SWK - Q1 2024

Transcript

Operator (participant)

Good morning, everyone, and welcome to the SWK Holdings First Quarter 2024 conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jason Rando. Sir, the floor is yours.

Jason Rando (EVP and COO)

Good morning, everyone, and thank you for joining SWK Holdings' first quarter 2024 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months ended March 31, 2024. The press release can be found in the Investor Relations section of swkhold.com under News Releases. Before beginning today's call, I would like to make the following statement regarding forward-looking statements. Today, we'll 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.

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. 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 first quarter 2024 corporate and financial results. Jody, go ahead.

Jody Staggs (CEO)

Thank you, Jason, and thanks to everyone for joining our first quarter conference call. SWK's first quarter of 2024 results were highlighted by 24% growth in finance segment revenue to a near all-time high of $11.5 million, while our Enteris segment signed an exclusive option and purchase agreement with a strategic partner that reduces the operating burn and may lead to the acquisition of certain CDMO-related tangible assets. SWK's core business is financing commercial-stage life science product companies through first lien term loans and royalties, with a focus on $5 million-$25 million dollar investments. We have concentrated on this niche for over a decade and have developed an extensive network and strong experience spanning the three core functions of a direct credit firm: origination, underwriting, and portfolio management.

These capabilities were evidenced during the first quarter as our finance segment generated a 10.3% year-over-year increase in gross finance receivables portfolio to $274.5 million, coupled with a 14.2% effective yield and 16.3% realized yield. These achievements led to a 24% year-over-year increase in segment revenue to $11.5 million. This performance enabled our finance segment to remain profitable in the quarter, generating $1 million of GAAP net income and $2.7 million of adjusted non-GAAP net income, despite being negatively impacted by a $6 million impairment in our loan book. We are constructive on the life science finance market and are actively pursuing multiple loan and royalty opportunities while remaining cognizant of increased competition in certain pockets of the life science finance market.

While many of our competitors have grown to a size where they must focus on large sponsor-backed opportunities, we believe SWK's focus on the less competitive sub-$25 million market remains a competitive differentiator. During the first quarter, our Enteris division signed an exclusive option and asset purchase agreement with a strategic partner, granting the partner a 2-year exclusive option to purchase certain Enteris tangible assets in exchange for option fees and guaranteed revenue payments. In April, we received the first low single-digit $ million-dollar option fee. The guaranteed revenue payments are due every 6 months, and we expect to receive the first guaranteed revenue payment in the third quarter. Our first quarter financial results did not include any revenue from either the option fee or guaranteed revenue payments.

As we highlighted on our fourth quarter call, the agreement immediately reduces the cash burn on Enteris, and we believe the business will be break even or better over the duration of the agreement. The agreement also provides our colleagues at Enteris the opportunity to work with our partner to increase the project pipeline and generate new business, while allowing SWK to prioritize our specialty finance business, focused on investing in small and mid-sized commercial-stage life science companies. Turning to our share repurchase program, we bought back 58,298 shares at a total cost of $1 million during the quarter. Since quarter close, we've repurchased an additional 19,000 shares for a total cost of $300,000.

At March thirtieth, 2024, our book value per share was $22.46, a 5% increase compared to $21.39 in the year ago period. Non-GAAP tangible financing book value per share totaled $19.69, an approximately 17% increase from the year ago period. For the first quarter of 2024, the realized yield of the finance receivables portfolio was 16.3% versus approximately 15% for the same period in the prior year. In summary, first quarter of 2024 was largely as expected, with the exception of the $6 million loan impairment.

For the remainder of 2024, we will prioritize selectively closing commercial-stage life science loan and royalty transactions that fit our underwriting criteria, working with our non-accrual borrower partners to realize positive outcomes, exploring paths for additional capital, and returning capital to shareholders via our buyback program. With that, let's open the call to questions.

Operator (participant)

Certainly. Everyone, at this time, we're conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone.... Your first question is coming from Mark Argento from Lake Street. Your line is live.

Mark Argento (Co-Founder and President)

Hey, Jody, just a couple quick ones. One, could you just touch on the impairment? You know, what was it? And then two, what's your kind of lending base or capacity right now? Thanks.

