SWK Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to the SWK Holdings Corporation First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jason Rando with Tiburon Strategic Advisors.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining SWK Holdings' Q1 2023 financial and corporate results call. Earlier this morning, SWK Holdings issued a press release detailing its financial results for the 3 months ended March 31, 2023. The press release can be found in the Investor Relations section of swkhole.com under News Releases. Before beginning today's call, I would like to make a formal statement regarding forward looking statements. Today, we're making certain forward looking statements about future expectations, plans for future potential product candidates and studies and expectations regarding our capital allocation and cash resources.

Speaker 1

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 ks 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 Heinrichsen, Chief Financial Officer. They'll provide an update on SFDK's Q1 2023 corporate financial results.

Speaker 1

Jody, go ahead.

Speaker 2

Thank you, Jason, and thanks to everyone for joining our Q1 conference call. 1st quarter results were in line with our expectations as financial segment Non GAAP net income totaled $7,300,000 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 250,000,000 which is an increase from $238,000,000 at the end of 2022 $196,000,000 at March 31, 2022. This quarter we implemented the current expected credit losses model, better known as CECL.

Speaker 2

Resulted in an $11,800,000 allowance for credit losses, which bridges to the $238,000,000 net total investment assets reported at The TESOL balance is not allocated to a specific finance receivable nor is driven by a view on any specific finance receivable. SFBK worked with a consultant to calculate an appropriate CISA reserve using our historical loss rates as well as competitor loss rates. Due to this analysis, we concluded an approximately 4% reserve against our funded and unfunded finance receivables is appropriate at this time. Based on our typical 5 year loan maturity, this translates to a roughly 80 basis point per year loss rate. This allowance was charged to our accumulated deficit and after adjusting for a change in our deferred tax asset resulted in a $9,700,000 reduction in book Our portfolio effective yield was 15.5%, up from 13.9% in Q1 20 22 and around an all time high.

Speaker 2

Our tailored financing solutions are well suited for the current market environment And we're issuing new term sheets with a mid to high teens cost of capital. Turning to the portfolio of credit quality, You will see in our 10 Q, we disclosed our internal credit scores for the first time. We score our loans 1 through 5 with 5 being the highest score. With the exception of the $11,800,000 Polonix non accrual position, all SWK loans are rated 3 or better as of the Q1 of 2023. We continue to work with Valanix to achieve a resolution.

Speaker 2

We are also in regular communication with boards that will require additional funding during 2023. We The $4,200,000 Ideal Royalty and the legacy $2,900,000 BEST royalty are the majority of the non Green Royalty positions. We are in regular communications with Ideal and working to achieve a resolution. The turnaround at our Entera While there will be one time charges in the 2nd quarter from former employee severance, current employee retention payments, Some final R and D program costs and strategic review costs. The Q1 2023 OpEx run rate is a reasonable normalized operating expense level for Enteris.

Speaker 2

Additionally, we are excited with the $7,000,000 of CDMO proposals 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 twenty twenty three. As previously discussed, we are working with an advisor to evaluate strategic alternatives for Antares and will provide an update when appropriate. During the quarter, we repurchased 28,766 shares through our 10b5-1 program.

Speaker 2

And year to date, we have repurchased nearly 50,000 shares. Minor correction from the press release. Post quarter close, we repurchased over 18,000 shares for approximately 318,000 dollars 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 Q1 of 2023 was a solid quarter for our financial segment with $7,300,000 of segment adjusted net income, A very strong 12% return on book and 15.5 percent effective yield.

Speaker 2

We are working with our 2 non accrual borrowers We're pursuing balance sheet capital deployed into this opportunity. With that, I would like to turn the call to our CFO, Yvette Heinekson for an update on our financial performance for the quarter. Yvette, the call is yours.

Speaker 3

Thank you, Jody, and good morning, everyone. As we mentioned earlier this morning, we reported Earnings for the Q1 of 2023. We reported GAAP pre tax net income of $4,500,000 or $0.35 per diluted share. Our reported Q1 2023 net income of $4,600,000 after income tax benefit of $100,000 included a $1,700,000 decrease in finance receivable segment revenue and a $600,000 decrease in our Pharmaceutical Development segment revenue. The decrease in year over year revenue included a $5,300,000 decrease from finance receivables that were paid off in 2022.

Speaker 3

That included $2,400,000 of revenue from the resolution of the BND Dental loan in Q1 of 2022 as well as $1,400,000 of royalties received on sales of NARCAN, which was sold in the Q4 of 2022. The decrease was partially offset by a $4,400,000 increase in revenues received from new investments initiated over the past 12 months or additional funding extended to existing borrowers. Absent any material unforeseen payoffs, we anticipate that finance Overall operating expenses during Q1 2023 decreased to $3,400,000 from $5,100,000 in Q1 of 2022. As Jody mentioned earlier, Entera's operating expenses decreased to $1,400,000 in Q1 2023 from $2,600,000 in Q1 of 2022. And Finance Receivables segment operating expenses decreased to $2,000,000 in Q1 2023 from $2,200,000 in Q1 20 22.

Speaker 3

Again, as Jody Effective January 1, 2023, SWK adopted the Accounting Standards Update 20 sixteen-thirteen, 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 $11,800,000 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 2 portfolio segments to arrive at our current allowance for credit losses of coincidentally $11,800,000 which is presented as a reduction to finance receivables.

