Q2 2023 SWK Holdings Corporation Earnings Call
Good afternoon, and welcome to the F. W. K Holdings Corporation second quarter, 2023, corporate and financial results Conference call.
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I would now like to turn the conference over to Jason Rando with cheap cheap rent strategic advisors. Please go ahead.
Okay.
Good evening and thank you for joining us to BK Holdings second quarter, 2023 financial and corporate results call.
Earlier today after you can't holdings issued a press release detailing its financial results for the three months ended June 32023.
The press release can be found in the Investor Relations section of yesterday's pay a whole dot com under news releases.
Before beginning todays call I would like to make the following statement regarding forward looking statements.
Yeah, It was 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 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 SDK holding at 10-K filed with the SEC.
You can make what he says to you from time to time.
Instead, he can't 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 Sydney are.
On today's call are Jody Stags, President and CEO , and you bet Heinrich Chief Financial Officer.
I'll provide an update on S&P case second quarter, 2023, corporate and financial results.
Jodie go ahead.
Thank you, Jason and thanks, everyone for joining our second quarter conference call.
During the second quarter, we made progress on several key initiatives, including closing a new $45 million credit facility, continuing the operational and financial turnaround into terrorists and concluding too 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.
Book value per share increased to $18 95 per share an 8% year over year increase after adjusting for the implementation of Cecil.
During the quarter, we repurchased $4 $6 million of shares at an average price of $16.88.
23% discount to the GAAP book value of $21.79.
There is much to be excited about at S. W. K.
Second quarter results were largely in line with internal expectations as financial segment non-GAAP net income totaled $7 $6 million, representing a 12% annualized return on tangible book value. While we are pleased with the 12% return we aim to improve on it through diligent underwriting of life Science life science loans and royalties coupled with.
Our balance sheet leverage.
Our gross investment assets totaled $234 million compared with $249 million at March 31, 2023, and $175 million at June 32022.
The sequential decline is primarily due to the sale of our.
Our actual loan to a third party for approximately $14 million.
Our portfolio effective yield was 14.5% compared with 15, 5% in the first quarter of 2023. The sequential decrease is primarily due to the divesture divestiture of the ACO them.
Our realized yield in the quarter was 15, 4% compared with 15, 3% in the first quarter of 2023.
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 during the quarter, we finalize the work out to the full one X one and after quarter's close we finalized the workout for the ideal royalty.
In both situations, we received cash of close with the majority of recovery expected from future royalties.
At this time, we believe the cash received combined with estimated future royalties will exceed the carrying value at position. Thus, we do not anticipate taking into permanent either position have or bolt positions will remain on non accrual.
Looking at credit quality, we radar loans, one to five with five being the highest score during the quarter. We had one loan scored as a two well the whole onyx loan which has been in workout for several quarters.
He discussed resolution achieved in late second quarter of 2023 was scored at what the.
The remaining loans were made at three or better we made our royalties green yellow and red and the ideal invest not accrued royalties related.
They didn't read while remaining royalties were rated green.
Results in a terrorist continue to improve and were in line with internal expectations revenue increased 55% sequentially to 200000, and we expect revenue to accelerate in third quarter and fourth quarter based on work generated from our pharma service partnership which was signed in late April .
Year to date, we have booked $2 million of CD Moe projects and are bidding on an additional 9 million dollar projects, which is an increase from 7 million dollar projects, we were bidding on last quarter.
Second quarter interest operating expense totaled $2 5 million compared with $1 4 million as the first quarter of 2023.
However, the second quarter included a final R&D payment as well as employee retention payments, which cumulatively totaled approximately $1 million.
Are we expecting a tourist quarterly opex will be approximately $1.5 million per quarter in the back half of 2020 three.
We are working with an adviser to evaluate strategic alternatives for terrorists and will provide an update when appropriate.
During the quarter, we closed a $45 million committed financing with first horizon bank, which replaced our prior $35 million facility.
The new facility gives us additional liquidity.
As well as flexibility to pursue other balance sheet capital options.
During the quarter, we repurchased 272492 shares at an average cost of $16.88 and.
And year to date, we have repurchased approximately 327000 shares for $5 $6 million at an average cost of $16.96.
We'd be repurchasing shares at the current level.
Highly attractive use of shareholders' capital.
Summarizing the second quarter of 2023 was a solid quarter for financial segment with a 12% return on tangible equity we were able to conclude workout process for two of our non accrual loans with reasonable outcomes. We're pursuing multiple core life science financings with attractive returns and expect to close additional transactions by year end and our new car.
Our new credit facility provides additional liquidity plus flexibility going forward.
