SWK Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Afternoon, and welcome to the SWK Holdings Corporation Second Quarter 2023 Corporate and Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Jason Rando with Steve Burand, Strategic Advisors, please go ahead.

Speaker 1

Good evening and thank you for joining SWK Holdings' 2nd quarter 2020 Earlier today, SWK Holdings issued a press release detailing its financial results for the 3 months ended June 30, 2023. The 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 a 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 our 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. 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 from SVBK Holdings on today's call are Jody Staggs, President and CEO Yvette Heinrichsen, Chief Financial Officer. They'll provide an update on SFBK's 2nd quarter 2023 corporate and financial results. Jody, go ahead.

Speaker 2

Thank you, Jason, and thanks, everyone, for joining our Q2 conference call. During the Q2, we made progress on several key initiatives, including closing a new $45,000,000 credit facility, continuing the operational financial turnaround into tariffs and concluding 2 long running workouts. Our financing business remains healthy and we generated a 15.4 realized yield during the quarter and are working towards multiple new financing closings by year's end. Tangible book value per share increased to 18.95 $4,600,000 of shares at an average price of $16.88 a 23% discount to the GAAP book value of $21.79 There is much to be excited about at SWK. 2nd quarter results were largely in line with internal expectations as financial segment non GAAP Net income totaled $7,600,000 representing a 12% annualized return on tangible book value.

Speaker 2

While we are pleased with the 12% return, we aim to improve on it through diligent underwriting of Life Science loans and royalties coupled with appropriate balance sheet leverage. Our gross investment assets totaled $234,000,000 compared with $249,000,000 at March 31, 2023 and $175,000,000 at June 30, 2022. The sequential decline is primarily due to the sale of our ACHER loan to a third party for approximately $14,000,000 Our portfolio effective yield was 14.5% compared with 15.5% in the Q1 of 2023. The sequential decrease is primarily due to the divestiture of the Acer loan. Our realized yield in the quarter was 15.4% compared with 15.3% in the Q1 of 2023.

Speaker 2

There were no early prepayments during the quarter. Looking ahead, our realized yields should benefit from the recent reference rate increase as well as pricing discipline on new financing proposals. Turning to the portfolio. During the quarter, we finalized the workout for the Fluonics loan and after quarters close, We finalized the workout for the ideal royalty. In both situations, we received cash at close with the majority of recovery expected from future royalties.

Speaker 2

At this time, we believe the cash received combined with estimated future royalties will exceed the carrying value of position, thus we do not anticipate taking an impairment on either position. However, both positions will remain on non accrual. Looking at credit quality, we rate our loans 1 to 5 with 5 being the highest score. During the quarter, we had one loan scored as a 2, while the Philonics loan, which has been a workout for several quarters with the discussed resolution in late Q2 of 2023 was scored at 1. The remaining loans were rated 3 or better.

Speaker 2

We rate our royalties Green, yellow and red and the ideal and best non accrual royalties were rated red, while remaining royalties were rated green. Results in Enteris continued to improve and were in line with internal expectations. Revenue increased 55% sequentially To $200,000 and we expect revenue to accelerate in 3rd quarter and 4th quarter based on work generated from our pharma service partnership, which was signed in late April. Year to date, we have booked $2,000,000 of CDMO projects and are bidding on an additional $9,000,000 projects, which is an increase from $7,000,000 projects we were bidding on last quarter. 2nd quarter Antares operating expense totaled $2,500,000 compared with 1 point We expect the Antares quarterly OpEx will be approximately $1,500,000 per quarter in the back half of twenty twenty three.

Speaker 2

We are working with an advisor to evaluate strategic alternatives for Enteris and will provide an update when appropriate. During the quarter, we closed a $45,000,000 committed financing with First Horizon Bank, which With First Horizon Bank, which replaced our prior $35,000,000 facility. The new facility gives STBK additional liquidity as well as flexibility to pursue other balance sheet capital options. During the quarter, we repurchased 272,000 4.92 shares at an average cost of $16.88 And year to date, we have repurchased approximately 327,000 shares for $5,600,000 at an average cost of $16.96 We view repurchasing shares at the current level as a highly attractive use of shareholders' capital. To summarize, the Q2 of 2023 was a solid quarter for our financial segment with a 12% return on tangible We were able to conclude workout process for 2 of our non accrual loans with reasonable outcomes.

Speaker 2

We're pursuing multiple core life science financings with attractive returns and expect to close additional transactions by year end. And our new credit facility provides additional liquidity plus flexibility going forward. With that, I would like to turn the call to our CFO, Yvette Heineersen, for an update on our financial performance for the quarter. Yvette, the call is yours.

