SWK Holdings Corporation (NASDAQ:SWKH) Q4 2019 Earnings Conference Call March 31, 2020 10:00 AM ET
Jason Rando – Tiberend Strategic Advisors, Inc.
Winston Black – Chairman and Chief Executive Officer
Conference Call Participants
Good day. And welcome to SWK Holdings Corporation Fourth Quarter and Full Year 2019 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note the event is being recorded.
And now I’d like to turn the conference over to Mr. Jason Rando, Tiberend Strategic Advisors. Please go ahead.
Good morning, everyone. And thank you for joining SWK Holdings’ fourth quarter and full year 2019 financial results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for three months and year ended December 31st, 2019. Press release can be found in the Investor Relations section of swkhold.com under news release.
Before beginning today’s call, I would like to make the following statement regarding forward-looking statements. Today, we will be making certain forward looking statements about future expectation, plan, event, circumstances, including statements about our strategy, interoperation at the development of our consumers through our product candidate. Plans for future potential product candidate, studies and expectations regarding capital allocation cash resource. These statements are based on current expectation and you should not place undue reliance on the statement. Actual result may differ materially due to our risks and uncertainty 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 disclaim any obligation to update information contain in its 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 corporate achievements during the fourth quarter, SWK’s fourth quarter and full year 2019 financial results and the status of the company’s portfolio.
With that I’ll turn the call over to Winston. Winston, go ahead.
Thank you, Jason. And thank you everyone for joining our first quarterly conference call as a NASDAQ listed company. We achieve much during 2019 and early 2020 which collectively has positioned the company for what we believe substantial long-term growth. While the acquisition of Enteris BioPharma in August 2019 and the uplisting of our common stock to the NASDAQ Capital Market in January this year are clearly important highlights to the past 12-months. But surrounding those transformative events has been the ongoing strong performance of our core healthcare specialty to life sciences finance business which continues to produce solid returns in 2019.
I will discuss each of these initiatives in detail shortly, but I feel I must begin the topic resonate in everyone’s minds the current virus outbreak. The coronavirus or Covid-19 is unprecedented global health crisis impacting all aspects of society in business. SWK like all businesses is not immune. We are actively taking measures to mitigate the impact of the situation as much as possible day by day. To ensure the safety and well-being of our employees and their families, we have instituted a company-wide work-from-home policy and halted work-related travel. With the ability to work remotely, SWK believes that its daily operations are largely insulated from the impact.
Unquestionably Covid-19 is having a far-reaching effect on the healthcare sector. Everything in hospitals and doctors offices, the companies that provide services, products and medications to patients and medical facilities. We are vigilantly monitoring the situation in a particular the impact on a portfolio companies, the liquidity and contingency plan. Since the outbreak began, we have been in regular contact with the individual management team initially focused on supply chain disruptions and more recently focused on business visibility. Thus far, we believe our portfolio is positioned to weather the challenges impacting their businesses. While we do expect some companies to see some choppiness in business strengths. We believe much of this will be demand to pull versus demand destruction as many of these businesses poised to rebound as hospitals and doctors’ offices reopen to address patient needs.
We believe this is due to SME case focus on investing small, medium lifestyle companies with strong investor property protecting commercial products that [Indiscernible] important demands within the healthcare system. Example of this is DxTerity Diagnostic which is developing a Covid-19 diagnostic test offer through the enterprise subscription testing service called KEEP AMERICA WORKING. Additionally, a number of our portfolio companies have publicly disclosed successful capital raise over the past 12-months as we disclosed in our portfolio update in February.
SWK remains well capitalized in the past with $30 million of liquidity between cash on hand and availability of our revolver. Unlike business development companies and investment plan, SWK’s balance sheet is not heavily leveraged illustrated by our positive net cash position. Given this, we prepared to prudently support our partner companies during this unprecedented time of stress and also importantly remain actively identifying opportunities to put our capital to work. Specifically thinking on that front, the unprecedented dislocation probably brought on by coronavirus outbreak should undoubtedly create compelling investment opportunities as small lean healthcare companies’ otherwise strong product offering will be in need of capital.