With that I would like to turn the call to our CFO about 110 for an update on our financial performance for the quarter that the call is yours.
Thank you Jody good afternoon, everyone.
Oh gosh I don't remember.
Earnings in the second quarter of 2023.
Reported GAAP pre tax income.
One 1 million or 40.
<unk> per diluted share.
Our reported Q2 'twenty 'twenty.
On a $3 9 million after income tax expense of $5 1 million.
I can't point $5 million and finance receivables segment revenue and a 1 million dollar increase in our pharmaceutical development.
If you put $5 million increase in Europe in your finance receivable segment revenue was primarily due to a 2.5 million dollar increase and I was just going to need and give you a funding gap.
$8 million increase in interest income due to an overall increase in reference right.
And at that point $5 million increase in royalty revenue when compared to the same.
Yeah.
The increase was partially offset by a $1.3 million decrease in interest royalties earned on finance receivables that was paid off in 2020 three.
Absent any material unforeseen payoffs, we still anticipate finance receivables revenue over the next two quarters of the year it could be comparable to the revenue reported in Q2 2023.
As Jerry mentioned earlier overall operating expenses, which include interest pharmaceutical manufacturing research and development.
As long as general and administrative expenses were $4 9 million during Q3 compared to 469.
2022.
Operating expenses were 5 million and <unk> 2023 can I get you.
And so to 'twenty 'twenty, you can finance receivables that segment operating expenses were 2.4 million in Q2 2023 compared to two point you're hanging in Q2 2022.
The slight increase in finance receivables segment operating expenses was primarily due to a $2 million million to $2 million increase in interest.
Thank you and what you a higher overall average balance on our credit facility.
Second quarter 2023, pharmaceutical development segment operating expenses included a $1 million.
Expand or employee bonus and retention as well as point 5 million final payment to our E. R. I was up there either of these expenses are expected to be repeated in the third quarter of 2023.
Finally, our finance receivables portfolio decreased by $14 8 million from the first quarter of 2023.
That resulted in an $8 $7 million benefit our allowance for credit losses in Q2 2023.
As a reminder, in Q1 of this year, we adopted the accounting standard down ethos.
Going forward changes to the size of our finance receivables well result in a corresponding percentage change to our allowance for credit losses.
In Q2 2023.
Changes in underlying assumptions.
That was our initial loss rates will also result in changes to our allowance for credit losses, we do not have any changes to these assumptions during the second quarter of 2023.
Future changes to our allowance for credit losses will run through the income statement.
I will now turn the call back over to Jodi.
Thank you in summary, the second quarter 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.
Yeah.
We will now begin the question and answer session to ask a question you Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
Our first question will come from Jacobs, Steven with Lake Street capital markets you.
You May now go ahead.
Hey, guys. Thanks for taking my questions just wanted to touch on the equity capital markets are we're seeing 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.
Hey, yeah. Thanks, I appreciate the question and thanks for dialing in.
I would say theres sort of two dynamics from that you know the first of all as for our portfolio companies that are public you know the ability to tap those equity markets is a positive you know most of our borrowers are in cash burning situations pre profit. So that's great for them.
For for situations, where we were out there trying to pursue a new loan no equity is almost always our number one competitor. So in some ways. That's a modest negative but I would say the pipeline is strong and most of the companies. We're speaking with really don't have access to.
The capital markets.
And any sort of material shape theres a few that were speaking with wood that are public and they may be are considering that but it's still fairly tough for small companies to access those in and so sort of any material means.
Okay, and maybe just the first touch on the first horizon.
Bank deal here.
That change your Lendable capital base or do you need access to additional facilities are how are you thinking about kind of capacity.
To grow the loan book here over the next 12 months.
Yeah, absolutely. So it increases our you know our current capacity by $10 million. So you know we've got 45 million committed by first horizon now our Pryor facility was 35 million right I think with this facility gives us is first of all.
The 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 now you know both of a partner and that's to BK or are focused on working with potential partner banks to bring them into the facility and we would love to take this up to 75 or $80 million. So we're working really hard on that.
I guess you know that.
The challenge right now is the regional bank market as it is in somewhat.
The other challenge position, so you know that.
But those conversations will take time, but it's a focus the other you know I think positive but this facility as 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 million, it's great and a good starting spot, but we believe that this business should support.
Much more leverage in that.
Okay, and then just last one for me here any updated thoughts on the buyback.
Are you guys just kind of plan to keep buying shares.
The discount to book value here or are.
How are you thinking about that moving forward.
Yeah, absolutely. So it made the board did authorize a new $10 million buyback, which was great and we appreciate their support and their belief that our shares are materially undervalued management shares that view. So we had we have a new broker we're working with them and you know the new the new plan is I would tell you a bit more flexible than our old plan. So.
