SWK Holdings Corporation (NASDAQ:SWKH) Q4 2021 Earnings Conference Call March 28, 2022 10:00 AM ET
Company Participants
Jason Rando – Executive Vice President & Chief Operating Officer, Tiberend Strategic Advisors, Inc.
Winston Black – Chairman and Chief Executive Officer
Operator
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. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] please note today’s event is being recorded.
I would now like to turn the conference over to Jason Rando with Tiberend Strategic Advisors. Please go ahead.
Jason Rando
Good morning, everyone, and 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 31, 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, plan, events, and circumstances, including statements about our strategy, future operations and 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 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. He’ll provide an update on SWK’s fourth quarter and year-end of 2021 corporate and financial results. Winston, go ahead.
Winston Black
Thank you, Jason, and thanks, everyone, for joining our fourth quarter conference call. 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 Biotricity, medical technology company developing remote biometric monitoring solutions, as well as close to $10 million senior secured debt facility to MolecuLight, privately-owned medical imaging company virtualizing its proprietary fluorescent imaging platform technology funding $8 million upfront. And most recently, we closed a $6.5 million senior secured loan in March, Acer Therapeutics.
We believe these transactions, coupled with our last fall 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 SWK’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 markets sell-off in the life science sector, which has placed a premium on the ability for both public and private companies 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 historical levels. Pouring [ph] this effort, 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 increased 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, and of our borrowers, Misonix was acquired by Bioventus in the fourth quarter for $518 million. Upon closing a transaction on October 21, Misonix paid us $31.6 million to cover principal accrued interest in excess fees and we intended our Misonix stocks at $20 per share for $1.9 million of cash and 71,000 shares of Bioventus’ common stock, which are freely tradable.
The transaction is a great example of our ability to partner with companies and grow our investment as our partners grow. Because the initial $12 million facility in 2015 and grew it to $30 million support cyber systems and then its successor, Misonix, resulting in approximately 1.7 times cash on cash return with a 15% IRR.
Misonix 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. The 27 realizations that generated realized internal rate of return or IRR of 20%.
Operationally, SWK also enters 2022 for 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 a reconstitution of our Board of Directors, bringing on three new talented independent directors. We need to seek on Robert Hatcher and Laurie Dotter to join Marcus Pennington and me. Mr. [indiscernible], Ms. Dotter and Mr. Hatcher, each bring extensive financial, investing and operational experience, which will be critical to our growth in long-term success.
The SWK team is also encouraged by a steady progress made by our subsidiary in Enteris BioPharma. CEO, Rajiv Khosla and his team are pursuing a two-pronged growth strategy to maximize the potential of his intelligence and pro-permit technologies and the company’s expanded manufacturing facility and contract manufacturing business.
In 2021, Enteris signed six Peptelligence and ProPerma feasibility studies in peptide and small molecule drug bringing a variety of therapeutic indications that includes 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 for Enteris and the company into licensing agreements for the new developed oral product, potentially providing new sources of revenue for Enteris and SWK.
The Enteris is capable of generating for SWK, has been demonstrated by the milestone payments from Cara Therapeutics for the development of its Oral KORSUVA, which was engineered using Peptelligence for multiple therapeutic indications.
In December, Cara paid Enteris a $5 million milestone payment related to the program, of which Enteris retained $3 million. And during the year, Cara paid Enteris $15 million in aggregate and license fees, of which Enteris retains 6.9 million.
Turning to our finances. As of December 31, 2021, SWK’s portfolio of royalties and structure credit backed by royalties bought 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 31 2020. Note that the year-end figures here do not include portfolio movements executed this 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 book value per share of $20.80 as of December 31, 2021, which includes a $0.27 per share negative impact from the amortization of Enteris’ intangibles, the $0.17 per share negative impact from the costs associated with last year’s strategic review. This compares to $18.80 as December 31, 2020. As well financing book value per share was excludes our deferred tax assets, tangible assets goodwill, and contingent consideration payable hold $18 per share.
Management views its tangible financing book value per share as a relevant metric value the company’s core specialty finance business. For the fourth quarter of 2021, SWK reported total revenues of $15 million, a 38% increase compared to $10.9 million for the fourth quarter of 2020.
Revenue primarily consisted of interest in fees earned on our finance receivables and royalty payments generated by our portfolio companies, as well as revenue generated by Enteris. The increase in revenue was primarily due to an increase in fees and interest in the early payoff of two term loans and the Cara 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 finance receivables portfolio and due to milestones earned related to Cara license.
Income before taxes for the fourth quarter of 2021 totaled $8.4 million, compared to $3.4 million in the same period of previous year. The increase was driven apart by our better revenues during the quarter, plus a decrease in expenses, driven by less amortization of intangible expenses, as well as decreasing the change in the fair value of acquisition related contingent consideration.