It is ideally suited to our business model. In response to the dislocation of our stock price, Board of Directors has authorized to repurchase about $2 million of the company’s common stock from time to time through a 10b5-1 trading plan in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. This program will expire on September 30th, 2020 and replaces the program that expired on February 29, 2020. SWK Holdings continue to evaluate additional stock repurchase programs as circumstances dictate.
In closing on these points, it is fair to say that coronavirus outbreak will continue to impact businesses for some time. However, we believe SWK structured focus will allow us to withstand the difficulties and potentially position us for near-term compelling opportunities they arise certainly when the price subside.
For those new to SWK, we provide unique financing solutions that allow our partners to monetize future cash flow with no dilution to their equity stakes. Our services include direct and embedded growth investments, first in debt financing, mixed offerings and product acquisition. We focus on transactions in the $5 million to $20 million range of which their substantial market to just certain dynamics and healthcare industry. As of December 31st, 2019, SWK’s portfolio royalties and structured credit back by royalties totaled approximately $175.1 million across 23 partners with a GAAP effective yield of 13.2%. That compares favorably to $175.5 million as of December 30th, $169.7 million as of June 30th and $167.1 million as of December 31st, 2018.
SWK recorded a book value per share of $18.31 to the December 31st, 2019 compared to $16.47 as of December 31st, 2018. After the [Indiscernible] also reported tangible book value per share for our specialty finance segment of $14.74 which eliminates our deferred tax assets and net asset value of Enteris.
SWK’s fourth quarter revenue is $9.4 million with our specialty finance revenue increasing 37% year-over-year driven by strong outstanding results. SWK’s consolidated fourth quarter GAAP net income was $8.8 million or $0.68 per diluted share and non-GAAP adjusted net income of $4.8 million or $0.37 per diluted share.
Our non-GAAP adjusted net income and non-cash items including the periods benefit from income tax accrual, mark-to-market changes in equity positions and the amortization of Enteris related intangibles. The core net income also was impacted by a $1.6 million write-down to a royalty asset due to lowering of our expected results for that asset. $4.5 million of Enteris related intangible amortization and $8.2 million benefit from income tax. For 2019, SWK reported $30.7 million in revenue, an 18% increase year-over-year with the specialty finance division driving [$30.4 million] results.
SWK 2019 consolidated GAAP net income was $23.8 million, or $1.85 per diluted share and non-GAAP adjusted net income was $21.4 million, or $1.66 per diluted share. 2019 SWK results were impacted by $4.8 million of Enteris related intangibles amortization and a $7 million benefit from income tax rules. Excluding the operating results of Enteris BioPharma and costs associated with that acquisition, the core specialty financed business generated adjusted non-GAAP net income of $24.4 million, or $1.89 per diluted share for 2019 and non-GAAP adjusted net income of $6.2 million, or $0.48 per diluted share for the fourth quarter of 2019.
The strong fourth quarter results capped a strong year for the specialty finance segment punctuated by 12.6% adjusted return on tangible book value. I’d like to note that this was also achieved without leverage. SWK was active during 2019 deploying capital with an aggregate deployment of approximately $32 million across specialty finance segment and Enteris. The trend has continued into 2020 with SWK deploying an additional $5.5 million during the first quarter through existing partners pursuant to their credit agreements. As noted earlier, we anticipating announcing additional transactions this year as our core business remains the primary growth driver for SWK.
As evidenced by these results, our specialty finance business in 2019 on strong footing and working hard to maintain our momentum in 2020 despite recent event.
I like to share a quick note on the Enteris related intangibles amortization. As we noted in the announcements for the acquisition, we do expect to receive substantial milestone payment under the existing license agreement in the near term to medium term. As a result of this, in GAAP accounting SWK will be amortizing life inflated tangibles over the expected receipt timeframe. Going forward, we expect them to executing with two-pronged strategy to build value for our shareholders. First of all, expanding beyond a traditional specialty healthcare finance business through synergistic transactions would offer both attractive valuations and upside optionality capable of driving returns for our shareholders.
