SWK Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to the SWK Holdings Third Quarter 2023 Corporate and Financial Results Conference Call. All participants will be in a listen only mode. After today's remarks, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Jason Rando at Tiburon, Strategic Advisors, please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining SWK Holdings' 3rd quarter 2023 financial and Earlier this morning, SWK Holdings issued a press release detailing its financial results for the 3 months ended September 30, 2023. Press release can be found in the Investor Relations section of swkwhole.com under News Releases. Before beginning today's call, I would like to make Following statements regarding forward looking statements. Today, we'll be making certain forward looking statements about future expectations, plans, events and circumstances, Concluding 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.

Speaker 1

Actual results may differ materially due to our risks and uncertainties, including those detailed in the Risk Factors section of SWK Holdings' 10 ks filed with the SEC and other filings we make with the SEC from time to time. STV Decay 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 from SWK Holdings on today's call are Jody Staggs, President and CEO and Yvette Heinrichsen, Chief Financial Officer. They will provide an update on SWK's Q3 2023 corporate and financial results. Jody, go ahead.

Speaker 2

Thank you, Jason, and thanks everyone for joining our Q3 conference call. During the Q3, our core finance business generated healthy returns while our Entera subsidiary grew revenue, reduced cost and moved closer to profitability. We achieved a key 2023 goal of improving our balance sheet via the issuance of a $33,000,000 senior note as well as a $15,000,000 increase in our credit facility to $60,000,000 We appreciate our underwriters' work to complete the bond offering in a challenging environment. We are also thrilled to partner with our new bank group member Woodforest and appreciate the work the Woodforest team undertook to evaluate our business. With the added capital, we have over $60,000,000 of liquidity to deploy into an attractive opportunity set.

Speaker 2

We believe raising this capital has several benefits. First, we are able to play offense at a time when other funding sources have pulled back. 2nd, 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 well now. Our gross financial receivables totaled $235,000,000 at quarter's end, a 10% increase from the prior year.

Speaker 2

We closed $15,000,000 transaction during the quarter and After quarter end, we closed 2 term loans totaling $26,000,000 The new deal pipeline remains strong with multiple royalty And we anticipate closing additional financing in the coming months. We are issuing new proposals at a 15% plus IRR while targeting the best Our portfolio effective yield was 14%, a 30 basis points decrease compared to Q3 of 2022. Our realized yield in the quarter was 14.7%, a decline from 17.5% in the Q3 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.

Speaker 2

During the quarter, we had 2 loans rated scored 82. The remaining loans were rated 3 or better. 1 of the 2 rated loans is our financing to Trio Healthcare, which was placed on non accrual 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.

Speaker 2

We are regularly speaking with our borrowers to ensure they appreciate the challenging We rate our royalties green, yellow and red. The 3 non accrual royalties, BEST, Ideal and PloNex are rated as reds. Two royalties are rated yellow with the remaining royalties rated green. And green rated royalties account for 55% of the royalty portfolio. Integral book value per share increased to $19.35 per share, a 6% year over year increase after adjusting for the implementation of CECL.

Speaker 2

Results at Antares continues to improve driven by the hard work of the team and support from our strategic partner. Revenue increased 72% sequentially to $300,000 and we expect strong revenue growth in the 4th quarter. Year to date, we have booked $2,700,000 of CDMO and are bidding on an additional $5,000,000 of projects. The headline bid number is down from the prior quarter as we removed 2 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 count.

Speaker 2

Our strategic partnership, we are currently working on approximately 18 projects from a variety of underlying customers. 3rd quarter of 2023 Antares operating expense totaled $1,200,000 compared with $2,600,000 in the Q3 of 2022. We view the Q3 of 2023 Antares quarterly operating expense as a reasonable quarterly run rate. Q3 of 2023 and tariffs EBITDA loss was $900,000 an improvement from a $2,500,000 loss in the Q3 of 2022 after adjusting for a $5,000,000 Cara milestone payment in the year ago quarter. We are deepening the relationship with our partner and are working with the team and our partner to improve Antares' profitability and increase subsidiary value.