Speaker 3

Thank you, Jody, and good afternoon, everyone. Earlier today, we reported earnings for the Q2 of 2023. We reported GAAP pretax net income of $5,400,000 or $0.42 per diluted share. Our reported Q2 2023 net income of $3,900,000 after income tax expense of $1,400,000 included a $2,500,000 increase segment revenue and a $100,000 increase in our Pharmaceutical Development segment revenue. The $2,500,000 increase Year over year finance receivables segment revenue was primarily due to the $2,500,000 increase in interest and fees earned due to funding new and existing loans, A $800,000 increase in interest income due to an overall increase in reference rates and a net $500,000 increase in royalty revenue when compared to the same period of the previous year.

Speaker 3

The increase was partially offset by a $1,300,000 decrease in interest, still anticipate finance receivables revenue over the next two quarters of the year to be comparable to revenue reported in Q2 2023. As Jody mentioned earlier, overall operating expenses, which include interest, pharmaceutical manufacturing, research and development expense, as well as general and administrative expense were $4,900,000 during Q2 2023 compared to $4,600,000 in Q2 2022. Entera's operating expenses were $2,500,000 in Q2 2023 compared to 2,400,000 in Q2 2022. And finance receivables segment operating expenses were $2,400,000 in Q2 2023 compared to $2,200,000 in Q2 2022. The slight increase in finance receivable segment operating expenses was primarily due to a $200,000 increase in interest expense due to a higher overall average balance on our credit facility.

Speaker 3

And Q2 2023 Pharmaceutical Development segment operating expenses included a $400,000 expense for employee bonus retention as well as $500,000 final payment to our CRO vendor. Neither of these expenses are expected to be repeated in the Q3 of 2023. And finally, our finance receivables for allowance for credit losses in Q2 2023. 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 Q2 2023.

Speaker 3

Changes in the underlying assumptions used to establish our initial loss Rates will also result in changes to our allowance for credit losses. We did not have any changes to these assumptions during the Q2 of 2023. Any future changes to our allowance for credit losses will run through the income statement. I will now turn the call back over to Jody.

Speaker 2

Thank you, Amit. In summary, the Q2 of 2023 was a solid period with results in line with our expectations. We made material progress on key initiatives during the first half of the year and for the remainder of 2023 we will pursue our goals with an aim of creating value for our owners. Operator, let's open the call for questions.

Operator

We will now begin the question and answer Our first question will come from Jacob Stephens with Lake Street Capital Markets. You may now go ahead.

Speaker 4

Hey, guys. Thanks for taking my questions. Just wanted to touch on the equity capital markets. We've seen them open up quite modestly over the last quarter here. How does this impact your ability To deploy capital, and your risk tolerance with making loans?

Speaker 2

Hey, yes, thanks. Appreciate the question and thanks for dialing I would say there's sort of 2 dynamics from that. The first of all is for portfolio companies that are public, the ability to tap those equity markets It's a positive. Most of our borrowers are in cash burning situation, pre profit. So that's great for them.

Speaker 2

For situations where we're out there trying to pursue a new loan, equity is almost always our number one competitor. So in some ways, That's a modest negative. But I would say the our pipeline is strong and most of the companies we're speaking with really don't have access to The capital markets in any sort of material shape. There's a few that we're speaking with that are public and they maybe are considering that, but it's still fairly For small companies to access those in sort of any material means.

Speaker 4

Okay. And maybe just touch on the First Horizon Bank deal here. Does that change your lendable capital base? Or do you need access to additional facilities? How are you thinking about kind of capacity To grow the loan book here over the next 12 months?

Speaker 2

Yes, absolutely. So it increases our current capacity by $10,000,000 We've got $45,000,000 committed by First Horizon now. Our prior facility was $35,000,000 I think what this facility gives us is, first of all, The terms, our partner, I think it's going to allow us to syndicate this facility a bit more easily, and that's something we're focused on now. So both our partner And SWK are focused on working with potential partner banks to bring them into the facility. And we would love to take this up to $75,000,000 or $80,000,000 So we're working really hard on that.

Speaker 2

I guess the challenge right now is the regional bank market is in somewhat Of a challenged position. So those conversations will take time, but it's a focus. The other, I think positive of this facility is it does allow us an issue an unsecured bond and that's something we're considering as well. So We've got a couple of other ways to bring on capital. The facility at $45,000,000 is great and a good starting spot, but we believe that this business should support much more leverage in that.

Speaker 4

Okay. And then just last one for me here. Any updated thoughts on the buyback? Are you guys just kind of planning to keep buying shares at a discount to book value here? Or how are you thinking about that moving forward?

Speaker 2

Yes, absolutely. So in May the Board did authorize a new $10,000,000 buyback, which was great. And we appreciate their support and their belief that Our shares are materially undervalued and your management shares that view. So we have a new broker we're working with and the new plan is, I would say, a bit more flexible than our old plan. So you probably saw that we repurchased than our old plan.

