Q4 2023 SWK Holdings Corp Earnings Call

Good morning, everyone and welcome to the S. W. K holdings fourth quarter and yearend 2023 conference call. At this time, all participants have been placed in a listen only mode and the floor will be opened 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 highest Jason rando with cheaper onto advises Jason over to you.

Yes.

Thank you Jenny.

Good morning, everyone and thank you for joining <unk> holdings fourth quarter, 2023 financial and corporate results call.

Early this morning is typically at 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 S. M. B, a K a whole dot com under news releases.

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

Daily, 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 cash resources.

Payments are based on our current expectations and 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 <unk> 10-K filed with the SEC and other filings, we make with the SEC from time to time.

S. K 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 on today's.

Today's call from SDK holdings, as Jodi stacks, President and CEO will provide an update on <unk> fourth quarter 2023, corporate and financial results.

Jodie go ahead.

Thank you, Jason and thanks, everyone for joining our fourth quarter conference call.

Before beginning the call I wanted to state our former CFO hydrogen for eight years of service to <unk>.

Over that period, if that upgraded our financial reporting controls and capital markets capabilities.

You bet and we wish you the best in your future endeavors I also want to thank the team and our consultants at <unk> for working with us to get the 10-K filed in a timely fashion. Thank you.

2023 was a productive year for <unk> 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 where to build and train. The team is prepared to scale the firm to raise balance sheet capital to facilitate this expansion.

To find a sustainable path forward for <unk> tariffs and to crystallize the third party capital strategy.

Elaborating on the three goals, we achieved first our investment team consists of six highly motivated credit professionals the law.

Largest and most experienced team has ever been which allows us to originate underwrite and manage more transactions at any time in our history.

The investment team is mature spy to support colleagues and we expect to replace the CFO position this year.

Second during 2023, we secured and expanded our new ABL facility totaling $60 million with two supportive bank partners and first horizon and what forest. We also raised at $43 million unsecured baby bonds.

We have deployed a portion of this capital and have approximately $50 million of liquidity to pursue core STP Kate 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 being terrorists C. D Moe operations to generate potentially breakeven or better profitability over the duration of that agreement and mainly lead to the sale of certain intangible assets oven tariffs at a premium to book value.

Finally, while we did not secure a JV or whats your 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.

Okay.

<unk> core business expansion commercial stage life science companies, we do this through first lien 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 for those our origination underwriting and portfolio management.

We believe the combination of an attractive niche combined with the existing team of platform persistent S&P case 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.

Oh consisted of $212 million of performing senior secured term loans to 16 parties $51 million of world royalties to seven entities and $26 million of nonaccrual instruments to fly parties.

We also hold approximately $2 million of warrants from public companies as well as warrants our seafarers for 12 company 12 private companies carried at zero on our balance sheet.

For the quarter, our portfolio effective yield was 14% and the real ideal was 14, 1%.

Minder the effective yield is the GAAP yield that assumes future cash flows received in line with our modeling, whereas the real ideal yield uses actual period finance receivable interest income and fees.

Over the past five years as it became real ideal realized yields averaged approximately 17% with variance based on timing of investment realizations royalty performance in 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 secured loans $20 million loan to journey medical dermatology focused pharmaceutical company, a $20 million loan to shield therapeutics, a pharmaceutical company commercializing a unique iron replacement therapy, and a $6 million loans into Korea, Lifesciences, a leader and been bench top surface plasma and residents tools we.

So deployed $14.1 billion to purchase a series of sales based milestones related to a portfolio of immune globulins.

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 tangible finance book finding.

Finance segment, adjusted net income and return on tangible book or the primary financial metrics, we use to gauge our core business progress.

2000, Twenty's refinance segment results included a $2 3 million or a negative impact from the seasonal reserve build which totaled $13 9 million eight years and as a reminder, throughout 2023, and we built a general allowance for loan loss to comply with Stifel.

On each new load, we reserve for 4% upfront for potential future loan losses.

2023 is growth in book value per share was negative negatively impacted by this built we think we're in the later innings of building. This general loan loss reserve, although it will increase a proportionate to growth in our finance receivables portfolio.

Turning to the terrorists agreement on March 18th we signed an exclusive option an asset purchase agreement with a strategic partner that.

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 inherited and terrorist tangible property and equipment at a premium to the September 30 of 2023 book value or approximately $6 million.

Tangible assets, including inventory will be about if our partner ops to exercise the agreement.

In consideration for the grant of the option the partner agreed to pay inherits a low single digit million dollar option fees with the first portion paid a close in the second portion what portion payable by January one 2025, if the option is not been exercised by that date.

If the option is exercised the option to get incredible to the purchase price. However, if it <unk>. It is nonrefundable. The opposite these are nonrefundable if the option is not exercised.

The partner also agreed to guarantee to and terrorists minimum annual revenue payments under existing collaboration agreements totaling mid single digit millions of dollars for each of the calendar year 'twenty 'twenty four and 2025.

