SWK Holdings Corp
NASDAQ:SWKH
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Earnings Call Analysis
Q4-2023 Analysis
SWK Holdings Corp
The company reported a strong quarter with its financial receivables generating $3.7 million in adjusted finance segment net income, amounting to a substantial $24.4 million for the full year of 2023. This reflects a commendable 10% adjusted return on the company's tangible finance book, which is one of the primary indicators of the company's core business progress. However, this performance was slightly tempered by the $2.3 million negative impact resulting from the buildup of the CECL reserve for potential future loan losses, now standing at $13.9 million, affecting the year's growth in book value per share. This reserve is a new accounting measure that requires a 4.4% reserve for each new loan to cover potential losses, indicating a prudent approach to risk management.
A pivotal event for the company was the signing of a strategic exclusive option and asset purchase agreement on March 18, with a global leader in drug and consumer product technologies. The partner has a 2-year exclusive option to buy certain Enteris tangible property and equipment for approximately $6 million, a figure above the book value as of September 30, 2023. The agreement also provides an option fee in the low single-digit millions, alongside commitments to minimum annual revenue payments for 2024 and 2025, totaling mid-single-digit millions each year. Notably, the agreement excludes Enteris' intellectual property assets, which the management team is actively seeking to monetize. This strategic move is expected to significantly reduce cash burn and possibly bring the Enteris business to break-even or better over the next two years, while allowing a stronger focus on the company's specialty finance business.
Reflecting the company’s fiscal health, the book value per share as of December 31, 2023, was $22.43, up from $21.80 at the end of the previous year. On a non-GAAP basis, the tangible finance book value per share increased to $19.61 from $19.02. Despite trading at a roughly 10% discount to this tangible book value, the company proceeded with share repurchases, buying back approximately 14,000 shares in the fourth quarter of 2023 for $200,000 and an additional 51,000 shares year-to-date through March 19, 2024, for about $900,000. This action suggests strong self-confidence in the valuation and dedication to deploying capital in a manner believed to be beneficial to shareholder value.
The market outlook appears much more positive than in prior months, with capital markets showing signs of momentum, especially in the smaller market cap spectrum. This has benefited companies in the portfolio that are in the commercialization phase and require capital influx. The landscape presents a promising pipeline with significant deal prospects, despite occasional competition and the choice of equity financing by some potential deals. The company also remains focused on strategic opportunities such as joint ventures or partnerships with third-party capital, to leverage their sourcing and management capabilities and potentially generate additional revenue through management fees while improving return on equity for the shareholders.
The company concluded the year with a reinforced portfolio, totaling approximately $290 million, and the strategic agreements setting a potential for a profit-neutral or better performance in areas outside their core business. This has positioned the company well for repurchasing shares, which aligns with their belief in their valuation and strategic deployment of capital. With a proficient team and capabilities, as well as a favorable market, the company is poised for success as it aims to capitalize on the vibrant life science finance opportunities below $25 million. A bullish outlook for 2024 has been expressed, supported by solid plans for growth and deployment of capital.
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Good morning, everyone, and welcome to the SWK Holdings Fourth Quarter and Year-end 2023 Conference Call. [Operator Instructions]. Please note this conference is being recorded.
I will now turn the conference over to your host, Jason Rando with Tiberend Advisers. Jason, over to you.
Thank you, Jenny. Good morning, everyone, and thank you for joining SWK Holdings' Fourth Quarter 2023 Financial and Corporate Results Call.
Earlier this morning, SWK Holdings issued a press release detailing its financial results for the 3 months ended December 31, 2023. 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 statements 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 on today's call from SWK Holdings is Jody Staggs, President and CEO, who will provide an update on SWK's fourth quarter 2023 corporate and financial results. Jody, go ahead.
Thank you, Jason, and thanks, everyone, for joining our fourth quarter conference call. Before beginning the call, I want to thank our former CFO, Yvette Heinrichson, for her 8 years of service to SWK. Over that period, Yvette upgraded our financial reporting, controls and capital markets capabilities. Thank you Yvette and we wish you the best in your future endeavors.
I also want to thank the team and our consultants at the CFGI for working with us to get the 10-K filed in a timely fashion. Thank you.
2023 was a productive year for SWK as we accomplished 3 of our 4 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. As a reminder, our 2023 goals were to build and train the team and prepare to scale the firm, to raise balance sheet capital to facilitate this expansion, to find a sustainable path forward for Enteris and to crystallize a third-party capital strategy.
