SWK Holdings Corp (SWKH) 2022 Q3 法說會逐字稿

Good morning, and welcome to the SWK Holdings third-quarter 2022 financial results conference call. (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.

Good morning, everyone, and thank you for joining SWK Holdings' third-quarter 2022 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months ended September 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 our consumer and 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 our 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 and joining me on today's call from SWK Holdings is Jody Staggs, President and Interim CEO; and Yvette Heinrichson, Chief Financial Officer. They will provide an update on SWK's third quarter and year-to-date corporate and financial results. Jody, go ahead.

Thanks, Jason, and thanks, everyone, for joining our third-quarter conference call. I'm excited to be speaking to you in my new role at SWK. This has been a productive past few months for the SWK team, and I look forward to sharing our progress. However, before doing so, I want to thank our Board for helping to ensure a successful leadership transition.

I also want to thank my predecessor, Winston Black, who has left SWK in a strong position. Winston is a longtime friend and valued mentor. I'm grateful for this opportunity to build on the foundation he's left.

I'd like to start with an overview of how I see the current business, as well as a vision of where we are going. SWK's mission is to be the partner of choice for small to mid-size life science companies seeking non-dilutive financing to fuel the development and commercialization of important life-saving technologies.

Since 2012, SWK has completed transactions with nearly 50 parties, funding almost $700 million. We think the results and the numbers produced over the past decade demonstrate that we are fishing in at attractive pond. Our focus is financings in the $5 million to $25 million range, and we have created a niche in non-name brand-sponsored situations, a minimally competitive field.

We also focus on smaller off-the-run royalties, while most larger competitors gravitate towards Tier-1 high-profile royalties. We believe and think the numbers demonstrate that the returns in this segment are highly attractive. SWK targets a low- to mid-teens return on our financings. During the third quarter, our effective yield was 14.3%, while our realized yield was 17.5%. We believe these returns are at the high end of our comp group.

Our sweet spot has been and remains financings in the $7.5 million to $15 million range. However, in the third quarter, we closed two $25 million financings with larger borrowers, demonstrating that our platform is valuable to companies on the larger end of our target range.

I think about the value of SWK in two buckets. The first bucket is our financial and balance sheet assets, and the second bucket is our intangible assets. I think our financial assets are somewhat obvious to all, and you can certainly review these in the press release and the marketing deck.

The first is our existing portfolio of yielding finance receivables and other tangible book value assets. And this is about $19.14 a share. The second is our deferred tax asset, which is on our books for a $1.35 a share. And the third are tariff assets, which are on our books for just over $1 a share.

What may not be as apparent to everyone is the intangible assets that SWK has built over the past decade. The first of these is a highly motivated and skilled team. Our corporate team currently has six, which will increase to seven next week. We anticipate adding a couple of additional investment professionals in 2023. While the team isn't large the team does possess the skillsets specific to succeed in our market vertical.

The second intangible asset is our reputation as a trusted partner. Borrower partners and referral sources know SWK will do what we say we will do and do so in a timely fashion. They also know that we'll treat our partners with respect. And this asset that has taken years to build is an asset that we protect.

The third intangible asset is an extensive proprietary deal sourcing via our network of executives, Board members, intermediaries, co-lenders and former deal partners. This network also can provide references for potential borrowers.

And fourth, we have a strong underlying track record with a 20% IRR and 1.4 times MOIC on our 30 exits.

Looking ahead, our leadership team is energized to build upon these valuable assets as we seek to scale our platform and drive per-share value. We will do this while maintaining underwriting discipline and always with an eye to protecting and growing our shareholders' capital. The good news is we don't have to reinvent the wheel and can utilize a tried-and-true path.

In the near term, we need to scale the platform. To facilitate this, we are evaluating adding leverage to our balance sheet, and we will do this in a responsible fashion and being mindful to our particular financing assets. While we are flexible and will consider various structures, the path of least resistance to add leverage will have two steps.

