SWKH - NASDAQ

Good day, and welcome to the SWK Holdings First Quarter 2022 Financial Results Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jason Rando with Tiberend 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 3 months ended March 31, 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 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 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'll provide an update on SWK's first quarter 2022 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone, for joining our first quarter conference call. The first quarter 2022 results show increased interest in SWK as preferred provider of nondilutive funding for small and midsized life science companies with differentiated commercial products. We completed 2 transactions during the quarter, deploying $18.5 million of capital with 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 structured debt financings included $12 million to advanced 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 new 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, health care life science -- life sciences growth companies [ really ] 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. To point this effort, we have in excess of $63 million in cash plus revolving for -- to meet opportunities in the market. As we announced last November and reaffirmed in early January, we remained committed to focusing on in growing SWK's core specialty finance business. The new Board of Directors now in place, we are focused on advancing our work to evaluate and implement strategic measures to improve our focused 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 [ annual bill ] to expire on its termination date at the end of this month. We anticipate further announcements regarding this work in the coming quarters. For 2012, SWK 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 state progress made by our subsidiary in Enteris Biopharma. Rajiv Khosla and his team are pursuing a two-pronged growth strategy maximize potential of its Peptelligence and ProPerma technologies, the company has expanded manufacturing facility and its contract manufacturing business. Enteris is set to present 2 abstracts at the end of 2022 Annual Conference in June, highlighting research in oral formulations of leuprolide. The compound incorporates Peptelligence technology that enables oral delivery of medications that were traditionally injected or infused. The company is also participating in the CPHi North America Conference to showcases drug delivery technology and contract manufacturing services. Enteris' 4 ongoing feasibility studies are in a variety of indications that includes cancer, women's health and central nervous system disorders. In these programs Enteris partners with drug companies to engineer the drug for oral delivery. We [ evolve ] this process is advance the development of the oral peptide or small molecules that could advance to licensing agreements between Enteris' partners during the medium term, potentially providing new sources of life sciences income. Turning to SWK finances. As of March 31, SWKs 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 nonaccrual position that was carried at $8.3 million. The company also received a $5.6 million cash fan from Acerus Pharmaceuticals and 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 nonaccrual positions and with a slight increase from a year ago. Cash collections were better then forecasts leading to a realized yield of our finance receivable portfolio of 22.5% versus 16.7% from the 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 2022, SWK reported total revenue of $11.1 million, a 19% (sic) [ 18% ] increase compared to $9.4 million for the first quarter of 2021. That growth was largely driven by $2.6 million from fees and interest due to the early payoff of the 2 loans I noted before. The GAAP net income for the first quarter of 2020 totaled $3.5 million or $0.27 per diluted share compared to $3.4 million, $0.26 per diluted share for the first quarter 2021. For the first quarter, adjusted non-GAAP net income generated by our 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, combination of our long-term investment strategy, permanent capital base, flexible mandate and lack of regulatory constraints places us to be in an advantageous position. These dynamics, coupled with growing momentum and tariffs offer the potential to foster a sustained period of value creation for SWK. With that, I will now open the call to your questions.

[Operator Instructions] Our first question comes from Kyle Bauser from Lake Street Capital Markets.

Winston, thanks for all the update. So maybe we can just chat on the activity out there. I mean, with things as depressed as they are, debt is becoming more attractive, I think, than equity, particularly in its mid-cap 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 their financials through better equity?

Sure. Good question, Kyle. I think certainly, your observation is accurate as those equity values have been compressed, it really highlights just really how accretive 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. I just say, generally speaking, the kind of pipeline activity is definitely brisk, and we are seeing a good amount of deals get done. So between ourselves and of course, in the rest of the market. So I think it's a pretty robust period out there.

And I appreciate that. And it sounds like, I think you said you've got access to about $63 million that you could deploy. So your [ price ] is pretty good for a while. But 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 [ rate ] interim and there's plenty of activity and capital at your disposal that you -- I'm just kind of curious how you're thinking about kind of leverage going forward.

Sure. Yes. We've talked about this in the past and I kind of made an indirect reference to this during my prepared remarks today. So yes, but we're definitely evaluating kind of what our optimal capital structure should look like. With -- going back to November last year and early this year, we have 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 about 5, 6 weeks in with our new Board, we're fairly focused on looking at this issue as well as kind of all other issues to make sure that we are kind of well positioned for the business going forward. So we don't have anything to announce right now regarding what that quantum of debt capital may potentially looks like that we're considering putting on. But suffice to say, we are evaluating that and expect us to be able to make some announcements in the coming months.

