SWK Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 15, 2024

Key Takeaways

  • Positive Sentiment: During Q3, the core finance segment generated $5 million of adjusted non-GAAP net income on $10 million of revenue, with receivables up 15% y/y to $270 million and the effective yield improving 60 bps to 14.6%.
  • Positive Sentiment: Completed an $11 million royalty monetization with Relieve Therapeutics (with $7.75 million advanced) and a $26 million upsized term loan amendment for Eaton Pharmaceuticals—plus warrants now significantly appreciated—and anticipate closing an $8 million MedTech term loan.
  • Positive Sentiment: Made progress on $32.5 million of non-accrual loans through Exxibo asset sale, BIOLASE auction win at $20.1 million, and expected Treo repayment, which should boost future realized yields.
  • Positive Sentiment: The Antares CDMO division’s revenue doubled to $600 thousand in Q3 with all-time high 4Q bookings, setting the stage for further growth in 2025.
  • Neutral Sentiment: The Board is actively exploring options to address the stock’s discount to book value, including share buybacks, aiming for 10% tangible book value per share growth in 2025 and beyond.
AI Generated. May Contain Errors.
Earnings Conference Call
SWK Q3 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

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. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Ira Gostin, Investor Relations. You may begin.

Speaker 1

Good morning, everyone, and thank you for joining the SWK Holdings Third Quarter 2024 Financial and Corporate Results Call. Yesterday, SWK issued a press release detailing its financial results for the 3 months ending September 30, 2024. The press release can be found in the Investor Relations section of swkhold dotcom under the News Release section. Before beginning today's call, I would like to make the following statement regarding forward looking statements. 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.

Speaker 1

These statements are based on our current expectations, and you should not place undue reliance these statements. Actual results may differ materially due to our risks and uncertainties, including those detailed in the Risk Factors section of SWK Holdings' 10 ks filed with the SEC and other filings we make with the SEC from time to time. 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. Joining me from SWK Holdings on today's call is Jody Staggs, President and CEO, who will provide an update on SWK's Q3 2024. Jody, please go ahead.

Speaker 2

Thank you, Ira, and thanks everyone for joining our Q3 conference call. 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 STBK family is thinking about and praying for you and your family today. Turning to the call, STBK's core business is financing innovative commercial stage life science product companies through 1st lien term loans and royalties with a focus on $5,000,000 to $25,000,000 investments.

Speaker 2

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. During the Q3, our core finance segment generated $5,000,000 of adjusted non GAAP net income. The gross finance receivables portfolio increased 15% year over year to 270,000,000 dollars The 3rd quarter portfolio effective yield improved 60 basis points year over year to 14.6 percent, in line with our historical average. Segment revenue increased 13.5% year over year to $10,000,000 as the to approximately $10,000,000 as the receivables growth was accompanied by a 13.8 percent realized yield.

Speaker 2

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. During the Q3, we closed an up to $11,000,000 royalty monetization with Relieve Therapeutics and we have advanced $7,750,000 to Relieve. During the quarter, we also closed a $26,000,000 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 $26,000,000 we'll fund.

Speaker 2

Upon signing the amendment, we received approximately 290,000 Eaton warrants at a $5.32 strike price. Shares of Eaton have approximately doubled since the deal was announced, increasing the value of our warrants, but also demonstrating the value of SMBK's minimally dilutive financing solutions. Between now year end, we anticipate closing an $8,000,000 term loan to a sponsor backed Medtech CDMO, and we are discussing advancing additional capital to multiple existing borrowers currently rated 4 or better. During Q3, our loan to EBITDA was repaid in full. The loan generated a 14% IRR and an 1.8% MOIC and we continue to own equity in EBITDA.

Speaker 2

At ninethirty, we had $32,500,000 of financial receivables on non accrual. However, post quarter close, we have made progress working out 3 non accrual names. On November 14, Exxibo sold its assets to a software company. SWK received $3,400,000 cash at close and expects to receive $500,000 in February 2025. 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.

Speaker 2

S7K will also receive a 3 year earnout consisting of 30% of the annual increase in the SaaS gross margin. We'll work through the accounting for the transaction in our Q4 financials, but at this time, we do not believe there is an impairment to the $4,500,000 carrying value as of September 30. Turning to BIOLASE. On November 4, 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 $20,100,000 SABK and our attorneys are working with the debtor and other interested parties to facilitate timely close and orderly wind down of the estate. The situation remains fluid and we will work through the accounting for the transaction in our Q4 financials, but at this time, we do not believe there is an impairment to the $15,800,000 carrying value as of September 30, 2024.

Speaker 2

Turning to the Treo 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 $1,500,000 carrying value as of September 30, 2024. To round things out, our Antares division is executing against the new business plan with segment revenue doubling to $600,000 this quarter. 4th 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 Antares is making as it works with our strategic partner to transition to a leading Phase 1 and Phase 2 inhaled and nasal CDMO.

Speaker 2

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. 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 the reduction in our diluted share count positions 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.

Operator

Certainly. At this time, we will be conducting a question and answer session. Your first question for today is from Scott Jensen, a Private Investor.