The first is we need to upsize our existing ABL. Our current $22 million ABL is too small for SWK, and we're working with our existing lender to address this, and we hope to have an update on this by year end.

The second step would be to [export unsecured bonds]. As a reminder, earlier this year, we filed an S-3 in anticipation of exploring this path. The bond market has clearly softened since we made that filing. But based on recent specialty finance bond offerings and considering our asset yields, we continue to think this is an attractive alternative. We will need to receive our secure lenders' approval to issue a bond.

Adding appropriate amount of leverage has multiple benefits. First, we will improve our return on equity, which is a metric closely linked how financial equities trade as a percent of book value. And secondly, the additional capital allows us to pursue more financings, which helped develop SWK team and our ecosystem. So in the near term, bring our leverage, deploy it, and increase our ROE.

In the medium term, we're also exploring a third-party asset management strategy. Many allocators, as well as generalist credit funds find our life science niche attractive and would like a means of allocating capital to the space.

SWK has a platform, know-how, and track record that is valued. We are in the early stages of exploring what might be possible here, and anything we do will require finding the right partner, and of course, we will need to benefit our shareholders. We have taken an initial concrete step on this strategy by hiring a firm to audit our full investment track record.

These initiatives are focused on driving SWK case value per share, which is our north star. One where we can augment this metric is more to capital allocation, and in particular, repurchasing stock at attractive valuations.

During the third quarter, we purchased over 34,000 shares at a $17.49 average cost via our 10b5 program. We've also been buying back stock post the quarter -- post the quarter close. It's important our shareholders know we have a sophisticated Board which balances the return that can be achieved through buying back stock with return for making additional loans and royalties.

We don't focus on the stock price on a day-to-day basis, but over a reasonable period of time, the Board and management team want the stock price to reflect the value of our assets and platform. Given SWK's strong foundation as well as a clear path to scaling the platform and driving shareholder returns, you can understand why the team is energized by the opportunity presented to us.

And while our portfolio companies are not immune to the current economic and capital market challenges, our outlook for the remainder of 2022 and into 2023 is optimistic. We are in communication with our existing portfolio companies to ensure they had adequate liquidity and are not in denial about the challenging environment.

However, we are also playing offense and targeting several financing opportunities as the ongoing market volatility makes our nondilutive structures attracted to companies in need of capital.

With that, I would like to turn the call to our new CFO, Yvette Heinrichson, for an update on our financial performance for the quarter. I've worked closely with Yvette for several years and excited to see her promoted to CFO.

It's a well-deserved promotion, and I'm confident our financial and accounting functions are in great hands. SWK and our shareholders will benefit from initiatives that Yvette is spearheading, including optimizing our capital structure and streamlining processes required to support financial receivables growth.

Yvette, I'll turn the call over to you.

Thank you, Jody. I appreciate the kind words, and I'm very happy to be here. I'd also like to thank you all for joining us this morning. SWK had a solid third quarter that was in line with expectations. As of September 30, 2022, SWK's total investment assets grew by 8% to $222.2 million from $206.3 million for the third quarter of the previous year.

Please note that that quarter-end figure does not include portfolio movements post quarter end. At the end of the quarter, the weighted average projected effective yield of our finance receivables portfolio, including nonaccrual position, was 14.3%. As Jody mentioned earlier, this is above SWK's historical range and represents an increase from 13.8% from a year ago.

Third-quarter realized yield on finance receivables was 17.5% compared to 18.8% one year ago. SWK reported non-GAAP tangible financing book value per share at $19.14. As of September 30th, 2022. That's a 9.4% increase from $17.50 as of September 30, 2021.

This figure excludes the deferred tax assets, intangible assets, goodwill, and contingent consideration payable. Management views tangible financing book value per share as a relevant metric to value the company's core finance receivables segment. The finance receivables segment's adjusted return on tangible book value was 11.1% as of September 30, 2022.

