Q4 2023 SWK Holdings Corp Earnings Call
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Jason Rando: Around the advisors, Jason over to you.
Jason Rando: Thank you Jenny.
Speaker Change: Good morning, everyone and thank you for joining <unk> holdings fourth quarter 2023 financial corporate results call.
Speaker Change: Earlier. This morning is typically at holdings issued a press release detailing its financial results for the three months ended December 31 2023.
Speaker Change: The press release can be found in the Investor relations sections of S. W. K whole dot com under news releases.
Speaker Change: Before beginning todays call I would like to make the following statement regarding forward looking statements.
Speaker Change: 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 and cash resources.
Speaker Change: These statements are based on our current expectations and you should not place undue reliance on these statements.
Speaker Change: Actual results may differ materially due to our risks and uncertainties, including those detailed in the risk factors section of <unk> Holdings 10-K filed with the SEC and other filings, we make with the SEC from time to time.
Speaker Change: That's the VK holdings disclaims any obligation to update information contained in these forward looking statements.
Speaker Change: As a result of new information future events or otherwise.
Speaker Change: Joining me on.
Speaker Change: Today's call from SDK Holdings, as Jodi Stags, President and CEO, who will provide an update on <unk> fourth quarter 2023, corporate and financial results.
Speaker Change: Jodie go ahead.
Speaker Change: Thank you, Jason and thanks, everyone for joining our fourth quarter conference call.
Speaker Change: Before beginning the call I want to thank our former CFO of at hydrogen for eight years of service to <unk>.
Over that period of that upgraded our financial reporting controls and capital markets capabilities.
Speaker Change: With that 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.
Speaker Change: 2023 was a productive year for <unk> of U K 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.
Speaker Change: As a reminder, our 2023 goals where to build and train the team and prepare to scale the firm trades balance sheet capital to facilitate this expansion.
Speaker Change: To find a sustainable path forward for in tariffs and to crystallize a third party capital strategy.
Speaker Change: Elaborating on the three goals, we achieved first our investment team consists of six highly motivated credit professionals, the largest and most experienced team has ever been which allows us to originate underwrite and manage more transactions at anytime in our history.
The investment team is butros buy to support colleagues and we expect to replace the CFO position this year.
Speaker Change: Second during 2023, we secured and expanded our new ABL facility totaling $60 million with two supportive bank partners and first horizon and workforce.
Speaker Change: We also raised at $43 million of unsecured baby bonds.
Speaker Change: We have deployed a portion of this capital and have approximately $50 million of liquidity to pursue core STP Kate life Science finance opportunities.
Speaker Change: Third as it relates to our entire subsidiary earlier. This week, we announced an agreement with a large strategic partner that we believe positions the tariffs CD mill 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.
Speaker Change: 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.
Speaker Change: We believe these achievements set the stage for improved shareholder returns going forward.
Speaker Change: <unk> core business is facing commercial stage life science companies. We do this through first lien term loans royalties and hybrid structures and focus on financings of 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 experiences.
Speaker Change: Spending of three core functions of a direct credit firm those our origination underwriting and portfolio management.
Speaker Change: We believe the combination of an attractive niche combined with the existing team of platform positions <unk> to successfully originate underwrite and manage a portfolio of mid teens, plus yielding finance receivables.
Speaker Change: At 12, 31, 2023, our gross portfolio of life Science finance receivables totaled $288 million, an all time high.
Speaker Change: The expansion of our portfolio is directly linked to the investments made in our team and underwriting process our portfolio.
Speaker Change: Yo 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 five parties.
Speaker Change: We also hold approximately $2 million of warrants from public companies as well as warrants or <unk> for 12 company 12 private companies carried at zero on our balance sheet.
Speaker Change: For the quarter, our portfolio effective yield was 14% and the realized yield was 14, 1% as a reminder, the effective yield is the GAAP yield that assumes future cash flows are received in line with our modeling, whereas the real ideal yield uses actual period finance receivable interest income and fees.
