SWK Holdings Corporation (NASDAQ:SWKH) Q2 2022 Earnings Conference Call August 11, 2022 10:00 AM ET
Company Participants
Jason Rando – Tiberend Strategic Advisors
Winston Black – Chairman and CEO
Conference Call Participants
Kyle Bauser – Lake Street Capital Markets
Operator
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.
Jason Rando
Thank you, and good morning, everyone, and 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 3 months ended June 30, 2022. The press release can be found in the Investor Relations section of swkhold.com other 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. Financial future potential product candidates and studies and our expectations regarding capital allocation and cash resources.
These statements are based on current expectations. 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 the SWK’s second quarter and first half of 2022 corporate and financial results.
Winston, go ahead.
Winston Black
Thank you, Jason. Thanks, everyone, for joining our second quarter conference call. As we celebrate our 10th anniversary as a life science focused specialty finance company, catering to small- and mid-sized commercial stage companies.
Before I discuss 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 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 the commercialization of life-saving and life-enhancing technologies.
Reflecting on the last decade, I’m very proud of what SWK has accomplished. We started 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 lifescience 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.
SWK team has successfully deployed approximately $676 million of capital into 48 investments, including a $5 million financing as completed in July and $25 million financing that was announced yesterday evening post quarter.
Utilize a deliberate contemplated approach in identifying investment opportunities that takes into consideration of the company and its management team potential of this technology, intellectual property as well the external factors that could impact our ability to generate a return. Such external factors could entail 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 selectively 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 to new transaction originations undertaking the repayment of — positions 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 a little [Indiscernible] 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 important benefit. We have a well-positioned balance sheet for the current environment, which includes $25 million of cash and untapped $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 2,000, 3000 and Microcap Indexes. Our addition to 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 for repurchase of the $10 million of stock, which we expect to be accretive to the company.
Returning to SWK finances. As of June 30, SWK 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 post quarter.
At the end of the second quarter of 2022, the weighted average projected effective yield of finance receivables portfolio was 14.2%, including non-accrual positions. There’s 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 assets and tangible 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 the segment was driven in part by a $10 million milestone payment from Cara Therapeutics, which did not recur 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 or non-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 step-down in royalty rates, which is actually similar to the payoff situation.
This was partially offset by $2.1 million interest and fees earned due to new funding. 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 income generated by Specialty Finance is a total $4.16 million, a 50% decrease since second quarter of 2021, which reflects [Indiscernible] nature of the Cara milestones and a smaller portfolio. For the 6-month period ended June 22, SWK GAAP net income totaled $4 million or $0.31 per diluted share compared to $17.4 million or $1.35 per diluted share.
Looking ahead, the remainder of 2022 offers significant potential for SWK as we continue to identify companies, technologies and intellectual property to which our investment vehicles are well suited and where strong risk-adjusted returns are likely to be achieved.
[Indiscernible] environment has expanded our opportunity universe as innovative companies continue to need growth capital amidst compression of other equity values, great recipe for our structure and non-dilutive solutions [Indiscernible] several closing financing in the second half of 2022 with the potential for some to occur in relative near term.
Additionally, our work with enteric Enteris BioPharma continues to advance as the company partners with pharmaceutical companies to develop orally delivered peptides and small molecules [Indiscernible] pipeline and maximize its state-of-the-art manufacturing facility.
Just repeating myself, we always aim to be prudent stewards of SWK’s capital and continued with our disciplined approach to underwriting. These dynamics combined with the advancement of the tariffs of the potential to foster a sustained period of value creation for SWK.
With that, I will now open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from Kyle Bauser of Lake Street Capital Markets.
Kyle Bauser
Maybe I’ll just start with the capital deployment. So obviously, subsequent to the quarter, I think you made a $5 million investment in [ Telo ] and then another nearly $4 million in unfunded commitments. And I think based on your prepared remarks, you’re confident to be able to deploy 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 or maybe the next 12 months? Just trying to kind of get a sense of where we think the invested assets can get to over the next 12 months or so?