For the third quarter of 2022, SWK reported total revenues of $13.6 million. This is an increase from $9.6 million for the third quarter of 2021. The increased revenue included recognition of $5 million of milestone revenue from Cara Therapeutics.

Finance receivable segment revenue decreased to $8.5 million from $9.4 million from the previous year. The decrease in finance receivable segment revenue was primarily due to a $1.3 million net decrease in royalty income, which was primarily due to the achievement of return premium that caused a step down in royalty rates.

That decrease in revenue was partially offset by a net increase in -- of $0.4 million in interest and fees earned on our finance receivable.

GAAP net income for the third quarter of 2022 totaled $6.6 million or $0.51 per diluted share compared to $2.2 million or $0.17 per diluted share for the third quarter of 2021. The 2022 third quarter's net income reflected $1.1 million of severance payable to the former CEO.

For the third-quarter 2022, adjusted non-GAAP net income generated by our finance receivables segment was $6 million compared to $7.7 million for the third quarter of 2021. Back to you, Jody.

Thanks, Yvette. In conclusion, SWK's fundamentals are strong, and the current market conditions are ideal for customer financing solutions. We are working with our existing portfolio companies to ensure they understand and are prepared for the challenging environment we face.

We are urgently pursuing opportunities to scale our platform while thoughtfully deploying [your] capital. We are well positioned to capitalize on our reputation as a financing partner of choice for small and mid-size life science companies.

And with that, I'll open the call for questions.

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

Hey, guys, this is Jake on here for Kyle. Thanks for the updates and taking the questions. I just have a couple of them for you guys today.

Hey, Jake. Good morning.

So to get started, I was just wondering about the update on timing for adding leverage to the balance sheet? I know you talked about it being in the short term, but is that looking into Q4, Q1 early?

Yes. You know, if it was up to me, I'd snap my fingers and that would happen now. I think I think the first step, Jake, I expect us to have an update very near term on that, so fourth quarter on the ABL. The second step, which we think could be the unsecured debt, I think it could happen relatively soon. There's a few challenges there.

Number one is we do have to have our unsecured lenders' approval to do a bond. And so, that's the focus right now. And the second is the market conditions. It looks like today, we're back in a bull market. So that's great. The [10-year] is down, and it's potentially opening up a window here. Six weeks ago, some folks didn't get bonds out.

So if the markets open and we can get the paperwork lined up, it's something that I think we can get done in a reasonable period of time. I don't want to say an exact date and the fourth quarter would be aggressive. But I think the watchword I want to convey is there's the sense of urgency to get these things done.

Yes, thanks for elaborating on that. And my next one talks about headcount. You mentioned you guys are currently at six and looking to be at seven, I believe. And is there a potential need to keep adding more, or is the team all set in place?

Yes. So we have an investment professional starting Monday and the -- that will bring our investment team to four, including me, and then our financial -- finance and accounting team to three. I think we're at a decent baseline. We are looking at and are considering bringing on an experienced mid-level investment professional and then a business development person in 2023.

If we can make those two hires -- and those aren't -- they're not things that need to happen tomorrow. I think that really puts the team in a great spot and gives us the throughput needed to scale the platform. So right now, I think, we've got a decent baseline.

If we can add those two, I think we're going to be in great shape. And we just need to find the right people. We're really focused on -- every hire needs to be better than the people already here. And so, we're being selective.

Yes, that's a good process for that and that makes a lot of sense. And I just got one more for you guys today. So what changes are you seeing in the level of deal activity out there compared to earlier this year? Thanks.

Yes, the -- there's been some fits and starts. Our portfolio is -- it's very healthy. If we had capital right now, I think we would have several deals that we would be pushing to close. I think what we're trying to do is really upgrade the situations we're looking at so the rates may be roughly the same as the things we've looked at. But we're looking to finance better assets, higher-quality assets, more equity, better lender terms.