Elaborating on the 3 goals we achieved. First, our investment team consists of 6 highly motivated credit professionals, the largest and most experienced the team has ever been, which allows us to originate, underwrite and manage more transactions than at any time in our history. The investment team is buttressed by 2 support colleagues, and we expect to replace the CFO position this year.
Second, during 2023, we secured and expanded a new ABL facility totaling $60 million with 2 supportive bank partners in First Horizon and Woodforest. We also raised a $33 million unsecured baby bond. We have deployed a portion of this capital and have approximately $50 million of liquidity to pursue core SWK life science finance opportunities. 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 Enteris CDMO operations to generate potentially breakeven or better profitability over the duration of that agreement and may lead to the sale of certain tangible assets of Enteris at a premium to book value.
Finally, while we did not secure a JV or launch a fund during the year, we built our network and are better positioned to pursue this goal in 2024 and beyond. We believe these achievements set the stage for improved shareholder returns going forward.
SWK's core business is financing commercial stage life science companies. We do this through firstly internal loans, royalties and hybrid structures and focused on financing 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 experience, spanning the 3 core functions of a direct credit firm. Those are origination, underwriting and portfolio management.
We believe the combination of an attractive niche combined with the existing team of platform positions SWK to successfully originate, underwrite and manage a portfolio of mid-teens plus yielding finance receivables.
At 12/31/2023, our gross portfolio of life science finance receivables totaled $288 million, an all-time high. The expansion of our portfolio is directly linked to investments made in our team and underwriting process. Our portfolio consisted of $212 million of performing senior secured term loans to 16 parties, $51 million of royalties to 7 entities and $26 million of nonaccrual instruments to 5 parties.
We also hold approximately $2 million of warrants from public companies as well as warrants or CVRs for 12 company -- 12 private companies carried at zero on our balance sheet.
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. Over the past 5 years, SWK's realized yield has averaged approximately 17% with variance based on timing of investment realizations, royalty performance and nonaccruals.
Turning to portfolio activity. During the fourth quarter, we closed 4 transactions committing $60 million of capital with $55 million of deployment. We closed 3 senior secured loans, a $20 million loan to Journey Medical, a dermatology-focused pharmaceutical company; a $20 million loan to Shield Therapeutics, a pharmaceutical company commercializing a unique iron replacement therapy; and a $6 million loan to Nicoya Life Sciences, a leader in benchtop surface plasma and residence tools. We also deployed $14.1 million to purchase a series of sales-based milestones related to a portfolio of immune globulins.
During the quarter, our financial 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. This is a 10% adjusted return on our tangible finance book. Finance segment adjusted net income and return on tangible book are the primary financial metrics we use to gauge our core business progress.
2023 Finance segment results included a $2.3 million negative impact from the CECL reserve build, which totaled $13.9 million at year's end. As a reminder, throughout 2023, we built a general allowance for loan loss to comply with CECL. On each new loan, we reserve 4.4% upfront for potential future loan losses. 2023's growth in book value per share was negatively impacted by this build. We think we're in the later innings of building this general loan loss reserve, although it will increase in proportion to growth in our finance receivables portfolio.
Turning to the Enteris agreement. On March 18, we signed an exclusive option and 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 agreement grants the partner a 2-year exclusive option to purchase certain Enteris tangible property and equipment at a premium to the September 30, 2023 book value or approximately $6 million. Other tangible assets, including inventory, will be valued if our partner opts to exercise the agreement.
In consideration for the grant of the option, the partner agreed to pay Enteris a low single-digit million dollar option fee, with the first portion paid at closed and the second portion payable by January 1, 2025, if the option has not been exercised by that date. If the option is exercised, the option fee is credible to the purchase price; however, it is nonrefundable -- the option fees are non-refundable if the option is not exercised.
The partner also agreed to guarantee 2 Enteris minimum annual revenue payments under an existing collaboration agreement totaling mid-single-digit million dollars for each of the calendar years 2024 and 2025. The agreement does not include any of the Enteris IP, which includes the Enteris Peptelligence oral dosing formulation, the licensing agreement with Cara Therapeutics and corresponding milestones and royalties, other licenses or any of Enteris' additional IP, including the oral leuprolide program. We are working with the Enteris' management team to monetize these assets.
