SWK Holdings Corporation 9.00% Senior Notes due 2027 Q2 FY2023 earnings call

• Closed a new $45 million credit facility. - Continued operational and financial turnaround in Enteris. - Concluded two long-running workouts for loans. - Financing business healthy with 15.4% realized yield and working towards multiple new financing closings by year-end. - Tangible book value per share increased by 8% year-over-year. - Repurchased $4.6 million of shares during the quarter. - Enteris revenue expected to accelerate in third and fourth quarters based on pharma service partnership. - Expect Enteris quarterly OpEx to be approximately $1.5 million per quarter in the back half of 2023. - New credit facility provides additional liquidity and flexibility.

Financial segment: Generated a 15.4% realized yield during the quarter. Gross investment assets totaled $234 million. Tangible book value per share increased to $18.95 per share, an 8% year-over-year increase after adjusting for CECL. Repurchased $4.6 million of shares at an average price of $16.88. Enteris: Revenue increased 55% sequentially to $200,000 in Q2 2023. Second quarter Enteris operating expense totaled $2.5 million. Year-to-date, Enteris had booked $2 million of CDMO projects and is bidding on an additional $9 million of projects.

• Realized yields should benefit from recent reference rate increase and pricing discipline on new financing proposals. - Expect Enteris revenue to accelerate in third and fourth quarters. - Pursuing multiple core life science financings with attractive returns and expect to close additional transactions by year-end. - The Board authorized a new $10 million buyback plan, which is more flexible than the old plan.

Q: Just wanted to touch on the equity capital markets. How does this impact your ability to deploy capital and your risk tolerance with making loans?

A: Yes. Appreciate the question. Thanks for dialing in. I would say there's sort of two dynamics from that. The first of all is for a portfolio of companies that are public, the ability to tap those equity markets is a positive. Most of our borrowers are in cash burning situation pre-profit. So that's great for them. For situations where we're out there trying to pursue a new loan, equity is almost always our #1 competitor. So in some ways, that's a modest negative, but I would say the -- our pipeline is strong, and most of the companies we're speaking with really don't have access to the capital markets in any sort of material shape. There's a few that we're speaking with that are public, and they maybe are considering that, but it's still fairly tough for small companies to access those in sort of any material means.

Q: And maybe just touch on the First Horizon Bank deal here. Does that change your lendable capital base? Or do you need access to additional facilities? How are you thinking about kind of capacity to grow the loan book here over the next 12 months?

A: Yes, absolutely. So it increases our current capacity by $10 million. So we've got $45 million committed by First Horizon now. Our prior facility was $35 million. I think what this facility gives us is, first of all, the terms our partner, I think, it's going to allow us to syndicate this facility a bit more easily, and that's something we're focused on now. So both our partner and SWK are focused on working with potential partner banks to bring them into the facility, and we would love to take this up to $75 million or $80 million. So we're working really hard on that. I guess the challenge right now as a regional bank market is in somewhat of a challenged position, so those conversations will take time, but it's a focus. The other, I think, positive of this facility is it does allow us an issue and unsecured bond. And that's something we're considering as well. So we've got a couple of other ways to bring on capital. The facility of $45 million is great and a good starting spot, but we believe that this business should support much more leverage than that.

Q: Any updated thoughts on the buyback? Or are you guys just kind of planning to keep buying shares at a discount to book value here? Or how are you thinking about that moving forward?

A: Yes, absolutely. So in May, the Board did authorize a new $10 million buyback, which was great, and we appreciate their support and their belief that shares are material, and I value management shares that view. So we have a new broker we're working with. And the new plan is, I would say, a bit more flexible than our old plan. So you probably saw that we repurchased almost $5 million, $4.6 million during the quarter, and we're pushing $6 million year-to-date. So the new plan seems to be working quite a bit better. And we'll just continue to work the plan in terms of the stock being at this price. We've got tiers. And as we get these reporting out, we'll have an open period where we can maybe be more aggressive. But buying back the stock at the current price, I think the valuation is quite attractive. And so that's something that the Board and management will continue to do.

Q: Good quarter, Jody and everyone on the team, especially with the buyback as just mentioned and pleasantly surprised on the 2 workouts. It's not going to being to be a hit to the bottom line, at least at this point. My question, I guess, is on Enteris. It looks like some good progress being made. And when you say $9 million in future bids that are out there, what is the kind of metrics that you use to [compete] on those? Is it price? Is it reputation? How can we kind of get an idea of how that hit ratio might work out?

A: Yes. Great question. We're still learning a bit about that. So the majority of those bids, those proposals stem from our partnership with a large pharma service organization, which I'm not supposed to name, but we've been working with them since April in a formal arrangement, and we are their preferred provider for certain Phase I and Phase II services. So they've got customers. They've got small biotech pharmas coming to them for help as they develop their programs and for particular dosing technologies, and that partner is referring them to us for certain of these services. So these are really warm leads. It's -- we're -- I would need to check, but we're picking up the vast majority of that revenue. The partner is keeping a bit of it. And really, for them, the benefit is getting these biotechs quality CDMO services and moving them through the clinical progression so they can hopefully use our partners, technology, patented technology once they get out to market. I wish I have some number to tell you we'll pick up x percent, but the rates have been great so far. I mean we the early proposals we put out, we're winning lots of those. And I think we'll definitely win our fair share of these new ones, particularly given that these are coming through warm leads. But at this time, I don't have a great rubric of the percent, and I'm still kind of working with Paul and the team and Enteris to understand that a bit better myself.

Q: And then just kind of a continuation, as you say, strategic options possibly for Enteris, clearly, one of the things that you'd benefited from over the past number of years have been the paybacks from some of the Cara royalties, and it seems like they're making good progress, at least to report this week, on their Oral program, would that be something where you'd still maintain some kind of future royalty access? Or would it just depend on the bid or the options that you're presented with?

A: Yes, I think we would retain that. It's really a financial asset at this point in time. We like royalties. We understand it. We think we understand what the value is, so there's no reason we could retain that. I tend to think the people that might be interested in the CDMO business are not really that interested in a royalty from a third party, so I would envision that we would retain that. There is another royalty there at Enteris as well. It's -- we haven't talked much about it. And it's just a royalty, milestone that there's an active program going on there. And then we're actually working on some other proposals as well. So I think all of those types of things, which are really financial assets, SWK would keep. I just don't see CDMO buyer really being that interested in those.

Q: Now that SVB has been gone for about 4 months, do you notice any change in the competitive environment?

A: Initially, I think the answer is yes. So therefore, a period of time, capital was really scarce. I think -- and actually, we've got one of our signed term sheets is a refi from SVB. And we're speaking -- I think my colleagues are speaking with another situation now, which again is another SVB situation when they've got an SVB facility. So I think we have seen those opportunities. Now, I mean, SBV, a lot of those professionals now have moved on, and I think they're really active. If you look at First Citizens and some of these people, they're getting back out there. So there definitely has been an opportunity, particularly in the smaller side where we play a lot in some of the less sponsor-backed channels. I gather the new owner of SVB and some of the places the banks where those folks are going, they're probably moving up the quality spectrum. So yes, it is an opportunity. I think it's not sort of the flood that we thought we might see when SVB and Signature went under, if that makes sense.