Q3 2024 SWK Holdings Corp Earnings Call
Thank you. Bye.
Speaker Change: Greetings. Welcome to the SWK Holdings third quarter 2024 conference call.
At this time, all participants are in a listen-only mode.
A question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ira Gostin, Investor Relations. You may begin.
Ira Gostin: Good morning everyone and thank you for joining the SWK Holdings third quarter 2024 financial and corporate results call
Ira Gostin: Yesterday, SWK issued a press release detailing its financial results for the three months ending September 30, 2024. The press release can be found in the Investor Relations section of SWKhold.com under the News Release section.
Ira Gostin: Before beginning today's call, I would like to make the following statement regarding forward-looking statements.
Ira Gostin: 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.
Ira Gostin: These statements are based on our current expectations and you should not place undue reliance on these statements.
Ira Gostin: Actual results may differ materially due to our risks and uncertainties, including those detailed in the Risk Factors section of SWK Holdings, 10-K filed with the SEC, and other filings we make with the SEC from time to time.
Ira Gostin: SWK Holdings disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise.
Speaker Change: Joining me from SWK Holdings on today's call is Jody Staggs, President and CEO, who will provide an update on SWK's third quarter 2024. Jody, please go ahead.
Jody Staggs: Thank you, Ira, and thanks, everyone, for joining our third quarter conference call.
Jody Staggs: Before we start, I wanted to acknowledge that our CFO, Adam Rice, was scheduled to speak on the call and be on the call. He had a death in the family last night, so he will not be on the call. Adam, the entire STPK family is thinking about and praying for you and your family today.
Jody Staggs: Turning to the call, SMBK's core business is financing innovative, commercial-stage, life-science product companies through first-lane term loans and royalties with a focus on $5 million to $25 million investments.
Jody Staggs: This is a market segment we believe remains underserved as many of our competitors are focused on larger opportunities. We have financed this segment of the market for over a decade and have expertise and capabilities in origination, underwriting, documentation, and portfolio management.
Jody Staggs: During the third quarter, our core finance segment generated $5 million of adjusted non-GAAP net income. The gross finance receivables portfolio increased 15% year-over-year to $270 million.
Jody Staggs: The third quarter portfolio effective yield improved 60 basis points year-over-year to 14.6% in line with our historical average.
Jody Staggs: Segment revenue increased 13.5% year-over-year to approximately $10 million as the receivables gross was accompanied by a 13.8% realized yield.
Jody Staggs: The realized yield was less than our effective yield due to an increase in our non-accrual loans. Given positive developments in our non-accrual bucket, we expect our realized yield should revert to the historical trend of approximating or exceeding our effective yield.
Jody Staggs: During the third quarter, we closed an up to $11 million royalty monetization with Relief Therapeutics, and we have advanced $7.75 million to Relief.
Jody Staggs: During the quarter, we also closed a $26 million upsized amendment to Eaton Pharmaceuticals to support Eaton's acquisition of a rare disease product. Eaton has publicly stated the deal is expected to close by year-end, at which time we expect the $26 million will fund.
Jody Staggs: Upon signing the amendment, we received approximately 290,000 heat warrants at a $5.32 strike price.
Jody Staggs: During third quarter our loan to EPICA was repaid in full. The loan generated a 14% IRR and an 1.8% MOIC and we continue to own equity in EPICA.
Jody Staggs: At 930, we had $32.5 million of financial receivables on non-accrual. However, post-quarter close, we have made progress working out three non-accrual names.
Jody Staggs: SWK received $3.4 million cash at close and expects to receive $500,000 in February 2025.
Jody Staggs: We also anticipate receiving approximately $700,000 by January 2, 2025, although this payment is contingent on the new owner executing a new agreement with an existing key vendor.
Jody Staggs: SWK will also receive a three-year earn out consisting of 30% of the annual increase in the SAS gross margin.
Jody Staggs: We'll work through the accounting for the transaction in our fourth quarter financials, but at this time we do not believe there is an impairment to the $4.5 million carrying value as of September 30th.
Jody Staggs: Turning to BioLase. On November 4th, an auction was held for the purchase of the BioLase assets and was won by an international third-party bidder with an all-cash bid of $20.1 million.
Jody Staggs: SABK and our attorneys are working with the debtor and other interested parties to facilitate timely close and orderly wind down of the estate.
