SWK Holdings Corp (SWKH) 2023 Q3 法說會逐字稿

Good morning and welcome to the SWK Holdings third-quarter 2023 corporate and financial results conference call. (Operator Instructions) Please also note that this event is being recorded today.

I would now like to turn the conference over to Jason Rando at Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings third-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 September 30, 2023. 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 consumer and drug product candidates, plans for future potential product candidates, and studies and expectations regarding 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 for SWK Holdings on today's call are Jody Staggs, President and CEO; and Yvette Heinrichson, Chief Financial Officer. They will provide an update on SWK's third-quarter 2023 corporate and financial results. Jody, go ahead.

Thank you, Jason, and thanks, everyone, for joining our third-quarter conference call. During the third quarter, our core finance business generated healthy returns, while our entire subsidiary grew revenue, reduced cost, and moved closer to profitability. We achieved a key 2023 strategic goal of improving our balance sheet by the issuance of a $33 million senior note, as well as a $15 million increase in our credit facility to $60 million. We appreciate our underwriters' work to complete the bond offering in a challenging environment.

We're also thrilled to partner with our new big bank group member, Woodforest, and appreciate the work the Woodforest team undertook to evaluate our business. With the added capital, we have over $60 million of liquidity to deploy into an attractive opportunity set.

We believe raising this capital has several benefits. First, we were able to play offense at a time when other funding sources have pulled back. Second, we believe a larger and more diversified portfolio may lead to a lower cost of capital for SWK. Finally, during our prior strategic review process, we learned that interested parties value a larger and more diversified portfolio, which is financing will allow.

Our gross finance receivables totaled $235 million at quarter's end, a 10% increase from the prior year. We closed $15 million transaction during the quarter, and after quarter end, we closed two term loans totaling $26 million. The new deal pipeline remains strong with multiple royalty and loan opportunities, and we anticipate closing additional financings in the coming months. We are issuing new proposals at a 15% plus IRR while targeting the best risk reward opportunities.

Our portfolio effective yield was 14%, a 30 basis points decrease compared to third quarter of 2022. Our realized yield in the quarter was 14.7%, a decline from 17.5% in the third quarter of 2022. There were no early prepayments during this quarter.

Looking at credit quality, we rate our loans 1 to 5, with 5 being the highest score. During the quarter, we had two loans rated -- scored at a 2; the remaining loans were rated 3 or better. One of the two rated loans is our financing to Trio Healthcare, which was placed on nonaccrual at quarter's end. We are working with management to achieve a satisfactory resolution.

Our core business is financing pre-profitability, commercial-stage life science companies. We are regularly speaking with our borrowers to ensure they appreciate the challenging macro and capital markets conditions. We believe our borrower partners understand this dynamic and have taken steps to reduce costs and raise capital to whether the challenging conditions.

We rate our royalties green, yellow, and red. The three non-accrual royalties -- Best, Ideal, Flowonix -- are rated as reds. Two royalties are already yellow, with remaining royalties rated green. And green-rated royalties account for 55% of the royalty portfolio.

Tangible book value per share increased to $19.35 per share, a 6% year-over-year increase after adjusting for the implementation of CECL. Results in Enteris continues to improve, driven by the hard work of the team and support from our strategic partner. Revenue increased 72% sequentially to $0.3 million, and we expect strong revenue growth in the fourth quarter.

Year to date, we have booked $2.7 million of CDMO projects and are bidding on an additional $5 million of projects. The headline bid number is down from the prior quarter as we removed two large legacy opportunities. Neither came from our strategic partner. And while both remain possibilities, they have been delayed, and we thought it prudent to remove them from the account.

Through our strategic partnership, we are currently working on approximately 18 projects from a variety of underlying customers. Third quarter of 2023, Enteris' operating expense totaled $1.2 million compared with $2.6 million in the third quarter of 2022. To review, the third quarter of 2023 Enteris' quarterly operating expense as a reasonable quarterly run rate.

