SWK Holdings Corp (SWKH) 2023 Q1 法說會逐字稿

Good morning, and welcome to the SWK Holdings Corporation first quarter 2023 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 with Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings first quarter 2023 financial and corporate results call. Earlier this morning, SWK Holdings issued a press release detailing its financial results for the three months ended March 31, 2023. 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're 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 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 those forward-looking statements, whether as a result of new information, future events, or otherwise.

Joining me from SWK Holdings on today's call are Jody Staggs, President and CEO, and Yvette Heinrichson, Chief Financial Officer. They'll provide an update on SWK's first quarter 2023 corporate and financial results. Jody, go ahead.

Thank you, Jason, and thanks, everyone, for joining our first quarter conference call. First quarter results were in line with our expectations as financial segment non-GAAP net income totaled 7.3 million, representing a 12% annualized return on tangible finance book value. This is a solid baseline return for our lending strategy, although we believe we can improve on this figure through continued diligent underwriting combined with appropriate balance sheet leverage.

Our gross total investment assets reached an all-time high of $250 million, which is an increase from $238 million at the end of 2020 and $196 million at March 31, 2022. This quarter, we implemented the current expected credit losses model, better known as CECL. CECL implementation resulted in an $11.8 million allowance for credit losses, which bridges to the $238 million net total investment assets reported at period end.

The CECL allowance is not allocated to a specific finance receivable, nor is driven by a view on any specific finance receivable. SWK has worked with a consultant to calculate an appropriate CECL reserve using our historical loss rates as well as competitor loss rates. Doing this analysis, we concluded an approximately 4% reserve against our funded and unfunded finance receivables is appropriate at this time. Based on our typical five-year loan maturity, this translates to a roughly 80 basis point per year of loss rate.

This allowance was charged to our accumulated deficit and after adjusting for a change in our deferred tax asset resulted in a $9.7 million reduction in book value. Our portfolio effective yield was 15.5% up from 13.9% in first quarter 2022 and around an all-time high. Our tailored financing solutions are well suited for the current market environment, and we are issuing new term sheets with a mid to high 10s cost of capital.

Turning to the portfolio credit quality, you will see in our 10-Q, we disclosed our internal credit scores for the first time. We score our loans one to five with five being the highest score. With the extension of the $11.8 million [Flowonix] nonaccrual position, all SWK loans are rated three or better as of the first quarter of 2023. We continue to work with Flowonix to achieve a resolution. We are also in regular communication with borrowers that will require additional funding during 2023.

We score royalties, green, yellow and red. For the first quarter of 2023, 84% of our royalties were scored green, the $4.2 million Ideal royalty and the legacy $2.9 million Best royalty are the majority of the non-green royalty positions. We are in regular communications with IPO and working to achieve a resolution.

The turnaround at our Enteris subsidiary continues with total Enteris operating expenses declining from $2.6 million in fourth quarter 2022 to $1.4 million as of first quarter 2023. While there will be one-time charges in the second quarter from former employee severance, current employee retention payments, some final R&D program costs, and strategic review costs, the first quarter 2023 OpEx run rate is a reasonable normalized operating expense level for Enteris.

Additionally, we are excited with the $7 million of CMO proposals and Enteris' bid on year to date. A material portion of these bids were driven by our relationship with a large pharma service organization. While it's too early to forecast our close rate, these are warm leads, and we expect the strong pipeline to drive revenue growth in the second half of 2023.

As previously discussed, we are working with an advisor to evaluate strategic alternatives for Enteris and will provide an update when appropriate. During the quarter, we repurchased 28,766 shares through our 10b5-1 program. And year to date, we have repurchased nearly 50,000 shares. A minor correction from the press release, post-quarter close, we have repurchased over 18,000 shares for approximately $318,000 or $17.57 a share. I think the press release said 400,000.

Our current program expires May 15, and I expect our Board will approve a new 10b5 program that we believe will have benefits over the old program, ideally allowing us to repurchase a greater number of shares.

To summarize, the first quarter of 2023 was a solid quarter for financial segment with $7.3 million of segment adjusted net income, a very strong 12% return on book, and 15.5% effective yield. We are working with our two non-accrual borrowers to seek a positive resolution and are in regular communications with borrowers that need access to capital markets near term. The new loan environment is attractive, and we're pursuing balance sheet capital deployed into this opportunity.

With that, I would like to turn the call to our CFO, Yvette Heinrichson for an update on our financial performance for the quarter. Yvette, the call is yours.

