Q3 2023 SWK Holdings Corp Earnings Call

Good morning, and welcome to the S. W. K Holdings third quarter, 2023, corporate and financial results Conference call.

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I would now like to turn the conference over to Jason Rando <unk> strategic advisors. Please go ahead.

Good morning, everyone and thank you for joining us to the UK Holdings third quarter, 2023 financial and corporate results call.

This morning, it has to be kept holdings issued a press release detailing its financial results for the three months ended September 32023.

Press release can be found in the Investor Relations section of it has to be a great whole dot com under newsroom and she was.

Before beginning todays call I would like to make the following statement regarding forward looking statements.

And they will make certain forward looking statements about future expectations plans events and circumstances.

Statements about our strategy future operations.

Element of consumer and drug product candidates.

For future potential product candidates and stuff.

These expectations regarding capital allocation and cash resources.

These statements are based on our current expectations and you should not place undue reliance on these.

Actual results may differ materially because of risks and uncertainties, including those detailed in the risk factors section of activity.

Cable and 10-K filed with the SEC and other filings, we make with the S. Ya Chu from time to time.

That's typically a holdings disclaims any obligation to update information contained in these forward looking statements.

As a result of new information future events or otherwise.

Joining me for the rest of you can't always on today's call are Joseph Stags, President and CEO and you bet Heinrich Chief Financial Officer.

Ill provide an update on <unk> third quarter, 2023, corporate and financial results.

Jodie 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 terrorist subsidiary grew revenue reduce cost and move closer to profitability.

We achieved a key 2023 strategic goal of improving our balance sheet by the issuance of a $33 million senior notes as well as a $15 million increase in our credit facility to $60 million.

We appreciate our Ottawa underwriters work to complete the bond offering in a challenging environment.

We're also thrilled to partner with her new Bank remember what forest and appreciate the work the work force team undertook to evaluate our business.

With the added capital we have over $60 billion of liquidity to deploy into an attractive opportunity set.

We believe raising this capital has several benefits first we were able to play offense at a time when other funding sources have pulled back.

We believe a larger and more diversified portfolio may lead to a lower cost of capital for us to have U K.

Finally during our prior strategic review process, we learned that interested parties valuate larger and more diversified portfolio with just for Nancy will now.

Our gross finance receivables totaled $235 million at quarter's end, a 10% increase from the prior year.

We closed one 5 billion dollar 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 out of 15% plus IRR, while targeting the best risk reward opportunities.

Our portfolio effective yield was 14% a 30 basis points decrease compared to the third quarter of 2022.

Our realized silver in the quarter was 14, 7% declined 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 82 remaining loans rated three or better.

One of the two rated loans as our financing to trio health care, which was placed on non accrual at quarter's end we.

We are working with management you would see this as a 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 bar partners understand this dynamic and have taken steps to reduce costs and raise capital to weather the challenging conditions.

We didn't we radar royalties green yellow and red.

The three non accrual crew royalties best ideal until on X R rated as rats.

Two royalties already yellow with remaining royalties red and 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 Cecil.

Resulted in terrorists continues to improve driven by the hard work of the team and support from our strategic partner revenue.

Revenue increased 72% sequentially due to your point $3 million and we expect strong revenue growth in the fourth quarter.

Year to date, we have booked $2 $7 million of CD Moe projects and are bidding on an additional $5 million of projects.

The headline bid number it's down from the prior quarter as we removed two large legacy opportunities. Neither came from our strategic partner and while both remain pop out possibilities. They have been delayed and we thought it prudent to remove them from the count.

The word strategic partnership we are currently working on approximately 18 projects from a variety of underlying customers.

Third quarter, 2023, and terrorist operating expense totaled $1 2 million compared with $2 6 million in the third quarter of 2022.

We view the third quarter 2023, and terrorists quarterly operating expense as a reasonable quarterly run rate.

Third quarter 2023 in <unk> EBITDA loss was 900000, an improvement from a $2 $5 million loss in the third quarter of 2022 after adjusting for a $5 million 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 and terrorists profitability increased subsidiary value.

During the quarter, we repurchased 60330 5345 shares of stock for approximately $1 million.

To date, we have repurchased 361593 shares for a total cost of $6 1 million.

Would you repurchasing shares at the current discount to book value as an attractive use of capital.

To summarize during the third quarter of 2023, we added capital to our balance sheet at time when deployment yields are attractive.

Our interior segment reduced burn it continues to improve its value proposition to our strategic partner.

And our financials segment generated healthy returns what closing additional ones.

We are focused on prudently deploying the recently raised capital and attractive loans and royalties or working with our current portfolio of partners to navigate the challenging business environment.

With that I would like to turn the call to our CFO Beth Anderson for an update on our financial performance for the quarter I bet the cultures.