The agreement does not include any of the terrorists IP, which includes the terrorists have telegent oral dosing formulation the licensing agreement with Cara therapeutics, and corresponding milestones and royalties other licenses or any of the terrorists as additional IP, including the oral Leuprolide program.

We're working with the entire its management team to monetize these assets.

The agreement immediately reduces our cash burn at a terrorist and we believe the business will be breakeven or better over the duration of the agreement importantly, the agreement allows us to vacate to prioritize our core specialty finance business. It allows our shareholders to participate in the earnings of the finance business to a greater extent.

At December 31, 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 on Tuesday at the end of 2022.

Education S APK shares trade at an approximately 10% discount to the 12 31 2023 tangible book value.

As a reminder, that book value tangible book value does.

It does not include the $13 $9 million seasonal reserve or said another way.

The seasonal reserve provides a $13.9 million buffer to potential future loan losses on top of that $19 60 months that's for sure.

The tangible book value also does not include any value for the entire C. T Mo and terrorist 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 is a prudent use of shareholder capital during.

During the fourth quarter of 2023, we repurchased approximately 14000 shares of stock for $200000 and year to date through March 19, 2024, we have repurchased an additional 51000 shares for a total cost of approximately $900000.

In conclusion, we ended the year on a strong note with four closed deals and our gross finance investment portfolio totaling approximately $290 million, an all time high the.

The terrorists agreement positions that business to be potentially profit neutral or better over the next two years. It allows us to vacate 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 and network and platform to successfully deploy capital into attractive 25 million.

And under a 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 one on your phone keypad now a confirmation tone will indicate your line is and Nicky you May Press Star two if you would like to remove your question from Nicky.

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. Your line is live.

Hey, Joe Thanks for taking my question just wanted to just get a just a high level read out in the overall market.

We've got kind of a higher rate environment for a little while here. It seems like that's been fully priced in.

Capital markets, especially on the small end of the market cap spectrum seem like they're picking up speed.

We're gaining some momentum finally, how do you see the you know the overall book the environment right now in terms of the books access to cap or some of your you know your London clients their access to capital right now in other forms and that overall, you know kind of the pipeline.

Your.

How do you feel like you're well positioned here in terms of the ability to put more capital to work over the near term.

Yeah, Thanks, Mark and good morning.

Yeah. So you know it's interesting because it 678 months ago, everyone was afraid to do deals sitting sitting on their hands and of course with a with S&P and a bitcoin and those things hitting all time highs.

But folks are are doing deals more frequently and folks are able to access capital. So you know the positive is.

Our portfolio is made of companies that are commercializing products they need to raise money you know this this environment better for them. So we've had a couple of companies raise money. We've had 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 say nine to 12 months ago.

No in terms of the pipeline.

We have a we saw a solid pipeline and in our segment of the market. You know a lot of these companies have don't have a lot of options.

Given time of the cycle.

We still got a lot of deals where we're hunting in and hope to close and I will say you know over the last sort of three months, we've had a handful of deals that I thought we would close like good good solid core F N B K life science deals.

You know one of those they end up taking equity Ah that was one we airports are long and hard on it and thought we had a really compelling proposal had key stake holders hold or buy them and they took equity which is understandable. We had another one where that where I think we got outbid, but theres still plenty plenty of things for us to do out there and plenty of these small companies.

That need no checks of 25 million.

Less.

Our slot, they're trying to raise money you don't have a lot of options.

But.

And then in terms of from a strategic perspective are you still focused on you know the opportunity to do it you know JV or find partner capital.

Anything changed now that you're kind of a quarter and into the new year in terms of the <unk>.

Brad's Jeep.

Yeah, No no. We we still would like to do that you know I think.

The goal what you really was you know what let's get ready to grow lets get the team ready to grow what's what's have the machine down and then race and balance sheet capital I think we did a pretty good job on that.

You know the JV and some kind of third party capital, it's really interesting to US we have an interesting you.

You know sourcing origination management capabilities, we've talked a lot of larger alternative asset managers in credit firms they find it interesting.

I think for us it will allow us to continue to grow assets, you know, perhaps expand our size a little bit in terms of check size and in sort of our aperture and then for shareholders we would.

We collect a fee, which would be fantastic as well and help or are we now all that's all that's easier said than done obviously and we've got to find the right partner and the right the right structure, but yeah. We're still interested we're still talking to people, but nothing is imminent, but it's it's you know I I know, it's you know the board is pushing US hard you do find something there in 2024.

Yeah.

Thank you Jody good luck. Thank you Martin.

Thank you very much just as a reminder, if anyone has any questions. You can press star one on your phone keypad now to join Nikki.

Okay. If we don't appear to have any further questions in the queue.

And back over to Jody for any closing comments.

Yeah. Thanks, Jimmy Yeah, just thanks, everyone for joining the call. It was highlighted on the call we're bullish about our prospects in 2024.

Increased finance receivables portfolio.

Many 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 J D and thank you everyone. Todays conference is now concluded you may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.