SWK Holdings Corporation

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. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Jason Randall at Tiber and 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 30th, 2023. Fresh leads can be found in the investor relations section of swkhole.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 should not place undue reliance on these statements. Actual results may differ materially due to our risks and uncertainties, including those details 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 four 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 Heinrichsen, 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 costs, and moved closer to profitability. We achieved a key 2023 strategic goal of improving our balance sheet via 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 are also thrilled to partner with our new bank group member, Wood Forest, and appreciate the work the Wood Forest 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 are 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 this financing will allow. Our gross financial receivables totaled $235 million at quarter's end, a 10% increase from the prior year. We closed one $5 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 financing 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 one to five, with five being the highest score. During the quarter, we had two loans rated, scored as a two. The remaining loans were rated three or better. One of the two 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. 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 weather the challenging conditions. We rate our royalties green, yellow, and red. The three non-accrual royalties, Best, Ideal, and Polonix, 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. 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 Interest 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 count. Through our strategic partnership, we are currently working on approximately 18 projects from a variety of underlying customers. Third quarter 2023 in-terrace operating expense totaled $1.2 million compared with $2.6 million in the third quarter of 2022. We view the third quarter 2023 in-terrace quarterly operating expense as a reasonable quarterly run rate. Third quarter 2023 in-terrace EBITDA loss was $900,000, an improvement from a $2.5 million loss in the third quarter of 2022 after adjusting for a $5 million 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 interest profitability and increase subsidiary value. During the quarter, we repurchased 60,335 shares of stock for approximately $1 million. And year-to-date, we have repurchased 361,593 shares for a total cost of $6.1 million. We'll be repurchasing shares at the current discounted book value as an 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 entire segment reduced burn and continues to improve its value proposition to our strategic partner, and our financial segment generated healthy returns while closing additional loans. We are focused on prudently deploying the recently raised capital in 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 Henderson, 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 pre-tax net income of $4.1 million, or $0.36 per diluted share. A reported Q3 2023 net income of 4.5 million after income tax benefit of 0.4 million included a 0.1 million dollar increase in finance receivable segment revenue primarily due to an overall increase in reference rates offset by a 4.7 million dollar 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 NTERAS's license agreement with Kara Therapeutics in 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. And terrace operating expenses were 1.2 million in Q3 2023 compared to 2.6 million in Q2 2022. And finance receivable segment operating expenses were 2.6 million in Q3 2023 compared to 3.6 million in Q3 2022. The consolidated 1.3 million dollar 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 some 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 earn and is forming a deep relationship with our strategic partner. Operator, let's open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And if you would like to withdraw a question, please press star then 2. At this time, we will take our first question, which will come from Mark Argento with Lake Street. Please go ahead.

A quick question with all the updates, the new bond debt issuance, and then the new facilities. Can you just walk us through where you sit right now in terms 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 out the quarter.

Yeah, thanks, Mark. Yeah, so we had a – well, to answer your first question, we 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, and it's, of course, a good time to have that. 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 one or two term sheets and kind of five or six proposals. And proposals typically will turn into term sheets or some portion will. So 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 are 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.

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

No, no, no, that's afterwards. That's as we stand today. With that program. You know, the 2060, and I think it's probably closer to $65 million of deployable liquidity as of today.

Got it. All right, now it'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. You know, when you guys are thinking about, you know, the conditions of the equity markets right now, you know, kind of how imperative is it for the equity markets to, you know, open back up for some of these companies to, you know, to continue to, you know, fund their businesses? Meaning, you know, is that something you guys are spending a lot of time on? Are you guys concerned about the, you know, the condition of the equity markets at this point within your portfolio companies or just kind of walk us through your thinking around that?

Yeah, so, you know, 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, you know, 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 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 that 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. Um, you know, I, I think, uh, it's a case by case basis. Um, I mean, the capital markets stay closed forever. Then, you know, that, that, that will be a challenge, but I, I think, uh, you know, the management teams we're talking to have found creative ways to, to raise some bits of capital along the way.

Uh, helpful. And then just, um, you know, again, talking about the markets, you guys, stocks trading, you know, 15, 16 book values, 19 and change. I saw you were active with the buyback. Where are you in terms of 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. There's not a whole lot we can do on that front. The one change to our program this year is we do have the ability to buy back one block a week. So if a block of shares comes up, we have the ability now to purchase those. And we had some of that occur earlier this year, and we were able to buy three decently sized blocks. So our primary goal would be to source more of those blocks. If we're doing it through the 10b-5, we are somewhat limited just via the 10B5 trailing volume and policies.

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

Yvette, 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 Yvette has it. Yeah, we can grab it out of the queue or whatever or offline. No problem. Thanks.

Appreciate it. Yes, absolutely. Thanks, Mark. And again, if you have a question or a follow-up, please press star then one to join the queue.

Our next question will come from Scott Jensen, a private investor. Please go ahead.

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 and the buyback. Have you thought about other ways, such as a 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 Tinder and and things of that nature. So yes, yes, they're always considering other ways to return capital.

And then I guess another one is, you know, with the interest 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 the terrace, you know, 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. So, you know, I think we detailed two point seven million dollars of bookings year to date. And I think the last time we said it was two million dollars. 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 four or 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 can't or should be disclosing. So we have our one strategic partner who is sending us referrals, we then have to go win the business. So they don't give us business, they give us referrals. The Interis team then goes and makes bids, proposals, and pitches their services. And then the underlying customer, these biotechs, may select Interis for phase one and phase two 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. 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 markets, as well as new drugs coming to market, which could affect those royalties, how do you price that risk? How do you guys think about that risk?

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'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 years. So I don't know that that has changed. 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 ninth guy at the table, kind of the last option for those people. 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 two 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 trending well versus our underwriting case. So we're trying to do a conservative case, price it at 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, you know, because you buy these royalties and you're buying from a party that's smarter than you. You know, 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. You know, we're going to buy, we're going to give you $10 million. And when we get a two times return, you know, 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. 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 the broker. We work through Jones, and so I can put them in touch with Jones. Thank you.

All right. Thanks for that information. Thanks, 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, 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.