Third-quarter 2023 Enteris' EBITDA loss was $900,000, an improvement from a $2.5 million loss in the third quarter of 2022 after adjusting for a $5 billion Cara milestone payment in the year-ago quarter. We are deepening the relationship with our strategic partner and are working with the team and our partner to improve Enteris' profitability and increase subsidiary value.

During the quarter, we repurchased 60,335 shares of stock for approximately $1 million. In year to date, we have repurchased 361,593 shares for a total cost of $6.1 million. We would be repurchasing shares at the current discount to book value attractive use of capital.

To summarize, during the third quarter of 2023, we added capital to our balance sheet at a time when deployment yields are attractive. Our Enteris segment reduced burn and continues to improve its value proposition to our strategic partner, and our financial statements generated healthy returns by closing additional ones. We are focused on prudently deploying the recently raised capital and attractive loans and royalties while working with our current portfolio partners to navigate the challenging business environment.

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. Thank you for joining our quarterly conference call. Earlier this morning, we reported earnings for the third quarter of 2023. We reported GAAP pretax net income of $4.1 million, or $0.36 per diluted share.

Our reported Q3 2023 net income of $4.5 million after income tax benefit of $0.4 million included a $0.1 million increase in finance receivables segment revenue, primarily due to an overall increase in reference rates, offset by a $4.7 million decrease in our Pharmaceutical Development segment revenue when compared to the third quarter of 2022.

The $4.7 million decrease in our Pharmaceutical Development segment revenue was primarily due to the receipt of $5 million milestone revenue related to Enteris' license agreement with Cara Therapeutics into Q2 2022 with no similar milestones occurring in Q3 2023.

As Jody mentioned earlier, absent any material unforeseen payoffs, we anticipate finance receivables revenue to slightly increase in Q4 2023 due to the addition of one-term loan during the quarter and two additional term loans subsequent to quarter end.

Overall operating expenses, which include interest, pharmaceutical, manufacturing, research, and development expense, as well as general and administrative expense, were $3.8 million during Q3 2023. That's down $2.4 million from $6.2 million in Q3 2022. Enteris' operating expenses were $1.2 million in Q3 2023 compared to $2.6 million in Q2 2022. And finance receivables segment operating expenses were $2.6 million in Q3 2023 compared to $3.6 million in Q3 2022.

The consolidated $1.3 million decrease in our operating expenses was primarily driven by a one-time severance payment of $1.1 million to the former CEO in Q3 of 2022, and a $0.4 million decrease in one-time professional fees related to corporate strategic planning that occurred in 2022. The decrease was partially offset by a $0.2 million increase in Board fees and other related expenses due to a revised Board compensation plan in 2023.

And finally, our gross finance receivables portfolio decreased by $13.9 million from the first quarter of 2023. This is primarily due to the payoff of one-term loan in Q2. However, the addition of a $5 million term loan during the third quarter resulted in provision for credit loss expense of $0.2 million.

As a reminder, in Q1 of this year, we adopted the accounting standard known as CECL. Going forward, changes to the size of our finance receivables will result in a corresponding percentage change to our allowance for credit losses as was the case in Q3 of 2023.

Each quarter, management evaluates its underlying assumptions used to establish estimated rates applied, loss rates applied, including whether current finance receivable pools remain appropriate. Any changes in these assumptions will also result in changes to our allowance for credit losses. We did not have any changes to these assumptions during the third quarter of 2023, but plan to reevaluate these assumptions at year end. And any future changes to our allowance for credit losses will run through the income statement.

I'll now turn the call back over to Jody.

Thank you, Yvette. To highlight the positives from the quarter, our portfolio generated a 14.7% realized yield. We have liquidity to deploy into an attractive opportunity set. We are buying back stock at a discount to tangible book, and our entire subsidiary has reduced its operating preferred and is forming a deep relationship with our strategic partner.

Operator, let's open the call for questions.

(Operator Instructions) Mark Argento, Lake Street.

