Q1 2023 SWK Holdings Corporation Earnings Call
Good morning, and welcome to the S. W. K Holdings Corporation first quarter 'twenty Trophy three financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation there were.
Will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Jason Rando with cheaper and strategic advisors. Please go ahead.
Good morning, everyone and thank you for joining <unk> holdings first quarter, 2023 financial and corporate results call.
Earlier. This morning, I said EBITDA holdings issued a press release detailing its financial results for the three months ended March 31 2023.
These can be found in the Investor Relations section of SDK whole dot com under news releases.
Before beginning todays call I would like all of the statements regarding forward looking statements.
Today, we'll be making certain forward looking statements about future expectations plans events and circumstances.
Any statements about our strategy future operations and the development of our consumer and drug product candidates.
As for future potential product candidates and studies and expectations regarding our capital allocation and cash resources.
Statements are based on current expectations and you should not place undue reliance on these statements.
Actual results may differ materially due to risks and uncertainties, including those detailed in the risk factors section of our syndicated holdings 10-K filed with the SEC and other filings, we make with the SEC from time to time.
So he can't 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 for <unk> Holdings on today's call are Joe <unk>.
President and CEO Jaime.
Heinrich Chief Financial Officer.
He will provide an update on if that's the case first quarter 2020, corporate and financial results.
Jodie go ahead.
Thank you, Jason and thanks to everyone for joining our first quarter conference call.
First quarter results were in line with our expectations as financial segment non-GAAP net income totaled $7 3 million, representing a 12% annualized return on tangible finance book value.
This is a solid baseline return for lending strategy. Although we believe we can improve on this figure to continued diligent underwriting combined with appropriate balance sheet leverage.
Our gross total investment assets reached an all time high of $250 million.
It is an increase from 238 million at the end of 2022 and 196 million at March 31 2022.
This quarter, we implemented the current expected credit losses model better known as diesel Cecil implementation resulted in an $11 8 billion dollar allowance for credit losses, which bridges to the $238 million net total investment assets reported at period end.
The season is not allocated to a specific finance receivable nor is driven by a view on any specific finance receivable.
That's the BK worked with a consultant to calculate an appropriate reserve using our historical loss rates as well as competitor loss rates.
Do this analysis, we concluded an approximately 4% reserve against our funded and unfunded finance receivables is appropriate at this time.
Based on our typical five year loan maturity. This translates to a roughly 80 basis point per year a loss rate.
This allowance was charged to accumulate accumulated deficit and after adjusting for a change in our deferred tax asset, resulting in a $9 $7 million reduction in book value.
Our portfolio effective yield was 15, 5% up from 13, 9% in first quarter 2022 and around an all time high.
Our tailored financing solutions 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 credit quality, you will see in our 10-Q, we disclosed our internal credit scores for the first time.
We score loans, one through five with five being the highest score with the exception of the $11 $8 million probiotics non accrual positions. All SBA loans are rated three or better as of the first quarter of 2023.
We continue to work with on X to achieve a resolution.
We are also in regular communication with boards that will require additional funding during 2023.
We score royalties green yellow and red for the first quarter of 2023, 84% of our royalties were scored clean.
The $4 2 million dollar ideal royalty and the legacy of $2 9 million, our best royalties or the majority of the non green royalty positions. We're.
We're in regular communications with ideal and working to achieve a resolution.
The turnaround at our terrorist subsidiary continues with total of terrorists operating expenses declining from $2 6 million in fourth quarter 2022 to one 4 million as of first quarter 2023.
While there will be onetime charges in the second quarter from former employee severance current employee retention payments. Some final R&D program costs and strategic review costs.
The first quarter 'twenty to 'twenty three opex run rate is a reasonable normalized operating expense level for tariffs.
Additionally, we are excited with the $7 million of CD Moe proposals inherits is bid on year to date.
A portion of these bids were driven by our relationship with a large former format service organization.
While it's too early to forecast our close rate. These are warm leads and we expect a strong pipeline to drive revenue growth in the second half of 2020 three.
As previously discussed we are working with an adviser to evaluate strategic alternatives for terrorists. It will provide an update when appropriate.
During the quarter, we repurchased 28766 shares through our <unk>, one program and year to date, we have repurchased nearly 50000 shares.
Minor minor correction from the press release post quarter close we repurchased over 18000 shares for approximately $318000 or $17.57 a share I think the press release I said 400000.
Our current program expires may 15th and I expect our board will approve a new T. N. B five program that we believe will have benefits over the old program, ideally, allowing us to repurchase a greater number of shares.
To summarize the first quarter of 2023 was a solid quarter for financial segment were $7 $3 million of segment. Adjusted net income a very strong 12% return on book and a 15.5% effective yield.