Speaker 2

During the quarter, we repurchased 60,335 shares of stock for approximately $1,000,000 Year to date, we have repurchased 361,593 shares for a total cost of 6,100,000 We'll be repurchasing shares at the current discounted book value as attractive use of capital. To summarize, during the 3rd And our financial segment generated healthy returns by closing additional loans. We are focused on prudently deploying the recently raised capital and attractive loans and royalties 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 Hunterson for an update on our financial performance for the quarter. Yvette, the call is yours.

Speaker 3

Thank you, Jody, and good morning, everyone. Thank you for joining our quarterly conference call. Earlier this morning, we reported earnings for the Q3 of 2023. We reported GAAP pretax net income of $4,100,000 or 0.3 $400,000 included a $100,000 increase in finance receivable segment revenue, primarily due to an overall increase in reference rates, offset by a $4,700,000 decrease in our Pharmaceutical Development segment revenue when compared to the Q3 of 2022. A $4,700,000 decrease in our Pharmaceutical Development segment revenue was primarily due to the receipt $5,000,000 milestone revenue related to Enteris' Bison's agreement with Cara Therapeutics in Q2 2022 with no similar milestones occurring in Q3 2023.

Speaker 3

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 1 term loan during the quarter and 2 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 $3,800,000 during Q3 2023. That's down $2,400,000 from $6,200,000 in Q3 2022. Entera's operating expenses were $1,200,000 in Q3 2023 compared to $2,600,000 in Q2 2022 and Finance Receivables segment operating expenses were $2,600,000 in Q3 2023 compared to $3,600,000 in Q3 2022. The consolidated $1,300,000 decrease in our operating expenses was primarily driven by a one time severance payment of $1,100,000 to the former CEO in Q3 of 2022 and a $400,000 decrease in one time professional fees related to corporate strategic planning that occurred in 2022.

Speaker 3

The decrease was partially offset by a $200,000 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 $13,900,000 from the Q1 of 2023. This is primarily due to the payoff of 1 term loan in Q2. However, the addition of a $5,000,000 term loan during the 3rd quarter resulted in provision for credit loss expense of $200,000 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.

Speaker 3

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 Q3 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.

Speaker 2

Thank you, Yvette. To highlight some positives We are buying back stock at a discount to tangible book and our tariff subsidiary has reduced its operating burn and is forming a deep relationship with our strategic partner. Operator, let's open the call for questions.

Operator

We will now begin the question and answer session. At this time, we will take our first question, which will come from Mark Argento with Lake Street. Please go ahead.

Speaker 4

Hey, Joey. Hey, Yvette. Just a quick question with all 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, The ability to fund loans and how aggressive are you guys going to be in terms of starting to deploy more capital? Looks like you already leaned in pretty good To start off the quarter?

Speaker 2

Yes. Yes. Thanks, Mark. Yes, so we had a well, to answer your first question, we have over We currently have over $60,000,000 of liquidity, deployable liquidity and that's after all reserves and unfunded commitments and whatnot. So We have plenty of capital currently and it's of course a good time to have that.

Speaker 2

So we did have a chunk of financing 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 1 or 2 term sheets and kind of 5 or 6 proposals. And proposals typically will turn into term 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.

Speaker 2

We want to be disciplined. There is quite a few companies out there that need money. So we're trying to really find the highest quality companies at an attractive rate. I'll pause there and see if that answers your question.

Speaker 4

No, that's helpful. So the 60, does that include the 2060 Verdi deployed or is that on top of 26?

Speaker 2

No, no, no, that's afterwards. That's as we stand today. With that program. With that program. With that program, we have 16, I think, is probably closer to $5,000,000 of deployable liquidity as of today.

Speaker 4

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, kind of how imperative is it the equity markets to 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?