Appreciate that. And if you were to potentially kind of scale up by taking more leverage, what -- 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 are you at capacity? And so you maybe want to add a member or 2 to your investment team? Or just kind of trying to understand if you do kind of scale up, what sort of resources would you need internally?

Sure. Again, another [ excellent ] question. From 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, yes, the first quarter, I think [ JD ] started on March 1. And as part of this, we also implemented a dedicated business development kind of function at SWK. So we're -- I think we're well positioned. And I think we're always looking for exceptional investment professionals. So it would definitely be on a lookout for additional resources as we look to grow. But at this point, we're not currently hiring someone from that perspective.

Fair. Got it. No, I appreciate that as well. And just lastly, on the Enteris business, you mentioned, of course, the 4 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've got 4 feasibility studies is the plan to kind of license them? Or do you want to kind of bring them to the FDA internally on your own? Just trying to understand what the playbook is for your internal assets?

Yes, sure. So yes, I guess one, a clarification there. The feasibility studies are actually work that the Enteris team is doing with third-party pharmaceutical partners. So those aren't necessarily -- those aren't our assets. Those are our partners' assets that we are -- that we're evaluating using our technology to make oral versions of those assets. And in that business development pipeline continues to build and we're -- and that can potentially be a very important revenue driver for us because those sorts of feasibility agreements are the things that turn into license agreement like the Cara license agreement. On the internal pipeline, we're -- we talked about the one program that we're really focused on, and we're -- so at this point, that's really kind of what the primary focus on 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.

[Operator Instructions] Our next question comes from [ Scott Jensen ], Private Investor.

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

Yes, it's a very interesting question. The -- on one hand, our structured debt transactions are typically indexed to LIBOR. And so we are getting that benefit from -- across the portfolio as well as on new deals from changes in LIBOR. And obviously, at some point, we'll be moving to a new reference rate. So we do see the benefit from that perspective. And on overall pricing, I think things have remained relatively constant. The market hasn't moved. Yes, I think all that much, generally speaking, I would say, is 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 formal conditions continue into the second quarter perhaps throughout the rest of the year, how that actually looks. We certainly will be looking to 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 leuprolide trial, which is recruiting according to the clinicaltrials.gov. What is the time frame we could expect to get that Phase II data? Since you're kind of looking at a month like -- do we have like second half of this year, first half of next year? Like what -- do we have any kind of guidance for when that might be?

Sure. The -- we -- I personally hope that we would be able to talk about it at some point this summer, but the recruitment is taking a little bit longer. Issues that we're seeing on patient recruitment, not all that dissimilar from what other pharmaceutical companies have noted over the last couple of quarters. So I think we're eyeing some time kind of later in the second half of this year to be able to have some results. But at this point, 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 and kind of as expeditiously as possible, but we'll see because that's really the gating factor on the timing.

And then to kind of follow on Kyle's point about the Phase III, 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 III? Or this -- or would you get more value by doing it yourself or kind of see that?

Yes. The there's definitely an art on the licensing side in terms of do you license preclinical Phase I, Phase II, Phase III kind of post-approval. And with that kind of sliding science scale as you advance the -- generally, with the royalty rates and so forth kind of increasing, you of course have to spend more of your own millions and be more at risk to get to those higher levels. I think frankly, it depends on what the -- how the data shape up. And what we're seeing from a regulatory perspective is required to actually get an asset across the line. I think we'll -- those sort of things will inform what the Phase III costs would be and then we'll essentially make that decision at that time. I think though, to the extent we are able to demonstrate in patients that were having a desired effect, 505b2 type program that may be the optimal time to license it. But we would, of course, 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 can be one of those people to catch the stock?

Yes. A well-timed question. [Indiscernible] referring back to what I noted the...

[ The fact is ] my friend and myself who might have caught it.

Sure. Yes. So we're definitely thinking about that. I think we all had hoped that we would have been in 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 5 weeks, 6 weeks, something like that. We're definitely looking at that. We're looking at everything, of course, 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 get -- to be able to make more announcements about buybacks and so forth in the coming months.

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 and good health to all. Thank you.