For the full year 2021, we reported income before taxes of $33 million. This compares favorably to net income before taxes of $3.7 million, with a positive variance from both the same factors noted a moment ago.
The GAAP net income for the fourth quarter ended December 31, 2021 totaled $6.3 million or $0.49 per diluted share, a rate of $4.6 million or $0.36 per diluted share in 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 was $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 31, 2021. This is a decrease compared with income-producing assets of $204.7 million as of December 31, 2020.
Looking ahead, 2022 has a potential to be a very fruitful year for SWK, given the synergies between our financial offerings, the ongoing need for small and mid-sized life science companies to raise capital to fund innovation. I’d note earlier in the presentation with visual roots of financing potentially less available due to market uncertainties. Combination of a long-term investment strategy, permanent capital base, flexible mandate and lack of regulatory constraints places SWK in advantageous position. These dynamics combined with growing momentum at Enteris offers potential to foster same period of value creation for SWK.
With that, I will now open the call to your question.
Question-and-Answer Session
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Michael Diana at Maxim Group. Please go ahead.
Michael Diana
Thank you. Hey, Winston.
Winston Black
Hey, Michael.
Michael Diana
In your core finance receivables business, how, if at all, do you think rising rates will impact that business?
Winston Black
Good question, thanks. Thank you for it. Yeah. I think we’ll probably see it in a couple of ways. One, there just with the associated equity market volatility and it could – commented on that in the prepared remarks before. And so that’s obviously the first way in terms of generating potential new opportunities.
From a cost to the cost of our facilities to our borrowers have given the LIBOR floors that most of our loan agreements have in them. I think at least initially, there won’t be that much of an increased cost associated up with our facilities with – for those portfolio companies, at least initially, but then, of course, as the extent that things continue, then there’ll be an increase in our overall interest income associated with those positions.
Yeah, I think on – then, I think lastly, of course, the main factor that is potentially driving new opportunities for us, beating the equity market volatility, to extent that any of our portfolio companies do need to finance in the near-term, then that of course will impact their ultimately, the cost of equity with which to raise capital. So yeah, I think they’ll be impacted at that point, potentially. And I think those are the primary ways we we see it impacting the portfolio.
Michael Diana
Right. And as you do make new loans, will you be able to command a higher rate on them do you think?
Winston Black
Yeah, interesting question. It probably depends on the bigger circumstances in which, like I said, always does. But what I mean by that, yeah, I think the segments where we compete that have been the most competitive, I think as volatility continues, some of the marginal capital providers, natural for them to exit, and potentially not be as aggressive as they were before. So you may see the lighting up in those segments, which are primarily visual venture back opportunities.
Yeah, but I see less kind of a impact in that segment than in other areas where we receive like capital in the companies that have nontraditional like the sponsors, or high-net worth funded or potentially founder bootstrap. I think in those cases, there’ll be less competition, and we’ll be able to negotiate better deals on behalf of the company.
Michael Diana
Okay, great. Thanks. And on Enteris, you’re saying your release that you’re – the six feasibility agreements could advance to licensing agreements over the medium-term. To put any sort of bracket on that, I mean, you talk about two to five, three to six, one to four?
Winston Black
Yeah. I would say in the one to three-year range and that reason for the wide range is that is a couple of fold. I guess one, the timing depends on, of course, our partners’ internal development timeline. And so to the extent that timeline involves a very robust Phase 1 program, for example, that could take a year to complete.
And so there’s that. And then the second biggest factor on that is cost tracking the optimum time to actually seek the license. Because as the pharmaceutical development candidate gets more and more derisked than the value that license could potentially get – gets greater and greater. And I think it’s one of things that we’re working on with management there is at what point was the kind of optimal point to negotiate that license.
So, because by way of example, the Cara agreement, the license agreement was present, right at Phase 2, where there had seen indications of efficacy, the program, from their perspective, was more risk, particularly since their injectable formulation had such great clinical success.
In the case of a pharmaceutical company that is perhaps earlier in their development stage, say, they’re somewhere in Phase 1. The program is not all that derisked from their perspective that may not be willing to pay as much for potential license. And then so there’s a little bit of titrating, kind of the optimal timeframe to actually strike that license. And so by that language, because it’s a little bit uncertain, but it certainly is more promising now than it was before.
Michael Diana
Okay, great. Thank you very much.
Winston Black
Sure.
Operator
[Operator Instructions] Our next question today comes from Scott Jenson, a private investor. Please go ahead.