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 <unk> 36, 36 cents per diluted share.

Our reported Q3 2023 net income 5 million after income tax benefit of 4 million included $1 million increase in finance receivables segment revenue, primarily due to an overall increase in reference rates.

Fault by $4 $7 million decrease.

Our pharmaceutical development segment revenue when compared to the third quarter 2022.

Before I point $7 million decrease in our pharmaceutical development segment revenue was primarily due.

Feet of $5 million milestone revenue related to terrorism license agreement with Cara Therapeutics Q2, 2022 with having similar milestones occurring in Q3 'twenty two 'twenty three.

As Tony mentioned earlier.

Material unforeseen payoffs, we anticipate finance receivables revenue increase in Q4 2023.

The addition of one term loan during the quarter.

Two additional term loans subsequent to quarter end.

Well I think we're all operating expenses, which include interest pharmaceutical manufacturing research and development expense as long 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.

I'm curious operating expenses were $1 2 million in Q3, 2023 compared to $2 6 million in Q2, 2022, and finance receivables 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.

Primarily driven by one time severance payment of 1.1 million is the former CEO in Q3 of 2022 and a point for a million dollar decrease in one time professional fees related to corporate strategic planning that occurred in 2022.

The decrease was partially offset by $2 million increase in part D and other related expenses due to a revised compensation plan in 2023.

And finally.

Finance receivables portfolio decreased by $13 9 million from the first quarter of 2023.

This is primarily due to the payoff of one turnaround in Q2.

However, the addition of a $5 million turnaround during the third quarter.

All of it in provision for credit loss expense of <unk> 2 million.

As a reminder, in Q1 of this year, we adopted the accounting standard counter detail.

Going forward it changes 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 rate applied Lafayette supplied including weather current finance receivable pools from inappropriate.

Any changes in either Samson 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.

Plan to reevaluate these assumptions at year end.

Any future changes to our allowance for credit losses will run through the income statement I'll now turn the call back over to Jodi.

[laughter].

You bet.

To highlight some positives from the quarter, our portfolio generated 14, or 14, 7% realized yield we have liquidity to deploy into an attractive opportunity set.

You're buying back stock at a discount to tangible book and our tear subsidiary has reduced its operating preferred it 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.

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At this time, we will take our first question, which will come from Mark Argento with Lake Street. Please go ahead.

Hey, Joe Yeah, you bet.

A quick question with all the updates are the new.

Baby bond debt issuance and then the new facilities could you just walk us through where you sit right now in terms of kind.

Kind of lending capacity, you know your ability to fund loans and how aggressive are you guys going to be in terms of starting to deploy more capital looks like you're already leaned up pretty good.

Start off the quarter yeah, yeah.

Yeah. Thanks, Mark Yeah. So we had a well to answer your first question. We have overstepped currently have over $60 million of liquidity.

The portable liquidity and that's after all reserves and unfunded commitments and whatnot. So we have plenty of capital currently.

Of course, a good time to have that.

So we did have a chunk of the financings that we closed shortly after closing our bond and upsizing, our ABL and then we have quite.

Quite a few deals that were working now we've got a couple of term sheets out and you know a number and I think maybe one or two term sheets and kind of five or six proposals.

Proposals are typically will turn into term sheets or some portion of them also.

We feel good about the opportunity set you know, particularly in our area of the market.

I think we want to be we definitely.

We are looking for the capital.

Not burning a hole in our pocket, we want to be disciplined there is 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 that's 60.

Does that include the 26, you've already deployed or is that on top of the 20 say no no no. That's afterwards as we stand today program 16.

<unk> I think it's probably closer to $65 million to deploy the liquidity adds up today.

Got it alright, that's helpful and then in terms of your current lender.

Lending portfolio I know you know.

A decent number of the companies are publicly traded or small publicly traded you know.

What do you guys are thinking about the conditions of the equity markets right now.

How imperative is that for the equity markets.

Open back up for some of these companies.

You know it continues to run their business as meeting at all.

Is that something that you guys are spending a lot of time on that you guys are concerned about the you know the condition of the equity markets at this point with any of your portfolio companies are just kind of walk us through your thinking around that.

Yeah. So it's definitely something that we think about it that we're talking to all of the borrowers regularly and I think the messaging has been and I think it's it's understood in pretty well received as you know hey look the ability to raise capital may be constrained over over the foreseeable future. So you can assume that that's going to be there.

Therefore, you need to do other things to try to get to cash flow breakeven as quickly as possible and that's going to be of course cost cuts. Perhaps there's you know there's revenue partnerships and things like that but particularly on the cost side, making sure that everyone understands it and that you know if if it's.