Hey, Jody and Yvette. Just a quick question with all of the updates, the new, maybe, bond debt issuance and then the new facilities. Can you just walk us through where you sit right now in terms of kind of lending capacity, your ability to fund loans? And how aggressive are you guys going to be in terms of strengthening to deploy more capital? Looks like you already lean in pretty good to start off the quarter.

Yeah. Thanks, Mark. So we had a -- to answer your first question, we have currently have over $60 million of liquidity, deployable liquidity, and that's after all reserves and unfunded commitments and whatnot. So we have plenty of capital currently, of course, a good time to have that.

So we did have a chunk of financings that we closed shortly after closing our bond and upsizing our ABL. And then we have quite a few deals that we're working now. We've got a couple of term sheets out and a number, I think, maybe one or two term sheets in kind of five or six proposals typically will turn into term sheets or some portion.

Also, we feel good about the opportunity set, particularly in our area of the market. I think we want to be -- we definitely are looking to deploy the capital. It's not burning a hole in our pocket. We want to be disciplined. There is quite a few companies out there that need money. So we're trying to really find highest-quality companies at an attractive rate. And I'll pause there and see if that answers your question.

No, that's helpful. So the $60 million, does that include the $26 million you've already deployed? Or is that on top of the $26 million?

No. That's afterwards. That's as we stand today --

What's that program?

$60 million, I think it's probably closer to $65 million of deployable liquidity as of today.

Got it. All right. That's helpful. And then in terms of your current lending portfolio, I know a decent number of the companies are publicly traded or small publicly traded. When you guys are thinking about the conditions of the equity markets right now, it's kind of -- how imperative is it for the equity markets open back up for some of these companies to continue to fund their businesses? Meaning, is that something you guys are spending a lot of time on? You guys concerned about the condition of the equity markets at this point with your portfolio companies? Or just kind of walk us through your thinking around that.

Yeah. So it's definitely something that we think about and that we're talking to all of the borrowers regularly. And I think the messaging has been -- I think it's understood and pretty well received. Look, the ability to raise capital may be constrained over the foreseeable future. So you can't assume that that's going to be there.

Therefore, you need to do other things to tried to get to cash flow break even as quickly as possible. And that's going to be, of course, cost cuts. Perhaps there's revenue partnerships and things like that. But particularly on the cost side, making sure that everyone understands it. And if there's a need or there's a perceived need to raise capital in the near term that they also need to be kind of cost aggressively and quickly not to the bone, but certainly anything discretionary.

So I think, if you look at our portfolio, that's been a pretty common theme, and most folks have done that. I think it's a case-by-case basis. I mean, the capital markets stay closed forever, then that will be a challenge. But I think that the management teams are talking to have found creative ways to raise some bits of capital along the way.

That's helpful. And then just talking about the markets got stocks trading 15, 16 book values, 19 and change. And so you were active with the buyback. Where are you in terms of the buyback? And is there ability to get bigger or more aggressive with that if there's still such a significant disconnect?

Yes. I agree with all of that. The ability to repurchase shares through our 10b5 program is limited by trailing volume, trailing 20-day volume. So there's not a whole lot we can do on that front.

Now, the one change to our program this year is we do have the ability to buy back one block a week. So if it bought shares -- a block of shares comes up, we have the ability now to purchase those and that occurred. We had some of that occurred earlier this year. We were able to buy three decently sized block. So that would be -- our primary goal would be to source more of those blocks. If we're doing it through the 10b5, we are somewhat limited just via the 10b5 trailing volume and policies.

Got it. How many more dollars do you have authorized on your current buyback program? If you have that handy.

Do you know that number off the top you had, Mark? I've had a ballpark idea of I want to give you the right number. And I might need to follow up with you on that unless they have --

Yeah, we can grab it out of the queue or whatever or offline. Thanks. Appreciate it.

Yes, absolutely. Thanks, Mark.

(Operator Instructions) Scott Jensen, Private Investor.

