SWK Q3 2024 Earnings Report

SWK EPS Results

• Actual EPS: $0.33
• Consensus EPS: $0.52
• Beat/Miss: Missed by -$0.19
• One Year Ago EPS: N/A

SWK Revenue Results

• Actual Revenue: $9.57 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

SWK Announcement Details

• Quarter: Q3 2024
• Date: 11/14/2024
• Time: TAS
• Conference Call Date: Friday, November 15, 2024
• Conference Call Time: 10:00AM ET

SWK (NASDAQ:SWKH) Holdings Corporation, offers specialty finance and asset management services in the United States. It operates in two segments, Finance Receivables and Pharmaceutical Development. The Finance Receivables segment provides customized financing solutions to a range of life science companies, including companies in the biotechnology, medical device, medical diagnostics and related tools, animal health, and pharmaceutical industries, as well as institutions and inventors. This segment also offers non-discretionary investment advisory services to institutional clients in separately managed accounts to invest in life science finance. The Pharmaceutical Development segment provides customers pharmaceutical development, formulation, and manufacturing services, as well as formulation solutions built around its proprietary oral drug delivery technologies, the Peptelligence platform. It also offers intellectual property licensing business. The company was formerly known as Kana Software, Inc. and changed its name to SWK Holdings Corporation in December 2009. SWK Holdings Corporation was incorporated in 1996 and is headquartered in Dallas, Texas.

SWK Q3 2024 Earnings Call Transcript

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.

Presentation

[Operator]

Greetings. Welcome to the SWK Holdings' Q3 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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, Head of Investor Relations at SWK Holdings]

Good morning, everyone, and thank you for joining the SWK Holdings' Q3 2024 financial and corporate results call. Yesterday, SWK issued a press release detailing its financial results for the three months ending September 30th, 2024. The press release can be found in the Investor Relations section of swkholdings.com 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. These statements are based on our current expectations, and you should not place undue reliance on these statements.

[Ira Gostin, Head of Investor Relations at SWK Holdings]

Actual results may differ materially due to our risks and uncertainties, including those detailed in the risk factor section of SWK Holdings' 10-K 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.

[Jody Staggs, CEO at SWK Holdings]

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 SWK family is thinking about and praying for you and your family today. Turning to the call, SWK's core business is financing innovative commercial stage life science product companies through first lien term loans and royalties with a focus on $5 million-$25 million investments. 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, CEO at SWK Holdings]

During the Q3, 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. The Q3 portfolio effective yield improved 60 basis points year-over-year to 14.6%, in line with our historical average. Segment revenue increased 13.5% year-over-year to approximately $2 million, as the receivables growth was accompanied by a 13.8% realized yield. 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 million royalty monetization with Relief Therapeutics, and we have advanced $7.75 million to Relief.

[Jody Staggs, CEO at SWK Holdings]

During the quarter, we also closed a $26 million upsize amendment to Eton Pharmaceuticals to support Eton's acquisition of a rare disease product. Eton has publicly stated the deal is expected to close by year-end, at which time we expect the $26 million will fund. Upon signing the amendment, we received approximately 290,000 Eton warrants at a $5.32 strike price. Shares of Eton have approximately doubled since the deal was announced, increasing the value of our warrants, but also demonstrating the value of SWK's minimally diluted financing solutions. Between now and year-end, we anticipate closing an $8 million term loan to a sponsor-backed medtech CDMO, and we are discussing advancing additional capital to multiple existing borrowers currently rated four or better. During Q3, our loan to Epica was repaid in full. The loan generated a 14% IRR and a 1.8% MOIC, and we continue to own equity in Epica.

[Jody Staggs, CEO at SWK Holdings]

At 9:30 A.M, we had $32.5 million of finance receivables on non-accrual. However, post-quarter close, we have made progress working out three non-accrual names. On November 14th, 2024, Xevo sold its assets to a software company. SWK received $3.4 million cash at close and expects to receive $500,000 in February 2025. We also anticipate receiving approximately $700,000 by January 2nd, 2025, although this payment is contingent on the new owner executing a new agreement with an existing key vendor. SWK will also receive a three-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 $4.5 million carrying value as of September 30th, 2024.

[Jody Staggs, CEO at SWK Holdings]

Turning to BIOLASE, on November 4th, an auction was held for the purchase of the BIOLASE assets, and it was won by an international third-party bidder with an all-cash bid of $20.1 million. SWK and our attorneys are working with the debtor and other interested parties to facilitate timely close and early 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 $15.8 million carrying value as of September 30th, 2024. 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 carrying value as of September 30th, 2024.