Jody Staggs (CEO)

Yeah. Thanks, Mark. Yeah, so the impairment was to our Trio loan, which was carried at $9.6 million at 12/30. Yeah, the situation remains in workout. There is a restructuring ongoing, so, you know, we remain positive towards the potential outcome here. But it's. I think the restructuring happened a little quicker than we would have thought. It was a little bit more rushed than we would have thought. And, you know, as it goes, the business goes through that, you know, there's likely to be some disruptions. Given that, given our structure under the restructuring, we felt this impairment was positive. Excuse me, was not positive, was appropriate.

We're, you know, as we, as we get a little further out from it, we'll do a full write-up and analysis of what happened here. You know, it was a U.K. borrower. We've only done a few of those, and I think we need to do a deep dive and understand if that played a role here. There are some other dynamics that, you know, I think in my mind happened, and we'll definitely use this as a learning experience. In terms of, you know, our lending capacity, the revolver, as we stand today, the revolver's undrawn. I think we've got $a few million of cash, so we have plenty of capacity, you know, let's say $50-$50 million.

We've got some undrawn commitments and things like that, but we're in the, you know, the $45 million-$50 million of capacity. I was talking to the team yesterday about what we've done year-to-date, and, you know, I think we would have liked to have closed some deals. We actually have submitted about $200 million of proposals year-to-date, which is up year-over-year, and we, you know, have about $60 million of proposals outstanding. So I think we're doing. We're running our playbook, we're out there originating, we're out there, you know, finding potential partners, we're out there submitting proposals.

The market has turned a bit, a bit more competitive, and that's both just sort of general dynamic of, you know, you know, a new player or two in the market, plus with equity markets moving higher, you know, that's an alternative for some of these companies. So, I don't think we're gonna be doing anything drastically different, but I've sort of challenged the team to think through our process, our proposals, are there things we should be doing differently? Are we out there hustling every day, you know, making sure that we're staying in front of these companies and putting the best proposal forward to get some closings.

Mark Argento (Co-Founder and President)

That's helpful. And then, you know, has any of your portfolio companies, you know, accessed the equity markets in terms of raising additional equity capital, or how do you guys view the broader capital markets right now?

Jody Staggs (CEO)

Yes. Yeah, so we do have some private companies that have raised capital recently, one public company as well. You know, and I suspect others are evaluating that given it's those are open. So it's, you know, it's a double-edged sword. It's great for our portfolio companies, more equity. You know, we finance cash-burning life science companies, so it's important that they have some ability to raise equity, particularly when things are good. It does make originating new loans, you know, I would say, modest and more challenging.

Mark Argento (Co-Founder and President)

Great. Thanks.

Jody Staggs (CEO)

Yeah. Thank you, Mark. Appreciate the questions.

Operator (participant)

Thank you. Once again, everyone, if you have any questions or comments, please press star, then one on your phone. Your next question is coming from Bill Koch. Your line is live.

Speaker 4

Hi, this is Bill Koch calling. I am a shareholder, not a financial person.

Jody Staggs (CEO)

Hey, Bill.

Speaker 4

In fact, Hi. Hi. I appreciate this opportunity. In fact, I'm a criminal defense lawyer. I, I don't, you know, all the financial numbers are, I think, great with this company. The only reason why I'm a shareholder, though, is, and this is my question, questions, actually, I have a lot of questions. The only reason why I'm a shareholder is because SWKH owns Enteris, and I owned Unigene stock 25 years ago.

Jody Staggs (CEO)

Yeah.

Speaker 4

I'm like, I've-- So, it's almost like I'd like to have, like, a lot of questions, but I couldn't really... I mean, I know what they are, but I couldn't really formulate them, given that I just found out last night that this conference call was gonna be this morning. But, you know, going back to stuff that Unigene did, some of the situations they were in, like with Pfizer and how they competed with Emisphere, through the years-

Jody Staggs (CEO)

Sure.

Speaker 4

All the deals, the big deals they had that Unigene had, and then Enteris had with sort of potentially, it never worked out, but potential blockbuster drugs. So I'm not sure if I could, should just start asking questions or if I could send you an email?