Speaker Change: Over the past five years as <unk> realized you realized yield has averaged approximately 17% with variance based on timing of investment realizations royalty performance in non accruals.
Speaker Change: Turning to portfolio activity during the fourth quarter, we closed four transactions committing $60 million of capital with $55 million.
Deployed.
Speaker Change: We closed three senior secured loans $20 million loan to journey medical dermatology focused pharmaceutical company, a $20 million loan to she'll therapeutics, a pharmaceutical company commercializing a unique iron replacement therapy, and a $6 million loan to Nicoya life Sciences a Li.
Speaker Change: <unk> bench top surface plasma residents tools.
Speaker Change: We also deployed $14 $1 million to purchase a series of sales based milestones related to a portfolio of immune cartoons.
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.
Speaker Change: This is a 10% adjusted return on tangible finance book finding.
Speaker Change: Finance segment, adjusted net income and return on tangible book or the primary financial metrics, we use to gauge our core business progress.
Speaker Change: 2023 refinance segment results included a $2 $3 million negative impact from the seasonal reserve build which totaled $13 9 million eight years and as a reminder, throughout 2023, we built a general allowance for loan loss to comply with Stifel.
Speaker Change: On each new load, we reserve for 4% upfront for potential future loan losses 2023 is growth in book value per share was negatively impacted by the spilt.
Speaker Change: We think we are in the later innings of building. This general loan loss reserve, although it will increase in proportionate to growth in our finance receivables portfolio.
Turning to the <unk> agreement on March 18th we signed an exclusive option an asset purchase agreement with a strategic partner 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.
The agreement grants the partner a two year exclusive option to purchase certain inherited and tariffs tangible property and equipment at a premium to the September 32023 book value or approximately $6 million.
Speaker Change: Other tangible assets, including inventory will be about if our partner ops to exercise the agreement.
Speaker Change: Yeah.
Speaker Change: In consideration for the grant of the option the partner agreed to pay inherits a low single digit million dollar option fee with the first portion of <unk> that closed in the second portion what portion payable by January one 2025, if the option is not been exercised by that date.
Speaker Change: If the option is exercised the option fee incredible to the purchase price. However.
Speaker Change: It is nonrefundable the opposite these are nonrefundable, if the option is not exercised.
The partner also agreed to guarantee to <unk> minimum annual revenue payments under an existing collaboration agreement totaling mid single digit millions of dollars for each of the calendar year 2024 and 2025.
Speaker Change: The agreement does not include any of the <unk> IP, which includes the terrorists have intelligence oral dosing formulation, the licensing agreement with Cara therapeutics and corresponding milestones and royalties.
Licenses or any of the terraces additional IP, including the oral Leuprolide program we.
We are working with the <unk> management team to monetize these assets.
Speaker Change: The agreement immediately reduces our cash burn and tariffs and we believe the business will be breakeven or better over the duration of the agreement importantly, the agreement allows <unk> to prioritize our core specialty finance business and allows our shareholders to participate in the earnings of the finance business to a greater extent.
Speaker Change: At December 31, 2023, our book value per share was $22 43, compared with $21 80 at the end of 2022.
non-GAAP basis, our tangible finance book value per share was $19 61.
Speaker Change: Compared to $19 <unk> at the end of 2022.
<unk> shares traded at approximately 10% discount to the 12 31 2023 tangible book value.
Speaker Change: As a reminder, that book value that tangible book value.
Speaker Change: Does not include the $13 $9 million seasonal reserve or said another way the.
Speaker Change: Do you see some reserve provides a $13 $9 million buffer to potential future loan losses on top of that $19 <unk> per share the tangible but it also does not include any value for the entire CMO and tariffs IP the tax asset nor the value of private warrants or other fees that may be off balance sheet.
Speaker Change: With shares trading at this discount we view the repurchase of stock is a prudent use of shareholder capital.
Speaker Change: 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 foreclosed deals in our gross finance investment portfolio totaling approximately $290 million, an all time high the.