[Jody Staggs, CEO at SWK Holdings]

To round things out, our Enteris division is executing against the new business plan, with segment revenue doubling to $600,000 this quarter. Q4, quarter-to-date bookings are at an all-time high, which should support further revenue growth in 2025. We are pleased with the progress Enteris is making as it works with our strategic partner to transition to a leading phase I and phase II inhaled and nasal CDMO. 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.

[Jody Staggs, CEO at SWK Holdings]

We believe these actions, combined with the reduction in our diluted share count, position SWK 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. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. Your first question for today is from Scott Jensen, a private investor.

[Scott Jensen, Analyst at Private Investor]

Good morning, Jody. I’d like to pass on my condolences to Adam and his family. 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 BIOLASE. That was fun to watch the stalking horse go up and then even get outbid in the end. That turned out to be a well-played doubling down at the end. Congratulations. Same thing for Eton. That was a great deal, and they’ve done a good job of raising capital outside of you guys as well. It seems like it’s going in a really good direction. Thank you for the Enteris update. That was going to be one of my questions, so I appreciate that.

[Scott Jensen, Analyst at Private Investor]

I guess one of the things that I can't help but 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. 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 Capital'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 13F, SWK is one of the largest positions that they have.

[Scott Jensen, Analyst at Private Investor]

And so I just wondered whether the board has thought about how they're going to approach Carlson's position. And has 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? 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 a list of thoughts about how to approach this, because through the filings, you can see 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?

[Jody Staggs, CEO at SWK Holdings]

Yeah. 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. 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, as we've said, the situations are still fluid in a couple of cases. We'll enter 2025 with what 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. Enteris BioPharma is now cash flow break-even or better. 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 three-person board.

[Jody Staggs, CEO at SWK Holdings]

These are very sophisticated folks. They know this, and they're frustrated. We're frustrated, and so everyone understands that. Initially, when the new team came in, we had a mandate to simplify the situation, get Enteris worked out, grow the portfolio a bit, and 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. 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.

[Jody Staggs, CEO at SWK Holdings]

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. 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.

[Scott Jensen, Analyst at Private Investor]

Do they all know that? Do they know that Jones, they could just call up JonesTrading? 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?

[Jody Staggs, CEO at SWK Holdings]

Yeah. I can't speak to that in particular. These are sophisticated folks, so they traffic in these types of small securities. So I'm sure they're 10 times more knowledgeable than me on this. 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. 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. They're obviously not happy with the stock price, which none of us are.

[Jody Staggs, CEO at SWK Holdings]

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.

[Scott Jensen, Analyst at Private Investor]

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

[Jody Staggs, CEO at SWK Holdings]

Okay. Thank you, Scott.

[Operator]

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

[Michael Diana, Managing Director at Maxim Group]

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

[Jody Staggs, CEO at SWK Holdings]

Well, and again, I probably should be tighter with my language, but based on the commitments that we have in the Q4, including the Eton upsize, based on possible 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 pro forma model. And some things need to fall into place, but we do think we could end close to an all-time high at year-end. I would say that's probably as clean as it's been.

[Michael Diana, Managing Director at Maxim Group]

Yeah. No, I understand. It depends on payoffs and all sorts of things, but what is your all-time high? That's what I'm asking.

[Jody Staggs, CEO at SWK Holdings]

I believe we were in the two—okay, so this is on a gross basis. We did start doing this sample. I'm fairly sure we were around mid-$280s million. Let me pull this up because I do have it right here in front of me. So we were at $288 million on a gross basis in the Q4 of 2023. That was our all-time high. That was the only quarter we were above $280 million.

[Michael Diana, Managing Director at Maxim Group]

Yeah. I gotcha. 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?

[Jody Staggs, CEO at SWK Holdings]

Yeah, so you may...

[Michael Diana, Managing Director at Maxim Group]

If there's no impairment, let me, yeah, rephrase because you talked about impairment, no impairment. Let's assume there's no impairment.

[Jody Staggs, CEO at SWK Holdings]

Yeah. Yeah. 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 two 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. So as an example, our one-rated credits get reserved at 15%. So BIOLASE was a $15.8 million loan at the quarter. That means we had a $2.4 million reserve against it. Xevo was a one-rated credit. So it was a $4.5 million loan at the quarter. 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.