If there's a need or are there is a perceived need to raise capital in the near term that they also need to be kind of cost aggressively and quickly I'm not the bone, but certainly anything discretionary. So I think if you look at our portfolio that that's been a pretty common theme and those folks have done that.

You know I I think it's a case by case basis I mean, the capital market stay closed forever, then yeah that that that will be a challenge, but I think you know that the manager.

Teams are talking to you about creative ways to to raise some bits of capital along the way.

That's helpful. And then just you know again I'm talking about the market's got stocks trading 15, 16 book values 19 of change.

I'm sorry, you were active with the buyback you know where where are you in terms of the buyback is there ability to get bigger are more aggressive with that if there's still such a thing.

Significant disconnect.

Yeah. So yes, yes, I I I agree with all of that the ability to repurchase shares through our <unk> program is limited by trailing volume trailing 20 day volume so.

There's not a whole lot we can do on that front and now the you want the one change to our program. This year is we do have the ability to buy back one one block a week. So if it blocked chairs a block of shares comes up we have the ability now to purchase those in and that that occurred we had some of that occur.

Earlier this year, we were able to buy three decently sidewalk. So that would be our primary goal would be to source more of those blocks. If we're doing it to the <unk> five we are somewhat limited.

You have to be at the timber five trailing.

Volume and policies.

And what what how many more dollars.

Authorized right.

Our buyback program.

Okay.

I bet you do you know that number off the top you had.

I had a ballpark idea, but I wanted to give you the right number I might need to follow up with you on that unless you can grab it out of the queue or whatever or offline. Thanks I appreciate it.

Yes, absolutely thanks Martin.

And again, if you have a question or follow up. Please press Star then one to join the queue.

Our next question will come from Scott Johnson, a private Investor. Please go ahead.

Yeah.

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 side. The buyback have you thought about other ways such as a dividend.

Which would obviously open up to more investors as well.

Yeah, Yeah. The board is always considering I think every quarter, we have a discussion about dividends and other you know of course, there's other ways to to repurchase stock at Tinder and things of that nature. So.

So yes, yes, there are always considering.

Other ways to return capital.

And then I guess another one as you know with the interest pipeline.

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 and spice.

Searching scouring the web for your name are you precluded from what you're saying.

Those loans.

So on the tourists you know we have a couple of things. So we're going to I think we're going to do a better job of it.

I'm, giving you the bookings on a periodic basis. So you know I think we detailed $2 $7 million of bookings year.

Year to date and I think the last time, we said it was $2 million. So I would say that's the number.

To track and you know hopefully we can continue to accelerate.

The bookings, but that would be the number one metric you should track bookings.

Should should turn into revenue over kind of a poor 12 month basis.

So that that that would that should be helpful.

In terms of the underlying customers I don't think that's something we can really can't we should should be disclosing. So we have our one strategic partner who is sending us referrals. We did have to go win the business. So they don't give us business they give us referrals.

Terrorists team Didnt Didnt goes it makes bids proposals and pitches their services.

And then the underlying customer these biotechs.

<unk> select and terrorists for phase one phase two C D. Most 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 this route how do you price that risk.

How do you pay out that risk.

Yeah. That's a good question I mean, I don't think that dynamic has necessarily changed I think what's what's probably changed over the past 10 years as pricing.

You know it used to be able to assume I don't know, 3% to 8% price increases in and so now of course, you can't assume that you probably should be assuming.

Maybe it's in the early years, a couple of 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 real unique setups, where there's something a little bit off the run its smaller you know theres four sellers, maybe it's not a standard royalty because of the larger let's call it $30 million plus royalties and kind of tiered assets are very competitive and we don't want to be.

The you know the nice guy at the table kind of kind of the.

The last option for those people. So the initial focus is the deal dynamic really attractive.

If that checks out and we think the product has value has a runway.

And then what we're trying to do is make a conservative underwriting case and price that to a mid teens and so if you know 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.

Right now you both of those are trending well versus our our underwriting case so.

We're trying to do a conservative case priced out of the mid teens plus with a really good setup.

Somewhat off the one and the other fall back that we do have as we have done these cat deals in the past where you know.

Because I mean, you bought these royalties and you're buying from a party. That's smarter than you know these people have been around the asset for a long time and they they probably know things you don't.

So the bid ask maybe 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. We're gonna 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 at these people, believing the assets do they want to keep a residual.

And in the other positive that too is if they keep a residual you know they still have skin in the game. So if there is an IP challenge, where there are issues there they're more likely to work with you. So those.

Those are a few things we think about it.

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 our who to call.

Yeah, I would tell them to call me.

And I can put them in touch with our the broker we worked through Jones, and so I can put them in touch with our with Jones.

Thank you alright, thanks for that information.

And 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 thanks for everyone for joining the call. Thanks to the team Investor BK and our shareholders and 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.

Yeah.