Speaker Change: The <unk> agreement positioned that business to be potentially profit neutral or better over the next two years and allows <unk> 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 network and platform to successfully deploy capital and to be attractive 25 million.
Speaker Change: And under 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 pressing 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.
Speaker Change: Hey, Joni.
Speaker Change: Thanks for taking my question just wanted to get a high level read out in the overall market.
Speaker Change: We've got kind of a higher rate environment for a little while here it seems like that's.
That's been kind of fully priced in.
<unk> markets, especially on the small end of the market cap spectrum seem like they're picking up steam.
We're gaining some momentum finally, how do you see the overall book the environment right now.
Speaker Change: Terms of the books access to capital or some of your London clients their access to capital right now in other forms.
Speaker Change: And then overall.
Speaker Change: The pipeline.
Speaker Change: How do you feel like you're positioned here in terms of the ability to put more capital to work over the near term.
Speaker Change: Yes, Thanks, Mark and good morning.
Speaker Change: Yes, so it's.
Speaker Change: It's interesting 678 months ago, everyone was afraid to do deals sitting sitting on our hands and of course with with S&P and a bitcoin and those things hitting all time highs.
Speaker Change: Folks are doing deals more frequently and folks are able to access capital so the positive as well.
Speaker Change: Our portfolio is made of companies that are commercializing products that need to raise money.
Speaker Change: 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 in the recession, it seems to be quite a bit better than it was say 12 months ago.
Speaker Change: In terms of the pipeline.
Speaker Change: We have.
Speaker Change: We saw a solid pipeline in our segment of the market you know a lot of these companies have don't have a lot of options at any given time of the cycle.
Speaker Change: We still got a lot of deals, where we're hunting and hope to close and I will say 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 <unk> life science deals.
Speaker Change: One of those they ended up taking equity and that was one we worked long and hard on it and thought we had a really compelling proposal had key stakeholders holder by and they took equity which is understandable we had another one.
Speaker Change: I think we got outbid, but theres still plenty plenty of things for us to do out there and putting these small companies.
Speaker Change: E checks of $25 million or less.
Speaker Change: Our slot Theyre trying to raise money you don't have a lot of options.
Speaker Change: Well that makes.
Speaker Change: Makes sense and then in terms of from a strategic perspective are you still focused on the opportunity to do it JV or client partner capital.
Speaker Change: Anything changed now.
Speaker Change: Kind of a quarter ended.
Speaker Change: The new year in terms of the speed.
Speaker Change: Yeah, No no we still would like to do that I think.
Speaker Change: <unk>.
Speaker Change: The goal last year really was.
Speaker Change: Get ready to grow lets get the team ready to grow let's let's have the machine down and then race and balance sheet capital I think we did a pretty good job on that.
Speaker Change: The JV and some kind of third party capital, it's really interesting to us we have an interesting.
Speaker Change: Sourcing origination management capabilities, we've talked a lot of larger alternative asset managers in credit firms they find it interesting.
Speaker Change: I think for us it will allow us to continue to grow assets, perhaps expand our size a little bit in terms of check size and sort of our aperture.
Speaker Change: And then for shareholders we would.
Speaker Change: 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.
Speaker Change: We've got to find the right partner and the right the right structure, but yes, we're still interested we're still talking to people.
Speaker Change: I think it's imminent, but it's.
Speaker Change: I know, it's the board is pushing us hard to you do find something there in 2024.
Thank you Jody Good luck, yes, thank you Martin.
Speaker Change: 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 the queue.
Speaker Change: Okay. If we don't appear to have any further questions in the queue.
Speaker Change: Hi, Ken.
Speaker Change: To Jodi <unk> for any closing.
Speaker Change: Yeah. Thanks, Thanks, Janine yes.
Speaker Change: Thanks, everyone for joining the call and it was highlighted on the call. We are bullish about our prospects in 2024, given increased finance receivables portfolio plenty 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.
Speaker Change: Thank you very much Jody 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.