Hi. Good morning, Jody. So a few of the questions were already answered on kind of returning capital to shareholders and your restrictions sometimes on the supply, trying to buy back. Have you thought about other ways such as dividend, which would obviously open up to more investors as well?

Yeah. The Board is always considering. I think, every quarter we have a discussion about dividends and other -- of course, there's other ways to repurchase stock at tender and things of that nature. So yes, they are always considering other ways to return capital.

And then I guess another one is with the Enteris pipeline, you don't seem to report any of the deals that you get. So how will we gauge the progress of that? And is that restricted in the same way with some of your borrowers? The only way I can find information is by searching, scouring the web for your name. Are you precluded from releasing those loans?

So on Enteris, we have a couple of things. So we're going to -- I think we're going to do a better job of giving you the bookings on a periodic basis. I think we detailed $2.7 million of bookings year to date. I think the last time we said it was $2 million. So I would say that's the number really to track. And hopefully, we can continue to accelerate the bookings, but that would be the number one metric you should track. Bookings should turn into a revenue over kind of a forward 12-month basis so that should be helpful.

In terms of the underlying customers, I don't think that's something we can or should be disclosing. So we have our one strategic partner who is sending us referrals. We did have to go win the business. They don't give us business; they give us referrals. The Enteris team then goes and makes bids, proposals, and pitches their services. And then the underlying customer, these biotechs may select Enteris for Phase 1 and Phase 2 CDMO services. We'll continue to look at what we can disclose and try to make it as clear as possible what the trends and trajectory are there.

Does that answer the question, Scott?

Yes, thank you. And my last one is, when you go to buy a royalty today, with all the generic competition constantly coming into market as well as new drugs coming to market, which could affect those royalties, how do you price that risk? How do you think about that?

Yeah, that's a good question. I mean, I don't think that dynamic has necessarily changed. I think what's probably changed over the past 10 years is pricing. You used to be able to assume, I don't know, 3% to 8% price increases. And so now, of course, you can assume that you probably should be assuming -- maybe it's in the early years, a couple of percent increase and down in the out year. So I don't know that that has changed.

And I think for us, really the key on the royalties is one, we have to find really unique setups where there's something a little bit off the run. It's smaller. There's four sellers, maybe it's not a standard royalty. Because the larger, let's call it, $30 million plus royalties in kind of Tier A assets are very competitive. And we don't want to be the nice guy at the table, kind of the last option for those people.

So the initial focus is the deal dynamic really attractive. If that checks out and we think the product has value, has a runway, then what we're trying to do is make a conservative underwriting case and price that to a mid-teens. So if you look at our two largest royalties, that's what we did. And we've been able to, I'll say, mid-teens-plus, and right now, both of those are trending well versus our underwriting case. So we're trying to do a conservative case price out of the mid-teens-plus with a really good setup. That's somewhat off the run.

And the other fallback that we do have as we have done these [CAT] deals in the past where you buy these royalties and you're buying from a party that's smarter than you. These people have been around the asset for a long time, and they probably know things you don't.

So the bid ask and maybe quite wide. And one way, we've been able to narrow that bid ask is saying, hey, look, we're not going to buy this outright. We're going to buy. We're going to give you $10 million. And when we get a 2 times return, you get the royalty back. And that can be a really interesting way to sniff out of these people believe in the asset. Do they want to keep a residual? And the other positive of that, too, is if they keep a residual, do they still have skin in the game? So if there is an IP challenge or there are issues, they're more likely to work with you. So those are a few things we think about.

All right. I thought of one more question, and that is on the buyback. If there's somebody out there that wants to sell those blocks, do they know how or who to call?

Yeah, I would tell them to call me, and I can put them in touch with our -- the broker. We work through Jones, and so I can put them in touch with Jones.

Thank you. Thanks for that information.

Thank you, Scott.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Jody Staggs for any closing remarks.

Thank you. Thanks for everyone for joining the call. Thanks to the team of SWK and our shareholders. And I hope everyone has a great day.

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