We are working with her to non accrual borrowers to seek a positive resolution and are in regular communications with borrowers that need access to capital markets near term.
The new loan environment is attractive and we're pursuing balance sheet capital deployed into this opportunity with that I would like to turn the call to our CFO that heidrick central or an update on our financial performance for the quarter.
I bet the cultures.
Thank you Jody and good morning, everyone.
Mentioned earlier this morning, we reported earnings for the first quarter of 2023.
We reported GAAP pre tax net income of four 5 million or 30.
<unk> 35.
Per diluted share.
Q1, 2023 net income of four six.
After income tax benefit of 1 million included $1 7 million dollar decrease in finance receivables.
$6 million decrease in our pharmaceutical.
Segment revenue.
The decrease in year over year revenue included a five 3 million dollar decrease from finance receivable that were paid off in 2022.
That included <unk> 4 million of revenue from the resolution of DMV dams alone in Q1 of 2022.
That was one 4 million of royalties received.
Narcan, which was sold in the fourth quarter of 2022.
The decrease was partially offset by a $4.4 million increase in revenues received from new investments.
Hum.
The additional funding extend it to existing borrowers.
Absent any material unforeseen payoffs, we anticipate that finance receivables.
Three quarters of the year.
Comparable revenue reported in Q1 2023.
Overall operating expenses during Q1 'twenty two 'twenty three decree gave quite far medallion from five 1 million in Q1 of 2022.
As Jody mentioned earlier.
Operating expenses decreased.
One 4 million in Q1, 2023 from $2 6 million in Q1, 'twenty 'twenty Q.
And finance receivable segment operating expenses decreased to 29.
Yeah.
Q1, 'twenty two 'twenty three.
Thank you Matt.
One 2022.
Again as Jodi mentioned effective January one 2023 S. W. K adopted the accounting standards update 2016.
Which requires companies to develop and expected credit loss methodology based on historical data combined with the current condition and future development.
Upon adoption at the new accounting standard we wrote off before $11.8 million previously reported allowance for credit losses.
Finance receivables.
Receivables are now presented that preview.
Previously recorded allowance it.
We estimated expected credit losses, using a loss rate model that utilizes publicly available data sources current condition and qualitative forecast that are reasonable and supportable at endpoint.
We then applied our loss rate model to argue portfolio segments to arrive at our current allowance for credit losses.
Coincidentally, a $11 8 million.
Which is presented as a reduction to finance receivables.
We also recorded a $4 million liability or the unfunded commitment described in footnote six of our Q1 10-Q.
The cumulative impact from the adoption of the accounting standard we recorded a 9.77 million dollar reduction net of like a book deferred tax assets.
Five nine in the accumulated deficit.
Although the adoption of this accounting standard had a material impact to prior earnings utilizing the expected credit loss model will allow for smooth smoother financial reporting as it is.
Secondly, predicts nonperforming loans at future write offs that create volatility and financial reporting.
With that I will conclude by echoing Gary's remarks that environment.
<unk> gives us ever for high quality, well priced deployment and we are working hard we are working hard to take advantage of that.
I'll now turn the call back over to Jodi.
Thanks, So bad in summary, the first quarter of 2023 was in line with our expectations and we are pursuing our 'twenty to 'twenty three goals to position STB K for long term shareholder value creation.
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 one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Mark Argento with Lake Street. Please go ahead.
Hey, Julien you got just a couple of quick questions.
First off I know.
Do you want to.
Implementation of our CFO I'm just.
I wanted to clarify what how would you do it and kind of loan loss reserves previous work.
We're cutting specific loans or was there a different way that you're accomplishing the same thing.
Yeah, Let me give you sort of the high level in all of the bed speak to your kind of the specific accounting treatment, but historically, we've been either impairing or reserving against specific loans of royalties once the loss.
Or is it anticipated so it was it was specific so.
So we have not historically had.
Allocated sort of general loss bucket, so that that's really what the differences here.
How bad do you want to you want to comment or elaborate on that.
Under the.
Previously our previous model for recognizing tried.
Credit losses, It had you basically had.
And something that is likely to occur.
And it was really apply to specific asset we knew.
That we were not going to we.
We.
Yeah.
That is not paying according to the contractual terms and now the we have a general reserve that is applied to the entire portfolio.
Alright, that's.
Helpful.
Jody.
One other comment you know just because I know, it's a little confusing, but I think the important thing is this is an accounting you know, it's an accounting pronouncement and it's something we have to implement them you know it doesn't it doesn't in any way shape or form.
Reflect our view on the portfolio were expected losses, it's we we need to we needed to build this general reserve you don't want to finance companies have been doing this I think it really over the last three years and it was time for us to implement this so.
