, whether that be through debt or equity.

I think you're definitely on to something there, Kyle. That's certainly what's happening? There's a -- we're definitely seeing reverse inquiry, I guess you can call it, from opportunities that we've had discussions with in the past. But yes, as we consider what our pipeline looks like, it's -- there's a good amount of it that's also new leads as well.

The financing dynamic, generally, in our space is interesting. Sometimes, transactions come together very quickly. With a totally new situation, sometimes they can take years to develop the relationship, and for the counterparty and SWK, of course, be ready to transact.

But we're -- I would say we're seeing a bit of both of it. But I do think that the reason the -- one of the reasons the pipeline has grown so much is the current environment. But I think the other is that -- post the ending of the strategic processes last year, I think that's getting back out in the market. And engaging with the market has been very helpful as well.

Great. And maybe lastly, just on the Enteris business, I know it's hard to predict milestones and et cetera, and some are confidential. But just to the extent you can share, what sort of catalyst should we be watching for the Enteris business? Thank you

Sure. So the obvious catalysts, of course, are going to be additional milestones from our partner, Cara, and -- I really wish I could give a whole lot more clarity into that agreement. But as we've discussed before, we have to keep the terms of those milestones confidential.

But I think in the recent past, we have said we do expect additional ones in the next couple of quarters, so that's -- I don't think much has changed from that perspective.

On other catalysts, there is a little bit of pipeline development that we're that we're pursuing. So there may be some [probably read-outs in] the second half of the year that may inform how we keep moving the pipeline program forward, and of course, look to finance that going forward.

And then of course, these advancements -- material advancements -- on the feasibility side, the business development pipeline continues to grow. And one of the interesting things there is that the team is now engaging with some larger companies, which is great.

But of course, that results in the timelines that, of course, compete with everything else these big companies have going on. So it can be difficult to really pin down. But those are really the things that we're most focused on, which could drive toward additional licenses in the future.

[Great], I appreciate it. Thanks for all the updates.

Of course.

(Operator Instructions) [Scott Jensen], private investor.

Hey, good morning, Winston.

Hi Scott.

Great to see continued progress. Couple of things that I picked out of the queue, and I just wanted to figure out how they go through the income statement and that as you had a payoff of the Beleodaq at $4.3 million and it's -- on your balance sheet, a GAAP of $4.2 million. Is that -- how does that come through, as well as Ostomy, which -- you got paid $6.1 million for a $3.9 million on the GAAP, should be in that $2.2 million, roughly.

One, I think that's obviously a good thing that you get paid in some way so quick. I'd just be interested in your comments on how you see that as well. So I guess those are my first two.

Sure. Great questions as well. So the -- just from an accounting perspective the -- got to talk about a little bit in the past. We will recognize income according to payments received in our forecast. So in the case of Beleodaq, we -- there's always been a capped transaction, and we always knew that there was a milestone payment that was going to be hit at some point.

And so, that was factored into the carrying value and how we recognize income over time. So that's why the payment received was relatively close to what the carrying value was. And so, from an income perspective, what we've been for a recording of the excess -- the excess payment we got at the very end for the effective yield of overtime.

And so your -- from your question, you would assume that there's not a big gain in the quarter from that payoff. Does that make sense?

Yes.

Okay. And then, whereas on the Ostomy royalty, we definitely didn't expect to get that payback so quickly. And so, it's always great getting your money back because it tells you, you did a nice job with the underwriting.

But in this case, we didn't expect it as quickly and so, the -- it will translate into a payoff gain in the third quarter. I'm not sure about the exact math. I don't think it will be exactly the 2.2 delta, but it'll definitely be ---

Above zero.

It will be well above zero for the quarter.

Okay, great. And then the other question I had is on the -- now that you have Washington coming in on buybacks -- and obviously, it's a pretty low percentage number, 1%, at least it appears in the bill for a buyback tax.

Does that influence you at all about how you see the buyback or where you see the value? Just because haven't seen any development -- I know you have the program out there, but just how you see the buyback in general.

Sure. I think it always depends on where you're able to essentially buy back the portfolio at a -- relative to its carrying value or its intrinsic value, right? And so --

Yes.

I think the -- as we think about different levels and how much we want to buy relative to market to various discounts, I think we would just factor in the taxes as if you're paying more per share, and it will just follow that tiered system, if you will. To give a little more obvious context, we certainly would want to buy back a whole lot more stock at a 50% price discount, than they would at market.

And so -- not trying to give guidance on, of course, where those -- what we (multiple speakers) -- at preferred levels. But I think, as a general concept, that's probably how we should be thinking about it because whether we're buying from the market or we're paying tax to the government, I think that's how -- it's somewhat irrelevant. It's cash going out to acquire the shares, so that's how we'll probably think about it.

Okay, great. Thanks. I'll let somebody else go. I appreciate it.

Thanks, Scott.

This concludes our question-and-answer session. I would like to turn the conference back over to Winston Black for any closing remarks.

Thank you. In closing, I appreciate your time and attention and look forward to future updates as we continue to advance SWK Holdings. I'd also like to extend my sincere wishes of good health to all. Thanks.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.