[Jody Staggs, CEO at SWK Holdings]

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.

[Michael Diana, Managing Director at Maxim Group]

Sure.

[Jody Staggs, CEO at SWK Holdings]

I'm sorry. The CECL like Xevo was $700,000. It's 15% times 4.5.

[Michael Diana, Managing Director at Maxim Group]

Okay. 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?

[Jody Staggs, CEO at SWK Holdings]

Okay. So the way we're doing our new setup is on an existing five-rated loan that is seasoned, we will have a 0% CECL reserve against it. So in the case of Eton, it is a five-rated loan, and it's seasoned. We will not have to take a CECL reserve against that. So that is a positive. Now, if it is a new four-rated loan, we do take a 4.4% reserve against any new loan. So as an example, assuming we close this $8 million loan, we'll have to take a—what's that?—like a $350,000 CECL reserve. 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.

[Michael Diana, Managing Director at Maxim Group]

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

[Jody Staggs, CEO at SWK Holdings]

I think that's right. So if, and this is just envelope math, but if I look at the three non-accruals, I'm just going to call it $20 million. And let's assume that we can put that money out at roughly our effective yield. 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, 100 basis points. So that realized yield goes up closer to the effective yield.

[Michael Diana, Managing Director at Maxim Group]

Yeah. Okay. Great. All right. Thank you.

[Jody Staggs, CEO at SWK Holdings]

Okay. Thanks, Mike.

[Operator]

Your next question for today is from William Koch, a private investor.

[William Koch, Analyst at Private Investor]

Hi. This is William 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.

[Jody Staggs, CEO at SWK Holdings]

Sure. Absolutely. Yeah.

[William Koch, Analyst at Private Investor]

Yeah. 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. 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.

[Jody Staggs, CEO at SWK Holdings]

Thank you.

[William Koch, Analyst at Private Investor]

Yeah, and I bought the stock because of Enteris. 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 one quarter when their nasal calcitonin drug came out. That was good news too. But otherwise, I mean, everything else I was thinking about, about the stock price, etc., has been answered. I guess I'll stay tuned. Hang in there for us little guys too.

[Jody Staggs, CEO at SWK Holdings]

Absolutely. Yeah. We are working for all of our shareholders and appreciate your support, Bill.

[William Koch, Analyst at Private Investor]

Okay.

[Operator]

Your next question for today is from Scott Jensen, a private investor.

[Scott Jensen, Analyst at Private Investor]

Hey, Jody. Just to follow up on the BIOLASE, when you did the DIP financing in October, how does that relate to the $15.8 million that you have reserved?

[Jody Staggs, CEO at SWK Holdings]

Yeah. So $15.8 million was our advance at, so that was the gap mark at $630,000+ the amount we funded in the Q3. We advanced an additional $1.4 million after quarter close. So you can kind of think of the pro forma gap mark of $17.2 million.

[Scott Jensen, Analyst at Private Investor]

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

[Jody Staggs, CEO at SWK Holdings]

Yeah. I don't want to commit to that because you want to be.

[Scott Jensen, Analyst at Private Investor]

I hope. Yeah. I got it. Risk.

[Jody Staggs, CEO at SWK Holdings]

There's a lot of people that want to put their hands in the piggy banks.

[Scott Jensen, Analyst at Private Investor]

That's what I figured.

[Jody Staggs, CEO at SWK Holdings]

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.

[Scott Jensen, Analyst at Private Investor]

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, 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?

[Jody Staggs, CEO at SWK Holdings]

Yeah. I mean, I would frame it this way. Our documents are great. They're fine. We're a senior security lender with an all-asset lien. 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. 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 the estate open for weeks? And so do we need to give these people a day or not?" So there's that sort of fine line of how hard do you fight.

[Jody Staggs, CEO at SWK Holdings]

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

[Scott Jensen, Analyst at Private Investor]

Yeah. 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 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.

[Jody Staggs, CEO at SWK Holdings]

Thanks, Scott.

[Operator]

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

[Jody Staggs, CEO at SWK Holdings]

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 and SWK further. And with that, I hope everyone has a great day. Bye-bye.

Participants

Executives

• Jody Staggs, CEO
• Ira Gostin, Head of Investor Relations

Analysts

• William Koch, Analyst at Private Investor
• Scott Jensen, Analyst at Private Investor
• Michael Diana, Managing Director at Maxim Group