There are numerous life science biotech companies that are in desperate need capital and are reaching out and presenting themselves to second lien or quasi-equity situations. And the returns on those, of course, these data returns look amazing, but we're really not focused there right now. So pipeline, strong, lots of flow, and we're really just trying to sift through the things that makes sense for SWK.

Awesome. Thank you.

Okay, thank you. I appreciate the question.

(Operator Instructions) Scott Jensen, private investor.

Hi. Good morning, and congratulations, Jody, on your new position. And I too want to thank Winston for his good stewardship of the capital over the years. I guess my first is thank you on the buyback and keep going. I'm glad that you still are. I think that's a good use of capital at these price levels. The second is you've answered most of them, as far as capital and deal flow. So thank you.

As you talk about going into the asset management space, are the regulatory costs that come from that? And does that then determine the size that you need to make it a worthwhile venture?

Yes, thanks for the question. Just to echo Winston, the quarter -- these are -- as I said, they are seeds that were planted quarters and years ago under his leadership, so we're still benefiting from it.

The asset management concept is early. It's something that makes sense for us given what we do. The specific question around regulatory costs, we do have an [RIA]. So SWK possesses an RIA, so we have that already taken care of.

I think a lot of it depends on what it is. Again, this is me whiteboarding. This isn't necessarily a final plan, but if you go the GP, LP fund, which would be the hardest to do, I think, particularly as we will be first-time fund folks, I think -- yes, I think you're right. The cost to do that would be higher. The regulatory costs -- we would need that IR outreach.

And of course, you should you've got to find those LPs and that would require help. If you go all the way to the other side of a fund of one, or maybe there's a general credit group that wants to allocate to our space. I think the cost and the regulatory burden there is much lower. Now at the same time, you should expect the fees to just scale from what's right as well. So does that answer the question?

Yes, that helps. Thank you. And I guess my next one, since most have been expanded upon already, is obviously, you've shown great progress. The Cara got another milestone, and you just presented your data for Ovarest in, I think, last month.

And I'm just wondering what might be the next step there, both from a regulatory standpoint. This is a small Phase 2, but it was with an approved drug already. So that changes the need to prove that it's safe and effective.

Are you thinking about partnering? Do you launch in on your own, which obviously, if it goes to a Phase 3 would be a higher cost structure? Are there any thoughts about the next step for that drug?

Yes. Let me make a general statement and maybe a more specific statement. Given the leadership change and considering we've owned Enteris for three years, I felt like it made sense to just evaluate where we are and where we're going with Enteris.

So I'm working with the Enteris team and an adviser to really assess value, evaluate she assets there and also the cost structure. And this is a process that just kicked off, and I don't have anything further than that. But we'll be able to tell you more, I think, in the fourth quarter. So that's a general comment, and I think that's important to know.

In terms of -- on Ovarest, I was actually speaking to the CMO a couple of days ago. And there's some interesting findings there in terms of full suppression of estradiol in some of the samples, and Gary went out and did a paper on this.

So it's out there. In terms of what exactly that means, we're going to understand more as we do this evaluation party and work with the team, the third party. SWK is not funding a [phase story], just to be very clear.

Okay, good.

The assets it seems like there's interesting -- let me leave with a conclusion. SWK is not funding a phase story. So [interesting asset], SWK is not in the drug development business.

Full stop.

So hopefully, that answered your question.

Yes, great. I mean, just -- there's been so much interest in that space, and the French government coming out and making it a priority to work on endometriosis. I mean, there's just a lot of good interest. I would think somebody might have interest in the product. So thank you, that's great.

Yes. I think [that could be right].

Okay, great. I'll go back in line, and congratulations again.

Okay. Thank you, Scott.

(Operator Instructions) Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Jody Staggs for closing remarks.

Thank you, and thanks, everyone, for joining the call. We appreciate your time and continued attention towards SWK. Please reach out to myself, Yvette, or Tiberend with any follow-up questions. Have a great day.

Thank you, sir. 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.