Unidentified Analyst
Thank you. Good morning, Winston. Great quarter. So I have a couple of questions on the financing side, or I mean, on the financial side. You said your costs for 2021 for Enteris were $3 million higher. And I see that you’ve started to recruit for Phase 2 of your Leuprolide trial expected results they say on the site, May. What is the plan for Phase 3? And what would the cost maybe be in the back half of the year if you move on to Phase 3? And is that a decision SWK controls alone?
Winston Black
That’s a good question, Scott. So yeah, the – we’re – increased expenses last year associated with this program and we are in the midst of recruiting Phase 2. But the timing will hopefully that ends up being exactly what it is. But the, I guess with respect o ownership of that program, we have – we do have full control of the program. So the timing of advancing is largely up to us. But of course, also depends on having with the FDA in terms of having into Phase 2 meeting and this sort of thing.
In terms of the Phase 3 costs, we haven’t announced what that is yet, but in itself, I don’t want to comment on here. I think, as we think about developing our internal assets, generally, we’re currently contemplating the best way to do the fans those to what extent do we want to finance internally? We have opportunities of management externally, what are those? And then of course, there comes a question of the optimal time to seek an out license of the program to have another partner finished development.
So I think all – those are all things that we’re considering as we look at that Phase 3. To the extent that, our Phase 2 results are key to be robust. And as we expect, there may be opportunity to license it at that point. But again, I don’t want to make any promises here, because we’re still waiting for the data to come in and make sure we understand what the Phase 3 path is before comment on the timing and costs.
Michael Diana
Excellent. That answers all the questions I was going to ask there. The next one is on the B&D Dental loan, which I’m sure you’re happy to hop off your sheets after a number of years. How will that flow through the first quarter? Is it all flow through the…?
Winston Black
Yeah, it’ll – since that the payment was in excess of our carrying basis, that the increase will come through his income in the quarter?
Michael Diana
Excellent. And then going on to flow next, I know, I saw that it went into non-accrual status, which is a little interesting, because you had raise so much money between yourself and the $23 million led round by Farallon Capital. So is there anything going on there? Or is that just a company choice on their side?
Winston Black
Yeah, this is always the difficult part of being a public specially lender, in the sense of matters come up when we’re dealing with confidentiality [indiscernible]. I mean, certainly fishing going on.
Michael Diana
That’s why I asked it.
Winston Black
Yeah, it’s not an indication of all things going exactly as planned. So I can say that we are actively working with the company and Farallon to figure out exactly what we’re going to do there. We’re definitely disappointed that the things have been as challenging for the company as they have been. And we’re optimistic, we’ll have a pretty good idea in the neck, probably used to be weak, outside maybe five, six weeks of in terms of what the actual direction for working that position out will be. We’re actively talking with them literally every couple of days, so I put them to stay on not to distant future.
Michael Diana
Appreciate it. And then just thinking about, as you said, there’s a $0.17 hit last year for the special committee. And amortization is going to drop about $2.5 million this year from last year, both of course, helping. Are there any further costs from the special committee that will show up in the first quarter?
Winston Black
Yeah, that there will be some that mainly because the last Carlson offer was still being considered by the special committee. And then so as a better result, even though it was on the very beginning of January that there will be some costs associated with it. I think, certainly, the sort of expenses will be much less than they were last year. It was fairly robust and out pursuing the various things and we will have some in the first quarter at this point anticipating either after.
Michael Diana
Okay. And then the last one is just on Kara’s they reported another good news announcement this morning on the oral from Phase 2 of the ones that are in Phase 3, just that they got a good anti-age versus placebo. So it looks like that’s all heading in the right direction. They talk often on their presentations about it having such, the KORSUVA has such a potential in pain management, both because it’s non addictive, as well as they’ve seen such a great response. Are any of those – if they go in any direction, Or it’s Enteris under any of those? Do they have the exclusive right with KORSUVA? If they went in an oral direction for a trial like that? Or is it a better option?
Winston Black
No, no, no good. Great question. So that the license that Cara has taken is I guess one way to think about it is basically kind of freedom to operate with an oral version of KORSUVA kind of wherever they want to take it. So the indications aren’t like carved up, because it just carries on molecule. And so they own it, they can do what they want with it. But yeah, the – any sort of when we get to the royalty portions of that agreement, the older sales and so whether they’re from a sort of paratus related indication or however, else physicians may use it. We will be rolling on average.
Michael Diana
Okay, great. Thank you. I’ll let somebody else ask. Appreciate it. That’s cool.
Winston Black
I appreciate it.
Operator
And ladies and gentlemen, this concludes your question-and-answer session. I’d like to turn the conference back over to the management team for any final remarks.
Winston Black
Thank you, operator. In closing, I appreciate everyone’s time and attention and look forward to future updates as we continue to advance SWK Holdings. I’d like to extend my sincere wishes of good health to all. Bye-bye.
Operator
Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.
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