SWK Holdings Corporation

Good morning everyone and welcome to the SWK Holdings fourth quarter and year-end 2023 conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. If anyone should require operator assistance during the conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host Jason Rando with Tiber and Advisors. Jason, over to you.

Thank you, Jenny. Good morning, everyone, and thank you for joining SWK Holdings' fourth 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 December 31, 2023. The press release can be found in the investor relations sections of swkhold.com under News Releases. Before beginning today's call, I would like to make the following statement regarding forward-looking statements. Today, we will 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. These statements are based on our current expectations, and you should not place undue reliance on these statements. Action results may differ materially due to our risks and uncertainties, including those detailed in the Risk Factors section of SWK Holdings' 10-K file with the SEC and other filings we make with the SEC from time to time. SWK Holdings disclaims any obligation to update information containing these forward-looking statements, whether as a result of new information, future events, or otherwise. Joining me on today's call from SWK Holdings is Jody Staggs, President and CEO. We'll provide an update on SWK's fourth quarter 2023 corporate and financial results. Jody, go ahead.

Thank you, Jason, and thanks, everyone, for joining our fourth quarter conference call. Before beginning the call, I want to thank our former CFO, Yvette Heinrichsen, for her eight years of service to SWK. Over that period, Yvette upgraded our financial reporting, controls, and capital markets capabilities. Thank you, Yvette, and we wish you the best in your future endeavors. I also want to thank the team and our consultants at CFGI for working with us to get the 10-K filed in a timely fashion. Thank you. 2023 was a productive year for SWK as we accomplished three of our four primary goals while growing our finance receivables portfolio to an all-time high and repurchasing over $6 million of stock at a 25% discount to the current book value. As a reminder, our 2023 goals were to build and train the team and prepare to scale the firm. to raise balance sheet capital to facilitate this expansion, to find a sustainable path forward for Interis, and to crystallize a third-party capital strategy. Elaborating on the three goals we achieved, first, our investment team consists of six highly motivated credit professionals, the largest and most experienced the team has ever been, which allows us to originate, underwrite, and manage more transactions than at any time in our history. The investment team is butchered by two support colleagues, and we expect to replace the CFO position this year. Second, during 2023, we secured and expanded a new ABL facility totaling $60 million with two supportive bank partners in First Horizon and Wood Forest. We also raised a $33 million unsecured baby bond. We have deployed a portion of this capital and have approximately $50 million of liquidity to pursue core STPK life science finance opportunities. Third, as it relates to our entire subsidiary, earlier this week, we announced an agreement with a large strategic partner that we believe positions the Interis CDMO operations to generate potentially break-even or better profitability over the duration of that agreement and may lead to the sale of certain tangible assets of Interis at a premium to book value. Finally, while we did not secure a JV or launch a fund during the year, we built our network and are better positioned to pursue this goal in 2024 and beyond. We believe these achievements set the stage for improved shareholder returns going forward. SABK's core business is financing commercial stage life science companies. We do this through first lean term loans, royalties, and hybrid structures and focus on financing the $5 million to $25 million. This is a strategy we've honed over more than a decade and for which we have an extensive network, capabilities, and experience spanning the three core functions of a direct credit firm. Those are origination, underwriting, and portfolio management. We believe the combination of an attractive niche combined with the existing team and platform positions SFPK to successfully originate, underwrite, and manage a portfolio of mid-teens plus yielding finance receivables. At 12-31-2023, our gross portfolio of life science finance receivables totaled $288 million, an all-time high. The expansion of our portfolio is directly linked to the investments made in our team and underwriting process. Our portfolio consisted of $212 million of performing senior secure term loans to 16 parties, $51 million of royalties to seven entities, and $26 million of non-accrual instruments to five parties. We also hold approximately $2 million of warrants from public companies, as well as warrants or CBRs for 12 private companies carried at zero on our balance sheet. For the quarter, our portfolio effective yield was 14%, and the realized yield was 14.1%. As a reminder, the effective yield is the gap yield that assumes future cash flows are received in line with our modeling, whereas the realized yield uses actual period finance receivable interest income and fees. Over the past five