Thank you, Jody, and good morning, everyone. As we mentioned, earlier this morning, we reported earnings for the first quarter of 2023. We reported GAAP pre-tax net income of $4.5 million, or [$0.35] per diluted share. Our reported Q1 2023 net income of $4.6 after income tax benefit of $0.1 million included a $1.7 million decrease in finance receivables segment revenue and a $0.6 million decrease in our pharmaceutical development segment revenue.

The decrease in year-over-year revenue included a $5.3 million decrease from finance receivables that were paid off in 2022 that included $2.4 million of revenue from the resolution of the B&D Dental loan in Q1 of 2022, as well as $1.4 million of royalties received on sales of Narcan, which was sold in the fourth quarter of 2022.

The decrease was partially offset by a $4.4 million increase in revenues received from new investments initiated over the past 12 months or additional funding extended to existing borrowers. [Of sent any] material [and foreseen] payoffs, we anticipate that finance receivables revenue over the next three quarters of the year to be comparable to revenue reported in Q1 2023.

Overall operating expenses during Q1 2023 decreased to $2.4 million from $5.1 million in Q1 of 2022. As Jody mentioned earlier, Enteris operating expenses decreased to $1.4 million in Q1 2023 from $2.6 million in Q1 of 2022. And finance receivables segment operating expenses decreased to [$2 million] in Q1 2023 from $2.2 million in Q1 2022.

Again, as Jody mentioned, effective January 1, 2023, SWK adopted the accounting standards update 2016-13, which requires companies to develop an expected credit loss methodology based on historical data, combined with both current conditions and future developments. Upon adoption of the new accounting standard, we wrote off the full $11.8 million previously reported allowance for credit losses on specific finance receivables.

Those receivables are now presented net of those previously reported allowances. We estimated expected credit losses using a loss rate model that utilizes publicly available data sources, current conditions, and qualitative forecasts that are reasonable and supportable as inputs. We then applied our loss rate model to our [acute] portfolio segments to arrive at our current allowance for credit losses of coincidentally $11.8 million, which is presented as a reduction to finance receivables.

We also recorded a $0.4 million liability for the unfunded commitments described in footnote sixth of our Q1 10-Q. The cumulative impact from the adoption of the accounting standard was recorded as a $9.7 million reduction net of applicable deferred tax assets of $2.5 million to the accumulated deficit.

Although the adoption of this accounting standard had a material impact to prior earnings, utilizing the expected credit loss model will allow for smoother financial reporting as it incrementally predicts non-performing loans and future write-offs that create volatility in financial reporting.

With that, I will conclude by echoing Jody's remarks that the environment is as attractive as ever for high-quality, well-priced deployments, and we are working hard to take advantage of that. I will now turn the call back over to Jody.

Thanks for that. In summary, the first quarter of 2023 was in line with our expectations. And we are pursuing our 2023 goals to position SWK for long-term shareholder value creation.

Operator let's open the call for questions.

(Operator Instructions) Mark Argento, Lake Street.

Hey Jody and Yvette. Just a couple of quick questions. First off, I know you walked through the implementation of CECL. Just wanted to clarify how are you doing loan loss reserves previous? Were you haircutting specific loans or is there a different way that you are accomplishing the same thing?

Yeah, let me give you the high level then I'll Yvette speak to the specific accounting treatment. But historically, we've been either impairing or reserving against specific loans or royalties once the [loss ITO] is realized or is anticipated. So, it was specific -- so we have not historically had an unallocated general loss bucket. So, that's really what the difference is here.

Yvette, do you want to comment or elaborate on that?

Under the previous model for recognizing credit losses, it had to basically have something that is likely to occur. And it was really applied to a specific asset we knew that we were not going to -- that is not paying according to the contractual terms. And now we have a general reserve that is applied to the entire portfolio.

Alright, that's helpful. Jody -- (multiple speakers)

Just another comment, I know it's a little confusing, but I think the important thing is that this is an accounting -- it's an accounting pronouncement and it's something we have to implement. It doesn't in any way, shape or form reflect our view on the portfolio or expected losses. We needed to build this general reserve, a lot of finance companies have been doing this, I think, really over the last three years and it was time for us to implement this.

Yeah, that makes sense. Just turning to just the general opportunity out there. Obviously, there's a need for capital, especially in the areas which you guys focus on. [We take to make] one new loan in the quarter, extended to some additional capital, some existing customers. What's the dynamic right now in terms of the opportunity to deploy more capital? And then dovetailing with that, I know you guys have been hard at work at trying to source additional capital, add some leverage to the balance sheet, maybe you could give us an update on both fronts there? Thanks.