The second concerns enhancing our position as a publicly traded company bringing in new investors to SWK. The uplisting of SWK stock in NASDAQ Capital Market is the centerpiece of this plan and we expect the move to NASDAQ will serve to SWK’s visibility and enhance trade and liquidity by broadening our field of our stock to the larger shareholder base as we execute our business plan and drive long-term shareholder value. These efforts are maximizing our investment in Enteris BioPharma.
And in the terms of the deal in August 2019, SWK paid $21.5 million upfront and agreed to share with the seller the milestones and royalty proceeds, the non-exclusive license agreement between Enteris and Cara Therapeutic which was executed on August 20th, 2019. In that license agreement, Enteris license its proprietary Peptelligence oral drug formulation to Cara for use with its oral KORSUVA drug development candidate. And Enteris which now operates as a wholly owned subsidiary of SWK is a biotech company offering another innovative formulation solution utilizing proprietary oral drug delivery technology, Peptelligence.
Revenue generating with a proven platform technology, internal development pipeline and manufacturing capabilities, we believe that Enteris is a classic diamond in the rough is yet to realize its full economic potential. Our vision is to provide capital and resources for Enteris to accelerate its growth which we believe has a potential pretty significant returns based on current and future licensing and royalty partnerships now its licensing economics that were not reflected in Enteris’ evaluation at the time of acquisition. Enteris currently derives revenue from technology licenses consisting of milestone royalties as well as formulations and development work and clinical trial tablet manufacturing. Similar to SWK specialty financed segment, Enteris had a strong 2019 with total 2019 revenues exceeding $13.5 million with approximately $620,000 of that realized books close.
We expect 2020 to be an investment year for Enteris as we positioned the company for the future. The expansion in the manufacturing capabilities Enteris in majority facilities underway and should be completed in 2020. We are working with Enteris to bolsters management team and augment its business development efforts. In February this year, Enteris hired new Chief Medical Officer Dr. Gary Shangold, a biopharma industry veteran with an unmatched blend of executive experience in drug development, regulatory and commercialization. Gary has been tasked with advancing Enteris’ external and internal programs and most importantly to work with the business development team to develop new licensing and partnership opportunities that leverage Enteris’ Peptelligence platform, which is key to the company’s future.
Peptelligence has already been validated in numerous clinical trials spanning multiple drug candidates including three executed technology out licensing agreements. In fact, the license agreement with Cara announcement in August in our opinion is a significant derisking event and our acquisition of Enteris. Enteris received an upfront fee of $8 million cash and stock on Cara is entitled to undisclosed future milestones and royalties, which is described previously, will be shared by a SWK and Cara. The Cara program is currently evaluating Oral KORSUVA in three separate clinical trial studies. In December last year, Cara announced positive top-line results from a Phase 2 dose ranging trial for oral KORSUVA for treatment of pruritus in patients with moderate to severe chronic kidney disease. Cara announced that they intend to advance to Phase 2 trial in the second half 2020. Top-line data from Phase 2 trials in atopic dermatitis and chronic liver disease, the dose it tried is about expected this year.
In conclusion, 2019 the fiscal year was a clear reflection point in the growth of SWK. And we look forward to benefiting from initiatives that have been undertaken. All this is made possible by wills and efforts of our SWK team. I’d like to thank our employees for their dedication and loyalty and our stakeholders for their continued support as we evolve our model at SWK Holdings.
With that I’ll now open the call to your questions.
Our first question comes from [Indiscernible] and company. Please go ahead.
Hi. Good morning, Winston. And thanks for taking my question. Absolutely, so you know to course been a difficult situation out there with Covid-19, so having $30 million cash available could do quite a bit of flexibility right now. And it sounds like there’s been minimal disruption in the portfolio which is great. So I know it’s a fluid situation but do you anticipate not having to deploy much capital to support your portfolio companies through the situation? There are certainly some opportunistic investments out there at these new levels. I guess just kind of curious how you’re thinking about deploying the cash in addition to that buyback.