Yeah, no it makes sense.
Turning turning to just the general opportunity out there obviously, there's a.
Our need for capital.
Especially in the areas in which you guys focus on.
You made one new loan.
Quarter extended with some additional capital from existing.
Customers.
What what's kind of the dynamic right now in terms of the opportunity to deploy more capital on that dovetailing with that.
You know 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, yeah yeah.
Absolutely.
You know the opportunity said is it's quite interesting.
The pipeline is good in it and all that the the challenge really has been that that were were fairly deployed here.
We've got the ability to do maybe a small deal or two but it's it's challenging when you're at that level. Because we you know we have a they are a business, where we need to have a pipeline of opportunities ranging from first call to <unk>.
She'd issued and when we're we're down to that level of capital you know it it becomes challenging because you're sort of picking one 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 where of course, we would not go out there and 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 two here going forward.
On the call.
Res side on the balance sheet side.
I I personally am.
Frustrated that we have not been able to to.
Analysis anything to this point we've it's.
It's a little challenging to sort of answer that question because we.
We've of course been very active and have pursued a few different options and you know the the regional bank turmoil as it has been a has been a challenge, but one that we're going to overcome and I'm confident we're going to get this done but you know we were working with a variety of parties and in some of those parties how bad internal problems.
Right now I feel really good about where we are where we're working on a specific project to get this done them, but I can't really say anything else and I shouldn't we don't want to over promise in this environment. We will get this done it's going to happen. It's just a matter of when and ideally where we're going.
Gonna 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.
As we've discussed previously we've looked at you know on our unsecured bonds and things like that so.
It's going to happen.
You know the exact timing you know remains a bit TBD and once that happens and we have no material additional capital I think youll see us close more.
More loans will be able to kind of run the business the new development in the business development a portion of the business more effectively.
Great. Thanks for the color good luck.
You.
Again, if you'd like to ask a question. Please press Star then one.
The next question comes from Scott Jensen, a private Investor. Please go ahead.
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.
Development.
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 in our capital needs to be used to really increase our.
Value in all of our companies at some point in time are likely going to need to raise additional capital or are looking for some type of exit. So you know in one sense that that's our business that's always been our business and the capital we put in ideally as bridging them to that and bridging them close to cash flow breakeven.
The markets of course tougher for folks raising capital. That's I think everyone here knows that so you know to answer your question I think we're.
We're trying to get out in front of the situations, where the near term need for capital as you.
More obvious and maybe a little more stressed and that may be through amendments and what those amendments where maybe requiring certain things and you know 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.
So that's kind of the existing portfolio you know the new deal portfolio, we're really trying to focus on opportunities that our capitals bridging to cash flow positive and there's equity coming in and they were looking for a run ways you know much longer than maybe we have historically. So we're we're looking for you know 18 months plus where it's historically I think we've been much more comfortable and in a shorter runway.
<unk>.
Okay, Great and then my last question is just you had mentioned.
Possible increase in cost just for the second quarter from tariffs do you have like an approximate range about what that might be.
Yeah.
<unk> 2 million one no no no no no no no it won't it won't be that much but what we're talking about hundreds of thousands of dollars here I don't have that number in front of me. It's it's kind of a there's kind of a handful of things going on it you know we mentioned some one time or is there some form former severance cost there are a few retention.
Payments Oh, we're blending the strategic process. So we've got costs associated with that but I think you'll see.
A tweak in the second quarter, but once we get past all of that I think that's 1415, you know opex number and that's all win in a terrorist that's that's everything.
You know I think we feel really good about that the only way I would expect it to change going forward as if they just continue doing so well on the revenue front half to bring on a you know a little bit of additional help.
Understood and then just one more would be a statement rather than I am.
A question and that is just I would keep advisors more aggressive buying back the stock and I'm glad that you're thinking about expanding the program in that fashion. So thank you yeah. No I. Appreciate that you know we think at this level. It's a really solid use of capital is.
It hasn't been as easy as I think all of us would've would've hoped.
We do think that you know or oral tend to be five one maybe it was a bit suboptimal and that we can improve that.
I won't go into specifics, but there's we've you know we've spoken with new Council and things. So I think step one is really I'm getting that program optimized it and seeing what happens there, but here yeah I agree.
That settlement.
Thanks, so much.
This concludes our question and answer session I would like to turn the conference back over to Jodi <unk> for any closing remarks.
Thank you operator, thank you Jason and thank you have a bad appreciate everyone dialing in and the questions that now will be around today tomorrow I feel free to reach out if you would like to discuss our or have any questions on the results. Thanks and hope everyone has a great day bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
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