Yeah, absolutely. The opportunity of that is, it's quite interesting. The pipeline is good and all that. The challenge really has been that we were fairly deployed here. We've got the ability to do maybe a small deal or two, but it's challenging when you're at that level because we have a business where we need to have a pipeline of opportunities ranging from first call to term sheet issued. And when we're down to that level of capital, it becomes challenging because you're picking what are the opportunities to commit to and if that opportunity doesn't move forward, then you have to go back to the [mid-levels] of the pipeline.

We, of course, would not go out there and commit to situations where we don't have capital. Now we are building a little bit more capital now. So, I think we've got some opportunities regardless of what happens on our balance sheet to do a deal or two here going forward.

On the [raise] side, on the balance sheet side, I personally am frustrated that we have not been able to announce anything to this point. It's a little challenging to answer that question because we've, of course, been very active and have pursued a few different options. And the regional bank turmoil has been a challenge, one that we're going to overcome, and I'm confident we're going to get this done. But we're working with a variety of parties and some of those parties have that internal problems.

Right now, I feel really good about where we are. We're working on a specific project to get this done. But I can't really see anything else and actually we don't want to over-promise in this environment. We will get this done. It's going to happen. It's just a matter of when. And ideally, we're going to have additional capacity on our ABL, which is the most cost effective and structurally effective piece of capital.

And then we'll look at other things as well. And I think we've discussed previously; we've looked at unsecured bonds and things like that. So, it's going to happen. The exact timing remains a bit TBD. And once that happens and we have material additional capital, I think you'll see us close more loans. We'll be able to run the business, the new development in the business development portion of the business more effectively.

Great. Thanks for the color. Good luck.

Thank you.

(Operator Instructions) Scott Jensen, a private investor.

Hey, good morning, Jody. So, I have a question, just how do you view or prepare for the possible in the new regime in the market for companies raising capital since it often appears that you're that bridge until they get that next set of financing? How do you protect yourself or view that development?

Yes. Let me take a stab at that and kind of make sure I'm answering the right question. So, that's correct. We identify differentiated life science product companies. We're advancing their capital and our capital needs to be used to really increase value and all of our companies at some point in time are likely going to need to raise additional capital or look for some type of exit.

So, in one sense, that's our business. That's always been our business. The capital we put in ideally is bridging them to that and bridging them close to cash flow breakeven. The market is, of course, tougher for folks raising capital. I think everyone here knows that. So, to answer your question, I think we're trying to get out in front of the situations where the near-term need for capital is more obvious and maybe a little more stressed. And that may be through amendments and what those amendments will may be requiring certain things, probably a little bit more regular communications and trying to be a little bit more diligent and thoughtful about how we're working with those situations.

So that's the existing portfolio. You know, the new deal portfolio, we're really trying to focus on opportunities that are capital's bridging to cash flow positive and there's equity coming in and we're looking for runways much longer than maybe we have historically. So, we're looking for 18 months plus, whereas historically, I think we've been much more comfortable in shorter runways.

Great. And then my last question is just you had mentioned a possible increase in costs just for the second quarter for Enteris. Do you have like an approximate range about what that might be? $0.5 million, $4 million, $2 million, $1 million?

No, no. It won't be that much. we're talking about hundreds of thousands of dollars here. I don't have that number in front of me. So, there's a handful of things going on. We mentioned some one-timers, [just in] former severance costs, there are a few retention payments. We're blending the strategic process. So, we've got costs associated with that. But I think you'll see a tweak in the second quarter. But once we get past all of that, I think there's [one four and one five] OpEx number and that's all within Enteris. That's everything.

I think we feel really good about that. The only way I would expect it to change going forward is if they just continue doing so well in the revenue front, they have to bring on a little bit of additional help.

Understood. And then just one more would be a statement rather than a question. And that is just I would keep advising more aggressive buying back the stock. And I'm glad that you're thinking about expanding the program in that [fashion]. So, thank you.

Yeah. Well, appreciate that. We think at this level, it's a really solid use of capital. It hasn't been as easy as I think all of us would have hoped. We do think that our [rule] 10b5-1 maybe was a bit suboptimal and that we can improve that.

Yeah, I won't go into specifics, but we've spoken with new counsel and things. So, I think step one is really getting that program optimized and seeing what happens there. But here I agree and appreciate that sentiment.

Thanks so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Jody Staggs for any closing remarks.

Thank you, operator. Thank you, Jason, and thank you, Yvette. Appreciate everyone dialing in and the questions. Yvette and I will be around today, tomorrow. Feel free to reach out if you would like to discuss or have any questions on the results. Thanks, and hope everyone has a great day. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.