Winston Black
Great question, Kyle. I appreciate it. I do want to also note that last night, I mentioned at the very beginning, we did announce — well, I guess our partner announced financing with the [Indiscernible] $25 million financing with $21 million funded upfront.
So 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 several hundred million by the end of July.
So 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.
Kyle Bauser
Got it. I appreciate that. And just kind of curious about the dynamics playing out in the marketplace for potential targets that you’re evaluating. Have you kind of circled back with any that now kind of appreciate the cost of debt be cheaper than the cost of equity? I guess this may apply more to public comps.
But just kind of curious if that dynamic has changed where these targets are kind of reevaluating how they want to fund their growth, whether that be through debt or equity?
Winston Black
You’re — you’re definitely on to something there, Kyle. That’s certainly kind of what’s happening. There’s — we’re definitely seeing kind of reverse inquiry, I guess you can call it from opportunities that we’ve had discussions with in the past. But yes, as we kind of consider what our ton looks like it’s — there’s a good amount of — there’s also new leads as well.
The [Indiscernible] dynamics generally in our space is kind of interesting. Sometimes transactions came 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 obviously, 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, the guys getting back out in the market and engaging with the market has been very helpful as well.
Kyle Bauser
Great. And maybe lastly, just on the Enteris business. I know it’s kind of hard to predict milestones and et cetera, and some are confidential. But just to the extent you can share, what sort of catalysts should we be watching for the Enteris business?
Winston Black
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 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 wins in that in the next couple of quarters. So that’s — I don’t think much has changed from that perspective.
On sort of other catalysts, there’s a little bit of pipeline development that we’re pursuing so that there may be some [Indiscernible] readouts 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, sort of advancements — material advancements on the feasibility side, the — 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 time lines that, of course, compete with everything else that these big companies have going on.
So it can be difficult to truly pin down, but those are really the things that we’re kind of most focused on, which could kind of all drive toward additional licenses in the future.
Operator
[Operator Instructions] Our next question is from Scott Jensen, a private investor.
Unidentified Analyst
Great continued progress. A couple of things that I picked out of the Q, and I just wanted to figure out how they go through the income statement, and that is you had a payoff of the [Teladoc] at $4.3 million and on your balance sheet at GAAP at $4.2 million. Is that how does that come through as well as the economy, which you got paid $6.1 million for a $3.9 million on the GAAP, which should be a net $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 2.
Winston Black
Great questions as well. So the — just from an accounting perspective, the — talked about a little bit in the past. We will recognize your income core into advanced receives in our forecast. So in the case of [Indiscernible] we — has 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 kind of factored in to 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, we’ve been recording of the excess — the excess payment we got at the very end for the effective yield over time. And so from your question, you would assume that there’s not a big gain in the quarter from that sort of payoff. Does that make sense?
Unidentified Analyst
Yes.
Winston Black
Okay. And then — whereas on the Ostomy royalty, we definitely didn’t expect to get that payback so quickly. And so we — it’s always great getting your money back because it tells you, you did it in a nice shot 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 will definitely be above [Indiscernible]. It will be well above 0 in the quarter.
Unidentified Analyst
Okay. Great. And then the other question I had is on the — now that you kind of have Washington coming in on buybacks. And obviously, it’s 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 I haven’t seen any development? I know you have the program out there, but just how you kind of see the buyback in general?
Winston Black
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 intrinsic value, right? And so 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 we were pay more per share, and it was kind of all of that sort of tier system, if you will. Just to give a little more obvious context, we certainly would want to buy back a whole lot more stock at a 50% [Indiscernible] than they would [Indiscernible] that market.
And so not trying to give guidance on, of course, where those — what we levels are preferred levels. But I think as a general concept, that’s probably how we should be thinking about it because it’s whether we’re buying it 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.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Winston Black for any closing remarks.
Winston Black
Thank you. In closing, I appreciate your time and attention and look forward to future updates as we continue to advance SWK Holdings. I also like to extend my sincere wishes of good health to all. Thanks.
Operator
The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.
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