Sure. Yes. Great question and something that we are looking at my moment of course is as things change. Yes, I think the first thing is it’ll be critical to make sure that we are there to support the portfolio to the extent that company is needed. Yes, but we have, yes, as I’ve noted in the prepared remarks, we have been working very closely with all the portfolio management team to make sure that they’re prepared and had contingency plans and some of them we are talking or even every couple of days. Among the things that we’re doing to help ensure there’s much cash around we of course making sure that these companies are aware of all the SBA and kind of disaster funding sources that may be available to them which you know will certainly help.
But then we of course is trying to seize them some new interesting opportunity, yes, that are kind of starting to come our way. Yes, I think we’ll be prudent in terms of deploying the capital as we of course don’t want to spend too much of it and find out that it would be great to have some additional capital around to help some of the portfolio companies. I think will — I think we’re taking these things in a measured pace and as we get new information and see new opportunities, well allocate that $30 million as best as we can.
Okay. Got it. It was helpful and we saw some positive results in December that you mentioned for Cara Therapeutic Phase 2 trial and looks like the next milestones here will be beginning to Phase 3 trial and the two other phase 2 data readouts later this year. So maybe more specifically as we think about the next 12-months can you speak about other key milestones we should anticipate as it relates Peptelligence platform?
Sure. Yes. So quite — will be Cara and will be, you are watching their developments of course. Look, we also will be watching this development effort ramp and as part of that we’re looking for additional feasibility studies there. What we are looking for any sort of movement we can have on internal pipeline and allies I think anything there but I think we are more focused on the technology itself and in getting additional pharmaceutical companies using it and seeking additional licenses. So that’s really what we’re going to be looking for then I guess on that manufacturing side, I think during the balance of this year of course we will be looking at the completion of that facility build-out, which we believe will also be helpful on business development front.
Okay. And just a couple more here. If we take out the loss associated with Enteris operation and just kind of focus on specialty finance. We saw a massive sequential step up and adjusted earnings from the $0.52 in 2018 to — or $1.89 in 2019. So I realized that the income producing assets increased year-over-year, but maybe you can kind of call out any other key contributors to the step up perhaps some of the expense side of thing.
Sure. Yes, on the expense side, the biggest driver would have been in the second half 2018 we did have some material write down which impacted the financial results. Then of course while we did have them write down in fourth quarter, yes, they’re much less significant year-over-year. So that of course contributed to it but on the top line as you noted the revenue was up quite nicely during the year. That was driven particularly in fourth quarter by an exit of our Cheetah Medical Facility as well as the outperformance of a couple of the royalties during the period. There was a strong quarter.
Definitely and just I guess lastly on a macro level, there’s quite a large disparity it seems between the current share price and the company’s book value; uplisting to the NASDAQ, I think certainly helped here and as awareness builds on the story, I think that gap will likely close a bit, but just kind of curious about your thoughts on the reason for the disparity here and any color you might have. Thank you.
Terrific. Appreciate that question. We do get that frequently the post the acquisition of Enteris and the uplisting in NASDAQ, yes, I think the discount to book did close quite considerably with the stock trading into the $13 right before the coronavirus crisis kind of destroyed the equity markets, that set of — that level was trading at a discount of course now it is trading in a more substantial discount in, yes, I think as we look at our capital resources and being prepared for this environment and thinking about different investments we can make about buying our stock back at these levels is certainly one that’s uses of that capital.
With that said if we do want to remindful of the needs of the portfolio and make sure that we are well capitalized to help in unforeseen circumstances and of course to be able to take advantage of very compelling opportunities. So I think in the near term it will was skewed on this buyback and then as things normalized and we continue to help the story we will get to extent we continue to trade at material discounts and will noted during the prepared remarks, we’ll keep looking at additional buyback opportunities to turn capital to shareholders in an efficient manner.
Got it. That makes sense. Certainly a good time for the buyback program. Well, some really great updates here and appreciate you taking my questions.
End of Q&A
This concludes our question-and-answer session. I now like to turn the conference over Mr. Winston Black for any closing remarks. Please go ahead.
Thanks. In closing, I appreciate everyone’s time and attention. And look for the future updates as we continue to advance SWK Holdings. I like to extend our sincere wishes of good health to all during these unprecedented times. Thank you all for attending the call.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.