Jody Staggs (CEO)

Yeah. Let me maybe kind of frame it this way, and maybe it makes sense for us to get on a call, too, because I can walk you through kind of what's happened, you know, SWK's involvement and a lot of specifics around Unigene and the transition. So you know, we purchased Enteris, it's been over four years ago. It might have been five years ago. And at the time, the thesis really was, hey, this is a cool technology. They're, you know, helping peptide and certain small molecules go from IV to oral. There were some interesting things in the pipeline, and, you know, we saw the Emisphere transaction and sort of their involvement with GLP-1, and we thought, wow, this is pretty cool.

You know, they had signed the license with Cara, so we felt like that validated the technology, and we liked that a lot. You know, kind of fast-forward, I would say the execution wasn't great, and, you know, we certainly hold responsibility for that. I would say the window was kind of missed. So, you know, they're still talking to folks about additional licenses, and we've come close a couple of times, but the window was sort of missed. There was probably a four- or five-year window when there was some opportunities to get some things done, and again, execution wasn't great.

So, you know, when the board put me in as CEO, I, you know, we looked at that business and said, Hey, can we really add value doing what we're doing now? And if you look at our financials, it was a cash-burning situation. So we were sending money from our finance business to Enteris, which, you know, none of us wanted to do. And we made the decision to really downsize that business, so we, you know, reduced the headcount. There's a new CEO there named Paul Shields, and we've really refocused that around kind of classic CDMO operations. So they're focused right now on some sort of unique dosing types and helping companies evaluate those dosing types in phase I and phase II. So we still have Peptelligence.

There are still some efforts to do some licenses there. As mentioned, you know, we're talking to people, and we've come close a couple of times, but, you know, unfortunately, I think the window for monetizing that IP, you know, is probably not all the way closed, but it's not where it was five years ago.

Speaker 4

Okay. Well, I guess that kind of... Yeah, 'cause, I mean, I don't have much time yet, but, you know, all Emisphere had was an oral delivery technology that I-

Jody Staggs (CEO)

That's right.

Speaker 4

I believe Unigene's was actually shown, I think, in those calcitonin studies years ago to be better than, than Emisphere's technology in terms of delivering the API into the bloodstream. And Emisphere was bought by Novo for over $1 billion. So that's kind of why I thought, like, wow, this SWK has money, and maybe they can move Enteris forward to some, you know, some sort of, you know, huge, big deals like that. But I guess what you're saying is that's not gonna happen.

Jody Staggs (CEO)

I would say it's, you know, we haven't given up. You know, there's still some efforts there, but look, you're exactly saying our thesis. That is exactly what we thought. You know, we purchased it for, I think, $19 million. You know, we got some of the Cara license, so that, your thesis is exactly what we thought. And, you know, at the time, you know, I think we thought, and there was some work in the pipeline on GLP-1s, and, you know, I don't want to get too in the weeds here, but... So we saw all those same things and thought this, this could be a huge upside scenario. So again, I don't think it was a crazy idea. You know, it didn't work out like we would have hoped.

But yeah, I think your points are well taken. And just, I guess, last comment I would say is, you know, if you look at any of these dosing companies' technologies, most of the large pharma, you know, biotechs, they have, some of them, they do have internal capabilities. And you're right, like, the Peptelligence technology is, you know, from what we've seen from data, from talking to partners, it, it's the best out there in terms of getting certain API where it needs to go. However, is it a differentiating enough factor to get someone to pay a royalty? That's always the challenge. So, you know, if you can get 10% of the API where it needs to go versus 5%, that's awesome. That's great.

Is it valuable enough for someone to pay a royalty, or do they say, You know what? 5%, we can maybe up the milligram and still get the coverage we need. So that's what you're always wrestling with there.

Speaker 4

Hmm, okay. All right. I appreciate it.

Jody Staggs (CEO)

Absolutely. Yeah, and feel free to call. I'm happy to chat on that, and would love to hear your views on sort of what happened there.

Speaker 4

Okay. All right. Thank you.

Jody Staggs (CEO)

Thanks, Bill.

Speaker 4

Thank you.

Jody Staggs (CEO)

Okay.

Operator (participant)

There are no further questions in the queue.

Jody Staggs (CEO)

Great. Well, thanks for the questions, Mark and Bill, and thanks for joining the call. I'm around today. The team's around today and tomorrow, if you'd like to reach out, and hope everyone has a good day. Bye-bye.

Operator (participant)

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.