years, STPK's realized yield has averaged approximately 17%, with variance based on timing of investment realizations, royalty performance, and non-accruals. Turning to portfolio activity, during the fourth quarter we closed four transactions committing $60 million of capital with $55 million deployed. We closed three senior secure loans, a $20 million loan to Journey Medical, a dermatology-focused pharmaceutical company, a $20 million loan to Shield Therapeutics, a pharmaceutical company commercializing a unique ion replacement therapy, and a $6 million loan to Nicoya Life Sciences, a leader in bench-top surface plasmid resonance tools. We also deployed $14.1 million to purchase a series of sales-based milestones related to a portfolio of immune goblins. During the quarter, our finance receivables generated $3.7 million of adjusted finance segment net income, and for the full year of 2023, the segment generated $24.4 million of adjusted segment net income. This is a 10% adjusted return on our tangible finance book. Finance segment adjusted net income and return on tangible book are the primary financial metrics we use to gauge our core business progress. 2023 finance segment results included a $2.3 million negative impact from the CECL reserve build, which totaled $13.9 million at year's end. As a reminder, throughout 2023, we built a general allowance for loan loss to comply with CECL. On each new loan, we reserve 4.4% upfront for potential future loan losses. 2023's growth in book value per share was negatively impacted by this build. We think we're in the later innings of building this general loan loss reserve, although it will increase in proportion to growth in our finance receivables portfolio. Turning to the interest agreement, on March 18th, we signed an exclusive option and asset purchase agreement with a strategic partner that is a global leader in the design and manufacturing of a broad range of drug and consumer product dosing, dispensing, and protection technologies. The agreement grants the partner a two-year exclusive option to purchase certain Interest tangible property equipment at a premium to the September 30, 2023 book value, or approximately $6 million. Other tangible assets, including inventory, will be valued if our partner opts to exercise the agreement. In consideration for the grant of the option, the partner agreed to pay Interest a low single-digit million dollar option fee, with the first portion paid at close and the second portion payable by January 1, 2025, if the option has not been exercised by that date. If the option is exercised, the option fee is credible to the purchase price. However, if it is non-refundable, the option fees are non-refundable if the option is not exercised. The partner also agreed to guarantee to Interest minimum annual revenue payments under an existing collaboration agreement totaling mid-single-digit million dollars for each of the calendar years 2024 and 2025. The agreement does not include any of the Interis IP, which includes the Interis Pepteligence oral dosing formulation, the licensing agreement with Care Therapeutics and corresponding milestones and royalties, other licenses, or any of Interis' additional IP, including the oral Luprolyte program. We are working with the Interis management team to monetize these assets. The agreement immediately reduces the cash borne at Interis, and we believe the business will be breakeven or better over the duration of the agreement. Importantly, the agreement allows SWK to prioritize our core specialty finance business and allows our shareholders to participate in the earnings of the finance business to a greater extent. At December 31st, 2023, our book value per share was $22.43 compared with $21.80 at the end of 2022. On a non-GAAP basis, our tangible finance book value per share was $19.61 compared to $19.02 at the end of 2022. SWK shares trade at an approximately 10% discount to the 12-31-2023 tangible book value. As a reminder, that book value, that tangible book value does not include the $13.9 million CECL reserve. Or said another way, the CECL reserve provides a $13.9 million buffer to potential future loan losses on top of that $19.61 per share. The tangible book value also does not include any value for the Interest CDMO, Interest IP, the tax asset, nor the value of private warrants or other fees that may be off balance sheet. With shares trading at this discount, we view the repurchase of stock as a prudent use of shareholder capital. During the fourth quarter of 2023, we repurchased approximately 14,000 shares of stock for $200,000, and year-to-date through March 19, 2024, we repurchased an additional 51,000 shares for a total cost of approximately $900,000. In conclusion, we ended the year on a strong note with four closed deals and our gross finance and investment portfolio totaling approximately $290 million, an all-time high. The Interest Agreement positions that business to be potentially profit neutral or better over the next two years and allows STPK to focus on our core specialty finance business. We have been repurchasing shares at a valuation we believe represents a compelling use of shareholder capital. Finally, we have the team, expertise, network, and platform to successfully deploy capital into the attractive $25 million and under life science finance opportunity set. With that, let's open the call to questions.

