SWK Holdings Corp
NASDAQ:SWKH
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Greetings. Welcome to the SWK Holdings Third Quarter 2024 Conference Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Ira Gostin, Investor Relations. You may begin.
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.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.
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 Third quarter 2024.
Jody, please go ahead.
Thank you, Ira, and thanks, everyone, for joining our third quarter 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 do first lien term loans and royalties with a focus on $5 million to $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.
During the third quarter, our core finance segment generated $5 of adjusted non-GAAP net income. The gross finance receivables portfolio increased 15% year-over-year to $270 million. The third quarter 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 $10 million as the -- to approximately $2 million as the receivables grow accompanied by a 13.8% realized yield. The realized yield was less than our effective yield due to an increase in our nonaccrual loans. Given positive developments in our nonaccrual bucket, we expect our realized yield should revert to the historical trend of approximating or exceeding our effective yield.
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. During the quarter, we also closed a $26 million upsized 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 a $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 dilutive 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 4 or better.
During the third quarter, 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.
At 9/30, we had $32.5 million of finance receivables on nonaccrual. However, post quarter close, we have made progress working out 3 nonaccrual names. On November 14, Exeevo sold its assets to a software company. SWK received $3.4 million cash at close and expects to receive $0.5 million in February 2025. We also anticipate receiving approximately $700,000 January 2 -- by January 2, 2025, although this payment is contingent on the new owner executing a new agreement with an existing key vendor.
SWK will also receive a 3-year earn-out consisting of 30% of the annual increase in the SaaS gross margin. We worked 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 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 $20.1 million. SWK 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 fourth quarter financials. But at this time, we do not believe there's an impairment to the $15.8 million carrying value as of September 30, 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 30, 2024.
To round things out, our Enteris 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 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 nonaccrual bucket, which will improve our return on capital going forward. We believe these actions, combined with the reduction in our diluted share count, positions SWK to achieve our goal of 10% growth and tangible book value per share in 2025 and beyond.
With that, let's open the call to questions.
[Operator Instructions] And your first question for today is from Scott Jensen, a private investor.
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 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. So congratulations. The 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. So 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.
I guess one of the things that I can't help but will notice. Obviously, we got a stock market ripping. We have stock 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 you speak. And so then it goes down to, what I would call it the elephant in the room, the largest shareholder and the public information about Carlson's shutting down worldwide offices over the last year to 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. 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, bigger stock buyback, which clearly you can't buy at all from them. It 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?
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 nonaccruals. 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. Enteris is now cash flow breakeven 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 3-person board. These are very sophisticated folks. They know this and they're frustrated, we're frustrated. And -- so everyone understands that. We 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 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 you 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. 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 have 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.
Do they 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?
Yes. I can't speak to that in particular. These are sophisticated folks. So -- that traffic and these types of small securities. So I'm sure they're 10x 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 e-mail and phones 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. 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.
Your next question for today is from Michael Diana with Maxim Group.
Okay. Jody, when you just talk about the portfolio at all-time high. What -- is that $275 million? Or is that a different number?
Well -- and again, I probably should be tied with my language, but if -- based on the commitments that we have in the fourth quarter, including the Eton 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 pro forma -- 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. I would say that's probably as clean as it's been.
Yes. No, I understand it. It depends on payoffs and all sorts of things. But what is your all-time high, that's what I'm asking.
I believe we were in the 2 -- okay, so this is on a gross basis. We did start doing this -- 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 million on a gross basis in the fourth quarter of 2023. That was our all-time high. That was only quarter we were above $280 million.
Yes, I got you. Okay. And then in the fourth quarter cleaning up the nonaccruals. Is that going to come through the income statement on the provision line or [indiscernible] impairment. Let me reiterate because you talked about impairment. Let's assume there's no impairment.
Yes. Yes. That's -- 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. So as an example, our 1-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. Exeevo was a 1-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 work 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, that functionally, that's how it works. Sorry, like Exeevo was $700,000, it's 15% times 4.5.
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?
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. So in the case of Eton, 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. Now if it is a new 4-rated loan, we do take 4.4% reserve against any new loans. 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 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.
Right. And because of the resolution of the nonperformers, you said you're realized yield should go up to approach your effective yield, right?
I think that's right. So if -- and this is just envelope math. But if I look at the 3 nonaccruals, 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. I should be doing that over the portfolio by about 100 points -- 100 basis points. So that realized yield goes up closer to the effective yield.
Your next question for today is from William Koch, a private investor.
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 are 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.
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. 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. And yes, and I bought the stock because of Enteris and hear in 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. So that was good news, too. But otherwise, I mean, everything else I was thinking about the stock price, et cetera, has been answered. So I guess I'll stay tuned. So hang in there for us little guys, too.
Absolutely. Yes. We are working for all of our shareholders and appreciate your support, Bill.
Your next question for today is from Scott Jensen, a private investor.
Jody, just a 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?
Yes. So $15.8 million was our advance at -- so that was the GAAP mark at 6/30 plus the amount we funded in the third quarter. We advanced an additional $1.4 million after quarter close. So you can kind of think of like the pro forma GAAP mark of $17.2 million.
And that's the number you're referring to, you hope because obviously, the bidding went at $20 million plus that you think you all...
Yes, I don't want to commit to that because [indiscernible] there's a lot of people that would put their hands in the piggy banks. We're doing our best -- 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.
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 in 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 a some...
Yes, I mean -- I would frame it this way. Our documents are great. They're fine. We're a senior secured 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 being 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 time line of how hard you fight. But our docs are great. Our lean is fine. Our structure is great. So that's all good.
Yes. I had the pleasure of working next to a credit fund -- hedge fund was next to our equity hedge fund and listening to them and learning those kind of things. It's just -- it opened my eyes in a large way. So I clearly understand things that might not be so clear cut come into play. So -- good. Well, best of luck on that.
We have reached the end of the question-and-answer session, and I will now turn the call over to Jody for closing remarks.
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.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.