Jody Staggs: The situation remains fluid and we will work through the accounting for the transaction in our fourth quarter financials, but at this time, we do not believe there is an impairment to the $15.8 million carrying value as of September 30, 2024.
Jody Staggs: Turning to the TRIO loan, we anticipate receiving proceeds towards repayment of the facility in the next couple of months. We do not believe there is an impairment to the 1.5 million dollar carrying value as of September 30th, 2024.
Jody Staggs: To round things out, our Interest Division is executing against the new business plan with segment revenue doubling to $600,000 this quarter. Fourth quarter, quarter-to-date bookings are at an all-time high, which should support further revenue growth in 2025. We are pleased with the progress Interest is making as it works with our strategic partner to transition to a leading Phase I and Phase II inhaled and nasal CDMO.
. . . . .
Jody Staggs: In summary, we continue to deploy capital into attractive life science term loans and royalties, and based on anticipated near-term closings and unfunded commitments being drawn, we expect to end the year with our portfolio near an all-time high.
Jody Staggs: Post-quarter close, we made considerable progress on the non-accrual bucket, which will improve our return on capital going forward. We believe these actions, combined with reduction in our diluted share count, position to STVK to achieve our goal of 10% growth in tangible book value per share in 2025 and beyond.
With that, let's open the call to questions.
Speaker Change: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Your first call on your first question for today is from Scott Jensen, a private investor.
Scott Jensen: Good morning, Jody, and I'd like to pass on my condolences to Adam and his family. So, I think you've played kind of a tough year, at least coming in for small caps, and played the hand well, especially with the violas.
Speaker Change: fun to watch the stocking horse go up and then even you know get get out good in the end so that that turned out to be a well-played
Speaker Change: doubling down at the end, so congratulations. Same thing for you, that was a great deal and they've done a good job of raising capital outside of you guys as well, so it seems like it's...
Speaker Change: It's going in a really good direction. Thank you for the Interis update. That was going to be one of my questions, just so I appreciate that. I guess one of the things that I can't help but...
Speaker Change: We'll notice, obviously, you know, we got a stock market ripping.
Speaker Change: We have a stock that, you know, just muddles along and clearly that's
I think partly due to when big shareholders
Speaker Change: to exit the position, it takes a long time. And so even though if you're making good progress, it doesn't get reflected in the stock price. And clearly we have another one.
Speaker Change: And so then it goes down to, well I would call it the elephant in the room, the largest shareholder and the public.
Speaker Change: information about, you know, Carlson's shutting down worldwide offices over the last year or two, shrinking their assets. We all know how that kind of game goes if you read their 13-F.
SWK is one of the largest positions that they have.
Speaker Change: Um, and so I just wondered whether the board has thought about how they're going to approach
Carlson's
Speaker Change: position and as Carlson reached out in any way you know are have you guys gone through ideas you know a bigger stock buyback which clearly you can't buy at all from them be nice if one could but then we'd be in the same kind of position with a dominating shareholder
Speaker Change: Just whether there's a list of thoughts about how to approach this because through the filings you can see there's
Speaker Change: There's some movement on their end and clearly they don't have to reveal their hand. So you may not know it any more than I can read it But just wondering, you know has the board thought about possible
you know, reactions or responses to.
this known, probably, upcoming event, shall we say.
Speaker Change: Yeah, no, thanks for the question. I mean, that is the question. You know, just let me take a quick step back. You know, this year,
We had
Speaker Change: You know, we had a lot of cruels, we had to get through those.
Speaker Change: We feel pretty good about where we are there, you know We we look up now and assuming those things play out like we think and again There's you know, as we've said there's the situations are still fluid in a couple cases You know, we'll enter 2025 with you know, we think could be approximately an all-time high portfolio in terms of assets
Speaker Change: We think the yields kind of should revert to historical levels, you know, and terrorists is now cash flow breakeven or better. So we look at that and we think, you know, this is a business that we think should earn a double-digit ROE.
Speaker Change: But we do have to acknowledge, at some point in time, if shares are trading at a big discount, that may not be enough. I will say this is a key focus for the board. We're having regular calls. We're working through.
Speaker Change: In terms of, so 100% they are focused on this. I will tell you that this is my marching orders and working with the team and other folks.
to get this figured out.
Speaker Change: at the yields that we're generating should be attractive to somebody.
