SWK Q1 2024 Earnings Call Transcript

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May 16, 2024

There are 5 speakers on the call.

Operator

Good morning, everyone, and welcome to the SWK Holdings First Quarter 2024 Conference Call. At this time, all participants have been placed on a listen only mode, We will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jason Rando. Sir, the floor is yours.

Speaker 1

Good morning, everyone, and thank you for joining SWK Holdings' Q1 2024 Financial and Corporate Results Call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the 3 months ended March 31, 2024. The press release can be found in the Investor Relations section of swpahull.com under News Releases. Before beginning today's call, I would like to make the following statement regarding forward looking statements. Today, we'll be making certain forward looking statements about future expectations, plans, events and circumstances, including statements about our strategy, future operations and our expectations regarding our capital allocation and cash resources.

Speaker 1

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 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 SWK Holdings on today's call is Jody Stacks, President and CEO, who will provide an update on SWK's Q1 2024 Corporate and Financial Results. Jody, go ahead.

Speaker 2

Thank you, Jason, and thanks, everyone, for joining our Q1 conference call. SFK's Q1 of 2024 results were highlighted by 24% growth in Finance segment revenue to a near all time high of 11,500,000 while Entera segment signed an exclusive option to purchase agreement with a strategic partner that reduces the operating burn and may lead to the acquisition of CERN's CDMO related tangible assets. SWK's core business is financing commercial stage life science product companies to 1st lien term loans and royalties with a focus on $5,000,000 to $25,000,000 investments. We have concentrated on this niche for over a decade and have developed an extensive network and strong experience spanning the 3 core functions of a direct credit firm: origination, underwriting and portfolio management. These capabilities were evidenced during the Q1 as our Finance segment generated a 10.3% year over year increase in gross finance receivables portfolio to $274,500,000 coupled with a 14.2% effective yield and 16.3% realized yield.

Speaker 2

These achievements led to a 24% year over year increase in segment revenue to $11,500,000 This performance enabled our Finance segment remain profitable in the quarter generating $1,000,000 of GAAP net income and $2,700,000 of adjusted non GAAP net income despite being negatively impacted by $6,000,000 impairment in our loan book. We are constructive on the Life Science Finance market and royalty opportunities while remaining cognizant of increased competition in certain pockets of the life science finance market. While many of our competitors have grown to a size where they must focus on large sponsor back opportunities, we believe STBK's focus on the less competitive sub-twenty $5,000,000 market remains a competitive differentiator. During the Q1, our Antares division signed an exclusive option and asset purchase agreement with a strategic partner, granting the partner a 2 year exclusive option to purchase certain and tariffs tangible assets in exchange for option fees and guaranteed revenue payments. In April, we received the 1st low single digit $1,000,000 option fee.

Speaker 2

The guaranteed revenue payments are chewed up every 6 months and we expect to receive the 1st guaranteed revenue payments in the Q3. Our Q1 financial results did not include any revenue from either the option fee or guaranteed revenue payments. As we highlighted on our Q4 call, the agreement immediately reduces the cash burn on Antares and we believe the business will be breakeven or better over the duration of the agreement. The agreement also provides our colleagues at Antares the opportunity to work with our partner to increase the project pipeline and generate new business while allowing SMBK to prioritize our Specialty Finance business focused on investing in small and midsized commercial stage life science companies. Turning to our share repurchase program, we bought back 58,298 shares at a total cost of $1,000,000 during the quarter.

Speaker 2

Since quarter close, we have repurchased an additional 19,000 shares for a total cost of 300,000 dollars At March 30, 2024, our book value per share was $22.46 a 5% increase compared to $21.39 in the year ago period. Non GAAP tangible financing book value per share totaled $19.69 an approximately 17% increase from the year ago period. For the Q1 of 2024, the realized yield of the finance receivables portfolio was 16.3% versus 15% approximately 15% for the same period in the prior year. In summary, Q1 of 2024 was largely as expected with the exception of the $6,000,000 loan impairment. For the remainder of 2024, we will prioritize selectively closing commercial stage life science loan and royalty transactions that fit our underwriting criteria, working with our non accrual borrower partners to realize positive outcomes, exploring paths for additional capital and returning capital to shareholders by our buyback program.