Speaker 3

We also recorded a $400,000 liability for the unfunded commitments described in footnote 6 of our Q1 10 Q. The cumulative impact from the adoption of the accounting standard was recorded as a $9,700,000 reduction, net of as it incrementally predicts nonperforming loans and future write offs that create volatility in financial reporting. With that, I will conclude by echoing Gody's remarks that the environment is as attractive as ever for high quality, well priced deployment and we are working hard to take advantage of that. I will now turn the call back over to Jody.

Speaker 2

Thanks, Hamed. In summary, the Q1 of 2023 was in line with our expectations and we are pursuing our 2023 goals to position STBK for long term shareholder value creation. Operator, let's open the call for questions.

Operator

We will now begin the question and answer session. The first question comes from Mark Argento with Lake Street. Please go ahead.

Speaker 4

Hey, Jenny and you guys. Just a couple of quick questions. First off, I know you walked through the implementation of Heathrow, just wanted to clarify how are you doing kind of low loss reserves previous? Were You're haircutting specific loans or was there a different way that you are accomplishing the same thing?

Speaker 2

Yes. Let me give you sort of the high levels and I'll let Yvette speak to kind of the specific accounting treatment. But historically, we've been either Carrying or reserving against specific loans or royalties once a loss is real or is anticipated. So it was specific. So we have not historically had an unallocated sort of general loss bucket.

Speaker 2

So that's really what the difference is here. Abed, do you want to comment or elaborate on that?

Speaker 3

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

Speaker 4

All right. That's helpful.

Speaker 2

Jody, I know there's one other comment just because I know it's a little confusing, but I think the important thing is that this is an Counting it's an accounting pronouncement and something we have to implement. It doesn't in any way shape or form Reflects our view on the portfolio, our expected losses. We needed to build this general reserve. A lot of finance companies have been doing this, I think, Really over the last 3 years and it was time for us to implement this, so.

Speaker 4

Yes. That makes sense. Just turning to just the general opportunity out there. Obviously, there's a need for capital, especially in the areas in which you guys focus on. It looks like you made one new loan in the quarter, Extended some additional capital to existing customers.

Speaker 4

What's kind of 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.

Speaker 2

Yes, absolutely. The opportunity set is quite interesting. The pipeline is good and all that. The challenge really has been that we're fairly deployed here. We've got the ability to do maybe a small deal or 2, 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.

Speaker 2

And when we're down to that level of capital, It becomes challenging because you're sort of picking one of the opportunities to kind of commit to. And if that opportunity doesn't move forward, then you have to go back to Kind of the mid level 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 sort of regardless of what happens on our balance sheet to do a deal or 2 here going forward.

Speaker 2

On the GAAP raise side, on the balance sheet side, I personally am frustrated that we have not been able I don't announce anything to this point. We've it's a little challenging to sort of answer that question because we've, of course, been very active and I have pursued a few different options and the regional banks' 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 had 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 say anything else and I certainly don't want to overpromise in this environment.

Speaker 2

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.

Speaker 2

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 of a 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 kind of run the business the new development and the business development portion of the business more effectively.

Speaker 4

Great. Thanks for the color.

Speaker 1

Good luck. Thank you.

Operator

The next question comes from Scott Jensen, a Private Investor. Please go ahead.

Speaker 5

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

Speaker 2

Yes. Let me take a stab at it 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 them 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.

Speaker 2

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. That's 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 with those amendments, we 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.

Speaker 2

So that's kind of the existing portfolio. The new deal portfolio, we're really trying to focus on opportunities that our capital is 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

Speaker 5

And then my last question is just you had mentioned possible Increasing costs just for the Q2 for Antares. Do you have like an approximate range about what that might be? $5,000,000 $4,000,000 $2,000,000 $1,000,000

Speaker 2

No, no, no, no, no, no, no. It won't be that much. We're talking about 100 of 1,000 of dollars here. I don't have that number in front of me. It's kind of a there's kind of a handful of things going on.

Speaker 2

We mentioned One timers, there's some former severance costs. There are a few retention payments. We're running the strategic process, so we've got costs associated with that. But I think you'll see a tweak in the Q2, but once we get past all of that, I think this $14,000,000 $15,000,000 OpEx number and that's all in and in tariffs That's everything. I think we feel really good about that.

Speaker 2

The only way I would expect it to change going forward is if they just Continue doing so well on the revenue front, have to bring on a little bit of additional help.

Speaker 5

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. Thank you.

Speaker 2

Yes. No, I appreciate that. We think at this level, it's 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 oral 10b5-1 maybe was a bit suboptimal and that we can improve that.

Speaker 2

Yes, I won't go into specifics, but there's we've spoken with new counsel and things. So I think step 1 is really getting that

Operator

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

Speaker 2

Thank you, operator. Thank you, Jason. Thank you, Yvette. Appreciate everyone dialing in the questions. That and I will be around today, tomorrow.

Speaker 2

Feel free to reach out if you would like to discuss or have any questions on the results. Thanks. Hope everyone has a great day. Bye bye.

Operator

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

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Earnings Conference Call
SWK Q1 2023
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