Speaker Change: We are trying to buy back as much of those shares as we can, you know, through our program.
Speaker Change: Do they know that Jones, they could just call up Jones Trading, that's where you do your buyback? I mean, are they aware they could, you know, be a little bit more effective that at...
Getting out of position
Speaker Change: Yeah, I can't speak to that in particular these are sophisticated folks So that traffic in these types of small security, so I'm sure they're ten times more knowledgeable than me on this
Speaker Change: I will say, if anyone wants to sell, call me up. We're in an open period now, so happy to have those conversations. I think my email and phone's posted. Happy to discuss those. I'm sure we can figure something out direct.
Speaker Change: In terms of our largest shareholder, I try to speak with all of our large shareholders regularly, and I think they're happy with the way the business is performing. They're obviously not happy with the stock price, which none of us are.
Speaker Change: I can't really speak to what they're thinking or doing specifically, but I think, like you would imagine, any sophisticated investor who's seeing an asset that's trading at a discount, they're pressing us to figure this out as well.
Speaker Change: Right, awesome. I'll go back in the queue and see if anybody else has any any calls. Okay, thank you Scott.
Your next question for today is from
Michael, Diana with Maxim Group
Speaker Change: Okay, thank you. Hey, so, Jody, when you talk about the portfolio at an all-time high, is that $275,000 or is that a different high?
Jody Staggs: Well, and again, I probably should be tighter with my language, but if...
Based on the
Jody Staggs: The commitments that we have in the fourth quarter, including, you know, the Eaton upsize.
Mace: Mace. Thank you, everyone. Take care. Bye-bye, everyone. Thank you. Thank you. Thank you. Bye-bye. Thanks. Bye-bye. Transcripts provided by Transcription Outlets, LLC.
Speaker Change: Yeah, no, I understand. It depends on payoffs and all sorts of things, but what what is your all-time high? That's what I'm asking.
Speaker Change: I believe we were in the two, okay so this is on a gross basis, you know we did our doing this, I'm fairly sure we were around mid to 80s. Let me pull this up because I do have it right here in front of me.
So, we were at
Speaker Change: 288 on a gross basis in the fourth quarter of 2023. That was our all time high. That was the only quarter we were above 280.
Speaker Change: And then in the fourth quarter, cleaning up the non-accruals, is that going to come through the income statement on the provision line?
Speaker Change: So, yeah, so you may recall... If there's no impairment, let me, yeah, rephrase because we talked about impairment, no impairment. Let's assume there's no impairment. Yeah, yeah, that's...
Speaker Change: That's right, so you know again let's assume that for now and that this is not a commitment to that. But so last quarter or maybe two quarters ago we changed the way we reserve our CECL methodology.
Speaker Change: And so now we have a higher reserve against lower rated credits, which I think intuitively makes a lot of sense. So as an example
Speaker Change: Our one-rated credits get reserved at 15 percent. So Biolase, it was a $15.8 million loan at the quarter. That means we had a $2.4 million reserve against it.
Speaker Change: Ex-Ivo was a one-rated credit so it was a 4.5 million dollar loan at the quarter so we had a roughly $600,000 CECL reserve against that so yes if you know if things worked out well and we get our money back on those we would also be able to offset or reverse that that CECL reserve into into earnings.
Speaker Change: again all that is not saying that we're not going to you know that I'm committing to that but yes that functionally that's how it works sure but I'm sorry that like each evil was 700,000 it's it's 15% times
Speaker Change: Okay, and then if you do close these new credits, that's going to...
Speaker Change: lead to a provision, right, because of Cecil. Is that right?
Speaker Change: Okay, so the way we're doing our new setup is on an existing 5-rated loan that is seasoned, we will have a 0% CECL reserve against it.
Speaker Change: So in the case of Eaton, it is a 5-rated loan and it's seasoned. We will not have to take a Cecil Reserve against that.
Speaker Change: Reserve against any new loans. So as an example, assuming we close this $8 million loan, we'll have to take a, was that like a $350,000 financial reason.
Speaker Change: Yeah, so yeah, there's some puts and takes, but I think our new CECL methodology is quite a bit better where we're reserving ahead of time on low-rated credits and we're reserving less on higher-rated credits.
Right.
Speaker Change: And because of the resolution of the non-performers, you said your realized yield should go up to approach your effective yield, right?