Speaker 2

With that, let's open the call

Operator

Your first question is coming from Mark Argentino from Lake Street. Your line is live.

Speaker 3

Hey, Jody. Just a couple of quick ones. One, could you just touch on the impairment? What was it? And then 2, what's your kind of lending base or capacity right now?

Speaker 3

Thanks.

Speaker 2

Yes. Thanks, Mark. Yes, so the impairment was to our Trio loan, which was carried at $9,600,000 at twelvethirty. Yes, the situation remains in workout. There is a restructuring ongoing.

Speaker 2

So we remain positive towards the potential outcome here. But it's I think the restructuring happened a little quicker than we would have thought. It was a little bit more rushed than we would have thought. And as it goes the business goes through that, there's likely to be some disruptions. Given that given our structure under the restructuring, we felt this impairment was positive excuse me, was not positive, was appropriate.

Speaker 2

We're as we get a little further out from it, we'll do a full write up and analysis of what happened here. It was a U. K. Borrower. We've only done a few of those.

Speaker 2

And I think we need to do a deep dive and understand if that played a role here. There's some other dynamics that I think in my mind happened and we'll definitely use this as a learning experience. In terms of our lending capacity, we the revolver as we stand today, the revolver is undrawn. I think we've got a few $1,000,000 of cash. So we have plenty of capacity, let's say $50,000,000 to $50,000,000 We've got some undrawn commitments and things like that.

Speaker 2

But we're in the $45,000,000 to $50,000,000 of capacity. I was talking to the team yesterday about what we've done year to date. I think we would have liked to have closed some deals. We actually have submitted about $200,000,000 of proposals year to date, which is up year over year and we have about $60,000,000 of proposals outstanding. So I think we're doing we're running our playbook.

Speaker 2

We're out there originating we're out there finding potential partners. We're out there submitting proposals. The market has turned a bit more competitive and that's both just sort of general dynamic of a new player or 2 in the market plus with equity markets moving higher that's an alternative for some of these companies. So I don't think we're going to be doing anything drastically different, but I sort of challenge the team to think through our process, our proposals, are there things we should be doing differently? Are we out there hustling every day, making sure that we're staying in front of these companies and putting the best proposal forward to get some closings.

Speaker 3

That's helpful. And then has any of your portfolio companies access the equity markets in terms of raising additional equity capital or how do you guys view the broader capital markets right now?

Speaker 2

Yes. Yes. So we do have some private companies that have raised capital recently, one public company as well. And I suspect others are evaluating that given it's those are open. So it's a double edged sword.

Speaker 2

It's great for our portfolio companies, more equity. We finance cash burning life science companies. So it's important that they have some ability to raise equity, particularly when things are good. It does make originating new loans, I'll say, modest and more challenging.

Speaker 3

Great. Thanks.

Speaker 2

Yes. Thank you, Mark. Appreciate the questions. Thank

Operator

you. Your next question is coming from William Koch. Your line is live.

Speaker 4

Hi. This is Bill Koch calling. I'm a shareholder, not a financial person. Hi. Hi.

Speaker 4

I appreciate this opportunity. In fact, I'm a criminal defense lawyer. I don't all the financial numbers are, I think great with this company. The only reason why I'm a shareholder though is and this is my question, questions actually I have a lot of questions. The only reason why I'm a shareholder is because SWKH owns in tariffs.

Speaker 4

And I owned, Unigene stock 20, 25 years ago. So I'm like so it's almost like I'd like to have like a lot of questions that I couldn't really I mean I know what they are, but I couldn't really formulate them given that I just found out last night that this conference call is going to be this morning. But going back to stuff that Unigene did, some of the situations they were in like with Pfizer and how they competed with Hemisphere through the years, all the deals, the big deals they had that Unigene had and then Enteris had with sort of potentially it never worked out, but potential blockbuster drugs. So I'm not sure if I could just start asking questions or if I could send you

Speaker 2

an email. Yes. Let me maybe kind of frame it this way. And maybe it makes sense for us to get on a call too because I can walk you through kind of what's happened, SWK's involvement and a lot of specifics around Unigene and the transition. So we purchased Centaris, it's been over 4 years ago, might have been 5 years ago.