Speaker 2

So you probably saw that we repurchased almost $5,000,000 $4,600,000 during the quarter, and we're pushing $1,000,000 year to date. So the new plan seems to be working quite a bit better. And we'll just continue to work the plan in terms of the Being at this price, we've got tiers. And as we get this reporting out, we'll have an open period where we can maybe be more aggressive. But like buying back the stock at the current price, I think the valuation is quite attractive and so that's something that the Board and management will continue to do.

Speaker 4

Got it. Thanks. Best of luck moving forward here.

Speaker 2

Thank you. Appreciate the call and interest.

Operator

Our next question will come from Scott Jensen, a Private Investor, you may now go ahead.

Speaker 5

Hey, good quarter, Jody, and Everyone on the team, especially like the buyback, as was just mentioned and pleasantly surprised on the 2 workouts. It's not it's going to be a hit to the bottom line, at least at this point. My question, I guess, is on tariffs. It looks like some good progress being made. And when you say $9,000,000 in future Bigs that are out there.

Speaker 5

What is the kind of metrics that you use to compete on those? Is it price? Is it reputation? Like how can we kind of get an idea of how that hit ratio might work out?

Speaker 2

Yes. Great question. We're still learning a bit about that. So the majority of those bids, those proposals stem from our partnership With a large pharma service organization, which I'm not supposed to name, but we've been working with them April in formal arrangement. And we are their preferred provider for certain Phase 1 and Phase 2 services.

Speaker 2

So they've got customers, they've got small biotech Pharma is coming to them for help as they develop their programs and for particular dosing technologies And that partner is referring them to us for certain of these services. So these are really warm leads. It's where I would need to check, but we're picking up the vast majority of that revenue. The partner is keeping a bit of it. And really for them, the benefit is Getting these biotechs quality CDMO services and moving them through the clinical progression so they can hopefully Use our partners technology, patented technology once they get out to market.

Speaker 2

I wish I had some number to tell you we'll pick up X%, But the rates have been great so far. I mean, the early proposals we put out, we're winning lots of those. And I think we'll definitely win our fair share of these new ones, particularly given that these are coming through warm leads. But at this time, I don't have a great Rubric of the percent and I'm still kind of working with Paul and the team and Eterus to understand that a bit better myself.

Speaker 5

And then just kind of a continuation, as you say, strategic options possibly for Enteris. Clearly, one of the things that you've benefited from Over the past number of years have been the paybacks from some of the Cara royalties and it seems like they're making good progress at least their Report this week on their oral program. Would that be something where you'd still maintain some kind of future Royalty access or would it just depend on the bid or the options that you're presented with?

Speaker 2

Yes. I think we would retain that. It's really a financial asset at this point in time. We like royalties. We understand it.

Speaker 2

We think we understand what the value is. So there's no reason we could retain that. I tend to think the people that might be interested in the CDMO business are not really that interested in a Royalty from a 3rd party. So I would envision that we would retain that. There is another royalty there at Iteris as well.

Speaker 2

It's We haven't talked much about it. And it's just a royalty, there's no milestone that there's an active program going on there. And then we're We're actually working on some other proposals as well. So I think all of those types of things, which are really financial assets SWK would keep, I just don't see TD Mobile are really being that interested in those.

Speaker 5

Excellent. Well, thank you. Keep up the good work and

Operator

Our next question will come from Michael Diana with Maxim Group. You may now go ahead.

Speaker 1

Hey, Jody.

Operator

Hey, good evening.

Speaker 1

Now that SVB has been gone for about 4 months, is Do you notice any change in the competitive environment?

Speaker 2

Initially, I think the answer is yes. So therefore a period of time, capital was really scarce. I think and actually we've got One of our signed term sheets is a refi from SVB and we're speaking I think my colleagues are speaking with another Situation now, which again is another SVB, situation where they've got an SVB facility. So I think we have seen those opportunities now. I mean, SVB, a lot of those professionals now have moved on.

Speaker 2

And I think they're really active. If you look at First Citizens and some of these people, they're getting back out there. So There definitely has been an opportunity, particularly in the smaller side, where we play a lot, some of the less sponsor backed channels. I gather the new owner of SVB and some of the places the banks where those folks are going, they're probably moving up the quality spectrum. So, yes, it is an opportunity.

Speaker 2

I think it's not sort of the flood that we thought we might see when SVB and Signature Well, I went under if that makes sense.

Speaker 1

Okay, great. Thank you.

Speaker 2

Yes, absolutely. Thanks, Mike.

Operator

It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Jody Staggs for any closing remarks.

Speaker 2

Appreciate everyone speaking again. Hopefully, we've expressed the excitement we feel for what we've achieved so far this year and the opportunities ahead. Again, appreciate your support in dialing in and feel free to reach out to myself, Yvette or the Tiburon team if you have any questions. Hope you have a good evening. Bye bye.

Operator

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

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