Speaker 3

Good morning, Jody. Good morning, Josh. 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 small caps and played the hand well, especially with the biolase that was fun to watch the stocking horse go up and then even get outbid in the end. So that turned out to be a well played doubling down at the end.

Speaker 3

So congratulations. The same thing for Houghton. 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 going in a really good direction. Thank you for the Antares update.

Speaker 3

That was going to be one of my questions. So I appreciate that. I guess one of the things that I can't help but we'll notice, obviously, we got a stock market ripping. We have a stock that just muddles along and clearly that's I think partly due to when big shareholders decide 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.

Speaker 3

And clearly, we have another one continuing to unload and probably is in the process of unloading as we speak. And so then it goes down to, well, I would call it the elephant in the room, the largest shareholder and the public information about Carlson's shutting down of all the light offices over the last year or 2, shrinking their assets, we all know how that kind of game goes. If you read their 13F, SWK is one of the largest positions that they have. And so I just wondered whether the Board has thought about how they're going to approach Carlson's position? And as Carlson reached out in any way, have you guys gone through ideas, a bigger stock buyback, which clearly you can't buy at all from them?

Speaker 3

It'd be nice if one could, but then we'd be in the same kind of position with a dominating shareholder. Just whether there's list of thoughts about how to approach this because through the filings you can see there 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 has the Board thought about possible reactions or responses to this known probably upcoming event, shall we say?

Speaker 2

Yes. No, thanks for the question. I mean, that is the question. Just let me take a quick step back. This year, we had some non accruals.

Speaker 2

We had to get through those. We feel pretty good about where we are there. We look up now and assuming those things play out like we think, and again, there's as we've said, the situations are still fluid in a couple of cases. We'll enter 2025 with we think could be approximately an all time high portfolio in terms of assets. We think the yields kind of should revert to historical levels and tariffs is now cash flow breakeven or better.

Speaker 2

So, we look at that and we think this is a business that we think should earn a double digit ROE. Historically, finance companies that earn a double digit ROE should trade at book value. And the Board is we've got a 3 person Board. These are very sophisticated folks. They know this and they're frustrated.

Speaker 2

We're frustrated. And so, everyone understands that. Initially when the new team came in, we had a mandate to simplify the situation, getting tariffs worked out, grow the portfolio a bit and like show we can earn that ROE and then also buy back stock as aggressively as we could and we've attempted to do that. 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.

Speaker 2

We're having regular calls. We're working through potential past business plans to address this. 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. We continue to think that the portfolio particularly a little bit more cleaned up at the yields that we're generating should be attractive to somebody.

Speaker 2

In terms of our shareholders, I did see the filing that one of our larger shareholders had sold down a fair amount. So that probably has not helped, but we are trying to buy back as much of those shares as we can through our program.

Speaker 3

Do they all know that Jones, they could just call it Jones Trading, that's where you do your buyback? I mean, are they aware they could be a little bit more effective at getting out of position?

Speaker 2

Yes, 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 10 times more knowledgeable than me on this. I will say if anyone wants sell, call me up. We're in an open period now.

Speaker 2

So happy to have those conversations. I think my email and phone is posted, happy to discuss those. I'm sure we can figure something out direct. In terms of our largest shareholder, I mean I try to speak with all of our large shareholders regularly. And I think they're happy with the way the business is performing.

Speaker 2

They're obviously not happy with the stock price, which none of us are. 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 pricing us to figure this out as well.

Speaker 3

Right. Awesome. I'll go back in the queue and see if anybody else has any calls. I mean, Okay. Thanks, Scott.

Operator

Your next question for today is from Michael Diana with Maxim Group.

Speaker 4

Okay. Thank you. Hey, so, Jody, when you talk about the portfolio at an all time high, what is that $275,000,000 or is that a different number?

Speaker 2

Well, and again, I probably should be tied with my language, but if based on the commitments that we have in the Q4, including the Eaton upsize, based on one repayment, we think that we could end the year near an all time high. I don't really want to give guidance, but I have my sort of formal. Some things need to fall into place, but we do think there's we could end close to an all time high at year end. With that, I would say, that's probably as clean as it's been.

Speaker 4

Yes. No, I understand. It depends on payoffs and all sorts of things. But what is your all time high? That's what I'm going to ask.

Speaker 2

I believe we were in the 2 okay, so this is on a gross basis. We did start doing this full. I'm fairly sure we were around mid-280s. Let me pull this up because I do have it right here in front of me. So we were at $288,000,000 on a gross basis in the Q4 of 2023.

Speaker 2

That was our all time high. That was the only quarter we were above $280,000,000

Speaker 4

Yes. I got you. Okay. And then in the Q4 cleaning up the non accruals, is that going to come through the income statement on the provision line or?

Speaker 2

So yes, so you may recall

Speaker 4

There's no impairment. Let me yes, rephrase because you talked about impairment, no impairment.

Speaker 2

Let's assume there's no impairment. Yes, that's right. So again, let's assume that for now and this is not a commitment to that. But so last quarter or maybe 2 quarters ago, we changed the way we reserve our CECL methodology. And so now we have a higher reserve against lower rated credits, which I think intuitively makes a lot of sense.