Speaker 2

And at the time, the thesis really was, hey, this is a cool technology. They're helping peptide and certain small molecules go from IV to oral. There were some interesting things in the pipeline. And yes, we saw the Hemisphere transaction and their involvement with GLP-1s. And we thought, wow, this is pretty cool.

Speaker 2

Fast and they had signed the license with Cara. So we felt like that validated technology and we like that a lot. Kind of fast forward, I would say the execution wasn't great and we certainly hold responsibility for that. I would say the window was kind of missed. So they're still talking to folks about additional licenses and we've come close a couple of times.

Speaker 2

But the window was sort of missed. There was probably 4 or 5 year window when there was some opportunities to get some things done and again execution wasn't great. So when the Board put me in as CEO, we looked at that business and said, hey, can we really add value doing what we're doing now? And if you look at our financials, it was a cash burning situation. So we were sending money from our finance business to Antares, which none of us wanted to do.

Speaker 2

And we made the decision to really downsize that business. So we reduced the headcount. There's a new CEO there named Paul Shields and we really refocused that around kind of classic CDMO operations. So they're focused right now on some sort of unique dosing types and helping companies evaluate those dosing types in Phase 1 and Phase 2. So we still have Pettelligence.

Speaker 2

There are still some efforts to do some licenses there. As mentioned, we're talking to people and we've come close a couple of times. But unfortunately, I think the window for monetizing that IP is probably not all the way closed, but it's not where it was 5 years ago.

Speaker 4

Okay. Well, I guess I kind of yes, because I mean I don't have much time yet, but all Hemisphere had was an oral delivery technology that I believe Unigene was actually shown I think in those calcitonin studies years ago to be better than Hemisphere's technology in terms of delivering the API into the bloodstream and Hemisphere was bought by Novo for over $1,000,000,000 So that's kind of why I thought like, wow, this SWK has money and maybe they can move and tariffs forward to some sort of huge big deals like that. But I guess what you're saying is that's not going to happen.

Speaker 2

I would say it's we haven't given up. There's still some efforts there. But look, you're exactly saying our thesis. That is exactly what we thought. We purchased it for, I think, $19,000,000 We got some of the care license.

Speaker 2

So that your thesis is exactly what we thought. And at the time, I think we thought and there was some work in the pipeline on GLP-1s and I don't want to get too in the weeds here. But so we saw all those same things and thought this could be a huge upside scenario. So again, I don't think it was a crazy idea. It didn't work out like we would have hoped.

Speaker 2

But yes, I think your points are well taken. And just I guess last comment I would say is, if you look at any of these dosing companies' technologies, most of the large pharma biotechs they have some of them they do have internal capabilities. And you're right, like the pet intelligence technology is, from what we've seen from data, from talking to partners, it's the best out there in terms of getting certain API where it needs to go. However, is that a differentiating enough factor to get someone to pay a royalty? That's always the challenge.

Speaker 2

So if you can get 10% of the API where it needs to go versus 5%, that's awesome, that's great. Is it valuable enough for someone to pay a royalty or they say, you know what, 5%, we can maybe up the milligram and still get the coverage we need. So that's what you're always wrestling with there.

Speaker 4

Okay. All right. I appreciate it. Absolutely. Yes.

Speaker 4

And feel

Speaker 2

free to call. I'm happy to chat on that and would love to hear your views on sort of what happened there.

Speaker 4

Okay. All right. Thank you.

Speaker 2

Thanks, Bill.

Operator

Thank you. There are no further questions in the queue.

Speaker 2

Great. Well, thanks for the questions, Mark and Bill, and thanks for joining the call. I'm around today. The team is around today and tomorrow, if you'd like to reach out. And hope everyone has a good day.

Speaker 2

Bye

Speaker 4

bye. Thank

Operator

you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for

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Earnings Conference Call
SWK Q1 2024
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