Speaker 4

Are you guys concerned about the condition of the equity markets at this point within your portfolio Just kind of walk us through your thinking around that.

Speaker 2

Yes. So it's definitely something that we think about and that we're talking to all the borrowers Regularly. And I think the messaging has been and I think it's understood and pretty well received as, hey 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 try to get to cash flow breakeven as quickly as possible.

Speaker 2

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 that If there's a need or there's 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 management teams we're talking to have found creative ways to raise some bits of capital along the way.

Speaker 4

Helpful. And then just again talking about the markets, you guys stocks trading 2015, 2016 book values, 2019 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 Yes.

Speaker 4

We'll get disconnect.

Speaker 2

Yes. So, 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 Yes, we do have the ability to buy back 1 block a week.

Speaker 2

So if block shares a block of shares comes up, we have the ability now to purchase those. And That occurred we had some of that occur earlier this year and we were able to buy 3 decently sized blocks. 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.

Speaker 4

Got it. And what how many more dollars do you have authorized under your current Buyback program, if you have that handy.

Speaker 2

That, do you know that number off the top of your head, Mark? I have a ballpark idea, but I want to give you the right number. I might need to follow-up with you on that unless Ben has Yes,

Speaker 4

we can grab it out of the queue or whatever or offline. No problem. Thanks. Appreciate it.

Speaker 2

Yes, absolutely. Thanks, Mark.

Operator

Our next question will come from Scott Jensen, a Private Investor. Please go ahead.

Speaker 5

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

Speaker 2

Yes. 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 Tinder and things of that nature. So yes, they're always considering other ways to return capital.

Speaker 5

And then I guess another one is with the Antares 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?

Speaker 2

So on Eterus, we have a well, 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, so I think we detailed $2,700,000 of bookings Year to date, and I think the last time we said it was $2,000,000 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 Revenue over kind of a 4 to 12 month basis, so that should be helpful. In terms of the underlying customers, I don't think that's something we can or really candidly should be disclosing. So we have our one strategic partner who is sending us referrals.

Speaker 2

We didn't have to go win the business. So they don't give us business, they give us referrals. The Antares team then goes and makes bids, proposals and pitches their services. And then the underlying customer, these biotechs may select in tariffs for Phase 1 and Phase 2 CDMO services. And we'll continue to look at what we can disclose and try to make that as clear as possible what the trends and trajectory are there.

Speaker 2

Does that answer the question,

Speaker 5

Yes. Thank you. And my last one is, when you go to buy a royalty today, with all the Generic competition constantly coming into markets as well as new drugs coming to market, which could affect us relative. How do you price that risk? How do you guys think about that risk?

Speaker 2

Yes. 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. It used to be able to assume, don't know 3% to 8% price increases.

Speaker 2

And so now of course you can't assume that you probably should be assuming Maybe it's in the early years a couple percent increase and then down in the out year. So I don't know that that has changed. I think for us really the key on the royalties is when we have to find really unique setups where there's something a little bit off the run, it's smaller, There's 4 sellers. Maybe it's not a standard royalty because the larger, let's call it, dollars 30,000,000 plus royalties And kind of Tier A assets are very competitive. And we don't want to be the 9th guy at the table kind of The last option for those people.

Speaker 2

So the initial focus is, 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 2 largest royalties, that's what we did and we've been able to, I would say mid teens plus. And right now, both of those are tuning well versus our underwriting case.

Speaker 2

So we're trying to do a conservative case, Price has a mid teens plus with a really good setup that's somewhat off the run. And the other fallback that we do have is we have done these Cat deals in the past where because 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 may be 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.

Speaker 2

We're going to buy we're going to give you $10,000,000 and when we get a 2 times return, you get the royalty back. And that can be a really interesting way to sniff out if 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, 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.

Speaker 1

All right.

Speaker 5

I have 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?

Speaker 2

Yes. 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

Operator

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

Speaker 2

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

Operator

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

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SWK Q3 2023
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