You probably saw that we repurchased almost $5 million for $6 million during the quarter. You know when we were pushing $6 million year to date. So the new plan seems to be working quite a bit better.
And we'll just continue to work. The plan are you now in terms of the stock being at this price we've got tears and.
As we get these reporting out will have a an open period, but we can maybe be more aggressive but like buying back the stock at the current price I think the valuations are quite attractive and so that's something that the board of management will continue to do.
Got it thanks best of luck moving forward here.
I appreciate the call and the interest.
Okay and then you have a question. Please press Star then one.
Our next question will come from Scott Johnson, a private investor.
You May now go ahead.
Okay.
Hey, good quarter, Jody and everyone on the team, especially like the buyback was just mentioned.
Pleasantly surprised on the two workouts.
That's not it.
Turning to be a hit to the.
The bottom line at this point my question I guess is on Paris.
Looks like some good progress being made and when you say 90 million and you know future.
They're out there what is the kind of metrics that you used to compete on those prices at record pace and like how can we kind of.
You had an idea of how that hit ratio might work out.
Yeah a.
Great question, we're still learning a bit about that so the majority of those bids are those proposal stemmed from our partnership with a large firms for them a service organization, which I'm not supposed to name, but we've been working with them to April and a formal arrangement.
And we are their preferred provider for certain phase one and phase two services. So they've got customers. They've got you know small biotech swarm is coming to them for help as they develop their programs and in particular dosing technologies and that that partner is referring them to us for certain of these services. So these are real.
Warm leads them.
You know, it's it's where I would need to check, but we're you know we're picking up the vast majority of that revenue the partners keeping a bit a bit and it really for them to benefit is getting these these biotechs you know quality C D. Most services and moving them through the clinical progression. So they can hopefully use our partners technology patented technology once they.
Get out to market.
I wish I had some number to tell you. We'll you know we'll pick up X percent, but.
The rates have been great. So far I mean, we you know the 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 that these are coming due warm leads but at this time I don't have a great rubric the percent and.
Still kind of working with Paul and the team on a terrorist you to understand that a bit better myself.
And then just kind of a continuation as you say strategic options, possibly for terrorists.
Clearly one of the things that you benefited from over the past number of years have been the paybacks are from some of the care app royalties and it seems like they're making good progress at least there.
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 bed there yeah, the option that could presented with.
Yeah, I think we would retain that it's it's really a financial asset at this point in time, you know we like royalties we understand it we think we understand what the value is and so theres. No reason, we could retain that I tend to think that people that might be interested in the C. D. M. O business are not really that interested in a royalty from a third party.
So I would envision that we would retain that there you know there is another royalty there are terrorists as well it's.
We haven't talked much about it and it's just a royalty there no milestone to that there is a an active program going on there and then where we're actually working on some other proposals as well. So I think all of those types of things, which are really financial assets SDK would keep them I just don't see a C D mobile it really being that interested in those.
Excellent well, thank you keep up the good work and.
So if your broker pizza.
Got it back [laughter]. Thanks, Scott.
Right.
Our next question will come from Michael Diana with Maxim Group.
You may now.
Hey, Jeremy.
Hey.
Evening.
Now that our S. E B has been gone for about four months.
Do you notice any change in the competitive environment.
You know initially I think the answer's, yes. So you know there for a period of time capital was really scarce I.
Pink and actually we've got a one of our one of our signed term term sheets. As you know is a reef Ahmed from SBB and where we're speaking I think my colleagues are speaking with another situation now, which again is another S. P. B situation when they've got an S. B B P. B facility. So I think we have seen those opportunities now I mean.
S. P. B a lot of those professionals now have moved on and I think I think they're really active you know if you'll get for citizens and some of these people that are getting back out there. So there definitely has been an opportunity, particularly in the smaller side, where we play a lot in some of the less sponsor backed channels I gather the new owner of of S. P B and in some of the places the.
Banks, where those folks are going they are probably moving up the quality spectrum. So yeah. It is an opportunity I think it's not sort of the flood that we thought we might see yeah, when SBB and signature well went under if that makes sense.
Yep.
Great. Thank you.
Yeah.
Yeah, absolutely thanks, Mike.
It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Jodi <unk> for any closing remarks.
I appreciate everyone's speaking again, you know hopefully we've expressed the excitement we feel for what we've achieved so far this year and the opportunities ahead and again appreciate your support and dialing in and feel free to reach out to myself or that or the tiberon team and if you have any questions hope you have a good evening goodbye.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.