Speaker 2

So as an example, our 1 rated credits get reserved at 15%. So BIOLASE was a $15,800,000 loan at the quarter. That means we had a $2,400,000 reserve against it. Exivo was a 1 rated credit. So it was a $4,500,000 loan at the quarter.

Speaker 2

So we had a roughly $600,000 CECL reserve against that. So yes, if things worked out well and we get our money back on those, we would also be able to offset or reverse that CECL reserve into earnings. Again, all that is not saying that we're not going to that I'm committing to that. But yes, functionally, that's how it works. Sure.

Speaker 2

I'm sorry, that's like Achieva was $700,000 it's 15% times 4.5%.

Speaker 4

Okay. And then if you do close these new credits, that's going to lead to a provision, right, because of CECL. Is that right?

Speaker 2

Okay. So the way we're doing our new setup is on a existing 5 rated loan that is seasoned, we will have a 0% CECL reserve against it. So in the case of Eaton, it is a 5 rated loan and it's seasoned. We will not have to take a CECL reserve against that. So that is a positive.

Speaker 2

Now if it is a new 4 rated loan, we do take a 4.4% reserve against any new loan. So as an example, assuming we close this $8,000,000 loan, we'll have to take a what's that like a $350,000 CECL reserve. So yes, 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.

Speaker 4

Right. And because of the resolution of the non performers, you said your realized yield should go up to approach your effective yield, right?

Speaker 2

I think that's right. So if and this is just on below math, but if I look at the 3 non accruals, I'm just going to call it $20,000,000 And let's assume that we can put that money out at roughly our effective yield, That would be about $3,000,000 of annual income. And we have a roughly $250,000,000 equity base. So you can see that that would increase our realized yield. I should be doing that over the portfolio, but by about 100 points, 100 basis points.

Speaker 2

So that realized yield goes up closer to the effective yield.

Speaker 4

Yes. Okay, great. All right. Thank you.

Speaker 2

Okay. Thanks, Mike.

Operator

Your next question for today is from William Koch, a Private Investor.

Speaker 5

Hi. This is Bill Koch as she just indicated. Actually the two questions before me were pretty much what I was going to ask and they're great answers. So that pretty much sums it up for me. But I just would like to say a couple of things, if you got a second.

Speaker 5

Okay. Absolutely, yes. Yes, I'm not a sophisticated financial guy. I'm actually a criminal defense lawyer up in Connecticut. And I'm a lot older than you guys too.

Speaker 5

So one thing I was going to 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.

Speaker 2

Thank you.

Speaker 5

And yes, and I bought the stock because of Enteris and hearing the news today was good because I don't think Enteris and Unigene before it has made a profit probably like 20 or 25 years ago, maybe 1 quarter when their nasal calcitonin drug came out. So that was good news too. But otherwise, I mean everything else I was thinking about, about the stock price, etcetera, has been answered. So I guess I'll stay tuned. So hang in there for us little guys too.

Speaker 2

Absolutely. Yes, we are working for all of our shareholders and appreciate your support, Bill.

Speaker 5

Okay.

Operator

Your next question for today is from Scott Jensen, a Private Investor.

Speaker 3

Hey, Jody. Just a follow-up on the biolase. When you did the dip financing in October, how does that relate to the $15,800,000 that you have reserved?

Speaker 2

Yes. So $15,800,000 was our advance at so that was the GAAP mark at $6.30 plus the amount we funded in the 3rd quarter. We advanced an additional $1,400,000 after quarter close. So you can kind of think of like the pro form a GAAP mark of 17.2

Speaker 3

And that's the number you're referring to, you hope, because obviously the bidding went at $20,000,000 plus that you think

Speaker 2

you all are Yes, I don't want to commit to that because Yes, I

Speaker 3

do want to be There's a lot of people that want to put their hands in the big banks. Yes, that's

Speaker 2

what we're thinking. But I think what we've committed to is we think that the mark plus the CECL reserve is appropriate at this time and I still feel very comfortable saying that.

Speaker 3

Yes. 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. Do you feel like your documents and the way you write them gives you a good position within the bankruptcy court rules and guidelines to kind of get that? Is that kind of how you feel

Speaker 5

some confidence?

Speaker 2

Yes. I would frame it this way. Our documents are great. They're fine. We're senior secured lender with an all asset lien.

Speaker 2

So we've got that. But folks have various points of leverage in these situations. And I'm not a bankruptcy expert. You might actually talk to Bill. He may know more about it.

Speaker 2

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. And so you're constantly trying to do the math of, 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 not. So there's that sort of fine line of how hard you fight.

Speaker 2

But docs our docs are great, our lien is fine, our structure is great. So that's all good.

Speaker 3

Yes. I had the pleasure of working next to a credit fund, a hedge fund, was next to our 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 3

Thanks, Scott.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Jody for closing remarks.

Speaker 2

Great. Thanks everyone for joining the call. Thank you for the support. I am available if anyone wants to reach out, happy to discuss the quarter on SWK further. And with that, I hope everyone has a great day.

Speaker 2

Bye bye.

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