Speaker Change: I think that's right. So if, you know, and this is just envelope math, but if I look at the
Speaker Change: you know, the three non-accruals, I'm just going to call it $20 million.
Speaker Change: and let's assume that we can put that money out at roughly our effective yield.
Speaker Change: That would be about $3 million of annual income. And we have a roughly $250 million equity base. So you can see that that would increase our realized yield. Sorry, I should be doing that over the portfolio, but by about 100 points.
Speaker Change: hundred basis points so that you know that that realize yield goes up closer to the effective yield Okay, great All right. Thank you. Okay. Thanks Mike
Speaker Change: Your next question for today is from William Koch, a private investor.
Hi, this is Bill Koch, as she just indicated.
Speaker Change: Actually, the two questions before me were pretty much what I was going to ask, and they're great answers, so that pretty much...
Speaker Change: Thumbs it up for me, but I just would like to say a couple of things if you got a second. Absolutely, yeah. Yeah, I'm not a sophisticated financial guy. I'm actually a criminal defense lawyer up in Connecticut.
Speaker Change: and I'm a lot older than you guys, too. So one thing I was gonna say is that I love your website. I did notice that none of the guys had ties on. I have to wear a tie to court every day, so I'm like, wow, those guys are, but it's a great picture. Thank you.
Speaker Change: And, yeah, and I bought the stock because of Interis, and hearing the news today was good because I don't think Interis and Unigine before it...
Speaker Change: has made a profit probably like 20 or 25 years ago, maybe one quarter when their nasal.
Speaker Change: Calcitonin drug came out so um yeah so that was good news too but otherwise um I mean everything else I was thinking about about the stock price etc has been answered so um
Speaker Change: I guess I'll stay tuned, so hang in there for us little guys, too. Absolutely, yeah. We are working for all of our shareholders and appreciate your support, Bill.
Okay.
Speaker Change: Your next question for today is from Scott Jensen, a private investor.
Scott Jensen: Hey Jody, just a follow-up on the violates when you did the dip financing in October How does that relate to the 15.8 million that you have reserved?
Jody Staggs: Yeah, so 15.8 was our advance at, so that was the gap mark at 630 plus the amount we funded in third quarter.
Jody Staggs: We advanced an additional $1.4 million after quarter close, so you can kind of think of it like the pro forma gap mark of $17.2.
Speaker Change: and that's the number you're referring to you hope because obviously the bidding win at
$20 million plus.
Speaker Change: that you think you, you know, all hope, yeah, I got it, risk, there's a lot of people that want to put their hands in the piggy banks, we're doing our best to get out, but I think what we've committed to is...
Speaker Change: You know, we think that the MARC plus the CECL reserve is appropriate at this time, and I still feel very comfortable saying that.
Speaker Change: Yeah and so now when it comes down to it as far as that pecking order and clearly everybody's got their hands in the jar even if they're supposed to be way back at the end of the line.
Speaker Change: Do you feel like your documents and the way you write them gives you a Good position within the bankruptcy court, you know rules and guidelines to kind of get that is that
Yeah, I mean...
Scott Jensen: Scott, I would frame it this way, our documents are great, they're fine, you know, we're senior secure lender with an all asset lien, so we've got that, but...
You know...
Scott Jensen: Folks have various points of leverage in these situations and you know, I'm not a bankruptcy expert You might actually talk to Bill. He may know more about it But you start talking about things like unsecured creditors committees you start talking about things like certain payables that maybe go forward You start talking about professional fees
Scott Jensen: Gosh, do we just want to get this thing closed so we can move on and that we don't have to keep it open for weeks and so do we need to give these people or or not so there's that sort of fine line of how hard do you fight but our docs are great, our leans fine, our structure's great so that's all good.
Speaker Change: Yeah, I had the pleasure of working next to a credit fund,
Speaker Change: Equity Hedge Fund and listening to them and learning those kind of things it just it opened my eyes in a large way so I clearly understand the things that might not be so clear-cut come into play so good well best of luck on that and thank you again for the call.
Speaker Change: We have reached the end of the question and answer session and I will now turn the call over to Jody for closing remarks.
Jody Staggs: Great. Thanks everyone for joining the call. Thank you for the support. I am available if anyone wants to reach out. I'm happy to discuss the quarter and SWK further. And with that, I hope everyone has a great day. Bye-bye.