Thank you very much. We are now opening the floor for questions. If you have any questions, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For anyone using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please hold a moment whilst we poll for questions. Thank you. Your first question is coming from Mark Argento of Lake Street. Mark, your line is live.

Hey, Jody. Thanks for taking my question. Just wanted to just get a high-level read on the overall market. You know, we've got kind of a higher rate environment for a little while here. It seems like that's been kind of fully priced in. Capital markets, especially on the small end of the market cap spectrum, seem like they're picking up steam or gaining some momentum finally. You know, how do you see the overall book, the environment right now? In terms of, you know, the books access to capital or some of your, you know, your lended clients, their access to capital right now and other forms. And then overall, you know, kind of the pipeline, you know, how do you feel like your position here in terms of the ability to put more capital to work over the near term?

Yeah, thanks, Mark. And good morning. Yeah, so it's interesting. Six, seven, eight months ago, everyone was afraid to do deals sitting on their hands. And of course, with S&P and Bitcoin and those things hitting all-time highs, folks are doing deals more frequently, and folks are able to access capital. So the positive is our portfolio is made of companies that are commercializing products. They need to raise money. This environment is better for them. So we've had a couple of companies raise money. We have a couple of other companies out there raising money, and the reception seems to be quite a bit better than it was, say, nine to 12 months ago. In terms of the pipeline, we still have a solid pipeline. In our segment of the market, a lot of these companies don't have a lot of options at any given time of the cycle. We've still got a lot of deals we're running and hope to close. I will say, you know, the last sort of three months, we've had a handful of deals that I thought we would close, like good solid core SFK life science deals. You know, one of those, they ended up taking equity, and that was one we, you know, we had worked long and hard on and thought we had a really compelling proposal and had key stakeholder buy-in, and they took equity, which was understandable. We had another one where I think we got outbid. But there's still plenty of things for us to do out there, and plenty of these small companies that need, you know, checks of 25 million or less are still out there trying to raise money and don't have a lot of options.

Well, that makes sense. And then in terms of from a strategic perspective, are you still focused on, you know, the opportunity to, you know, JV or find partner capital? Anything changed now as you're kind of a quarter into the new year in terms of the strategy?

Yeah. No, we still would like to do that. I think the goal last year really was let's get ready to grow. Let's get the team ready to grow. Let's have the machine down and then raise some balance sheet capital. I think we did a pretty good job on that. The JV and some kind of third-party capital is really interesting to us. We have an interesting sourcing, origination, management capabilities. We've talked to a lot of larger alternative asset managers and credit firms. They find it interesting. I think for us, it will allow us to continue to grow assets, perhaps expand our size a little bit in terms of check size and sort of our aperture. And then for shareholders, we would collect a fee, which would be fantastic as well, and help ROE. Now, all that's easier said than done, obviously. And we've got to find the right partner and the right structure. But yeah, we're still interested. We're still talking to people. Nothing's imminent. But I know the board's pushing us hard to find something there in 2024. Thanks, Jody. Good luck. Yeah, thank you, Mark.

Thank you very much. Just as a reminder, if anyone has any questions, you can press star 1 on your phone keypad now to join the queue. Okay, if we don't appear to have any further questions in the queue, I can hand back over to Jodie for any closing comments.

Yeah, thanks, Ginny. Yeah, just thanks, everyone, for joining the call. It was highlighted on the call. We're bullish about our prospects in 2024, given increased finance receivables portfolio, plenty of availability to fund new deals, and continued demand for our customized loan and royalty products targeting innovative life science companies. Hope everyone has a great day.

Thank you very much, Jody, and thank you, everyone. Today's conference is now concluded. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.