The agreement immediately reduces the cash burn at Enteris, and we believe the business will be breakeven or better over the duration of the agreement. Importantly, the agreement allows SWK to prioritize our core specialty finance business and allows our shareholders to participate in earnings of the finance business to a greater extent.
At December 31, 2023, our book value per share was $22.43 compared with $21.80 at the end of 2022. On a non-GAAP basis, our tangible finance book value per share was $19.61 compared to $19.02 at the end of 2022. SWK shares trade at an approximately 10% discount to the 12/31/2023 tangible book value. As a reminder, that book value, that tangible book value does not include the $13.9 million CECL reserve.
Or said in other way, the CECL reserve provides a $13.9 million buffer to potential future loan losses on top of that $19.61 per share. The tangible book value also does not include any value for the Enteris CDMO, Enteris IP, the tax asset, nor the value of private warrants or other fees that may be off balance sheet.
With shares trading at this discount, we view the repurchase of stock as a prudent use of shareholder capital. During the fourth quarter of 2023, we repurchased approximately 14,000 shares of stock for $200,000. And year-to-date through March '19, 2024, we have repurchased an additional 51,000 shares for a total cost of approximately $900,000.
In conclusion, we ended the year on a strong note with 4 closed deals and our gross finance and investment portfolio totaling approximately $290 million, an all-time high. The Enteris' agreement positions that business to be potentially profit neutral or better over the next 2 years, and allows SWK 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 into the attractive $25 million under life science finance opportunity set. With that, let's open the call to questions.
[Operator Instructions] Your first question is coming from Mark Argento of Lake Street.
Just wanted to -- just get a high-level read on the overall market. We've had kind of a higher rate environment for a little while here. It seems like that's been kind of fully priced in. Capital markets, especially on the small end of the market cap spectrum seem like they're picking up steam or gaining some momentum slightly.
How do you see the overall book in the environment right now in terms of the books' access to capital or some of your lended clients, their access to capital right now in other forms. And then overall, kind of the pipeline how do you feel like you're positioned here in terms of the ability to put more capital to work over the near term?
Yes. Thanks, Mark. Yes. So it's interesting, 6, 7, 8 months ago, everyone was afraid to do deal sitting on their hands and of course, with S&P and Bitcoin and those things hitting all-time highs, but folks are doing deals more frequently and folks are able to access capital. So the positive is our portfolio is made of companies that are commercializing products. They need to raise money and this environment is better for them. So we've had a couple of companies raise money. We have a couple of other companies out there raising money and the reception seems to be quite a bit better than it was, say, say, 9 to 12 months ago.
In terms of the pipeline, we have -- we still have a solid pipeline in our segment of the market. A lot of these companies have -- don't have a lot of options at any given time of the cycle. We still got a lot of deals where we're hunting and hope to close. And I will say the last sort of 3 months, we've had a handful of deals that I thought we would close like good solid core SWK life science deals.
One of those, they ended up taking equity. And that was when we had worked long and hard on and thought we had a really compelling proposal and had key stakeholder buy in and they took equity, which is understandable. We had another one where I think we got outbid, but there's still plenty of things for us to do out there and putting these small companies that need checks of $25 million or less are still out there trying to raise money, don't have a lot of options.
That makes sense. And then in terms of from a strategic perspective, are you still focused on the opportunity to do a JV or find partner capital. Anything changed now as you're kind of a quarter into the new year in terms of the strategy?
Yes. No, we still would like to do that. I think the goal last year really was let's get ready to grow. Let's get the team ready to grow. Let's have the machine down and then raise some balance sheet capital. I think we did a pretty good job on that. The JV and some kind of third-party capital, it's really interesting to us. We have an interesting sourcing, origination, management capabilities. We've talked to a lot of larger alternative asset managers and credit firms. They find it interesting.
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. And then for shareholders, we would collect a fee, which would be fantastic as well and help ROE. Now all that's easier said than done obviously, and we've got to find the right partner and the right structure. But yes, we're still interested. We're still talking to people. Nothing is imminent, but it's -- I know it's -- the Board is pushing us hard to find something there in 2024.
[Operator Instructions] We don't appear to have any further questions in the queue. I can hand back over to Jody for any closing comments.
Thanks, Jenny. Yes. Just thanks, everyone, for joining the call. As highlighted on the call, we're 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.
Thank you very much, Jody. And thank you, everyone. Today's conference has now concluded. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.