SWK Holdings Corp Q2 FY2025 Earnings Call

Greetings. Welcome to the SWK Holdings Second Quarter 2025 Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Susan Xu, Investor Relations. You may begin.

Good morning, everyone, and thank you for joining SWK Holdings Second Quarter 2025 Financial and Corporate Results Call. Yesterday, SWK Holdings issued a press release detailing its financial results for the 3 months ended June 30, 2025. The press release can be found in the Investor Relations section of swkhold.com under News Releases. 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 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; and Adam Rice, CFO, who will provide an update on SWK's Second quarter 2025 corporate and financial results. Over to you, Jody.

Thank you, Susan, and thank you, everyone, for joining our second quarter conference call. As we last spoke, SWK has worked to reconcile the gap between how the market prices our assets and our view of the underlying value. During the second quarter, we completed a sale of the majority of our royalty assets, and after quarter close, we completed the sale of the majority of the assets at our MOD3 subsidiary. The sale of these assets was completed for approximately book value, a premium to where SWK has historically traded. During the quarter, SWK returned $49 million of the proceeds of these sales to shareholders through a $4 per share dividend. Additionally, year-to-date, SWK has returned an additional $3 million of capital to shareholders through the repurchase of approximately 200,000 of our common stock. We believe these steps demonstrate the organization's focus on realizing the underlying value of our assets and ensuring that shareholders benefit from these realizations. These actions have simplified our business and SWK's remaining financial assets are cash, $234 million of gross performing first lien term loans with an effective yield of 14.1%, $5 million of public equities warrants, and approximately 11 private warrants and earnouts, which are carried at $0 for GAAP purposes. Against these assets, we carry an $8.8 million general loan loss reserve. For the second quarter, both our non-GAAP adjusted net income and finance segment adjusted non-GAAP net income totaled $4.6 million. We believe this level is a reasonable run rate for the business going forward. Our non-GAAP tangible financing book value per share totaled $18.47, a year-over-year increase of 11.7% after considering the $4 per share special dividend and achieving our stated goal of 10% plus book value per share growth. On July 15, the Aptar Group exercised its option to acquire the majority of the MOD3 assets for a predetermined purchase price totaling $6.9 million which includes the $3.3 million of payments SWK had already received. We view this as a successful outcome and in the best interest of SWK shareholders, our former MOD3 colleagues in Aptar. We wish Paul and the team the best and look forward to following their success under the Aptar banner. With that, I will turn the call to our CFO, Adam Rice, to review the quarter's financial results.

Thank you, Jody, and good morning, everyone. Yesterday, we reported earnings for the second quarter of 2025. We reported GAAP pretax net income of $4.6 million or $0.37 per diluted share. Our reported second quarter net income is $3.5 million after income tax expense of just over $1 million. This includes a $1.2 million decrease in year-over-year finance receivables segment revenue and a $500,000 increase in year-over-year Pharmaceutical Development segment revenue. The $1.2 million decrease in year-over-year financing receivables segment revenue was primarily due to a $3.4 million decrease in interest and fees due to paydowns, payoffs, and the sale of the majority of our royalty portfolio. The decrease was partially offset by a $0.2 million increase in interest and fees earned due to add-on fundings and newly funded finance receivables. The previously mentioned paydown on funding activity is typical as SWK continually manages return of capital as well as capital deployment. As of June 30, 2025, our GAAP book value per share was $20.23, an 11% decrease compared to $22.72 as of June 30, 2024. Adjusting for the $4 per share dividend paid during the quarter, the GAAP book value per share was $24.46, a 6.8% increase year-over-year. Overall, operating expenses, which include Interest, Pharmaceutical Manufacturing, Research and Development Expense, General and Administrative Expense, and Provision for Credit Losses were $5.4 million during the second quarter of 2025 compared to $9.9 million in the second quarter of 2024. The MOD3 operating expenses were $1.2 million in the second quarter of 2025 compared to $2.5 million in the second quarter of 2024. The finance receivables segment operating expenses were $4.2 million in the second quarter of 2025 compared to $7.4 million in the second quarter of 2024. The finance receivables operating expenses further break down for the second quarter of 2025 to general and administrative expense of $2.2 million; provision for credit losses of $800,000; and interest expense of $1.2 million. For the second quarter of 2024, general and administrative expenses totaled $2.2 million, provision for credit losses was $4.1 million, and interest expense was $1.1 million. The decrease in Finance Segment operating expenses was mainly due to a $3.3 million decrease in provision for credit losses, which is most notably attributable to $500,000 of asset impairments in the second quarter of 2025 versus $4.3 million of asset impairments in the second quarter of 2024. Turning to our share repurchase program, we bought back just under 60,000 shares for a total of $900,000 during the quarter. Since the quarter closed, we have repurchased an additional 8,000 shares for a total cost of $1.3 million. With that, I'll turn it back over to Jody.

Thank you, Adam. The management team and Board are focused on achieving value for our shareholders as demonstrated by our actions year-to-date. Our remaining loan book is healthy, and we believe the second quarter's results are a reasonable proxy for the earnings power of the business going forward. With that, let's open the line to questions.

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

Congratulations on a nice quarter. With the MOD3 sale, obviously, we'll see a bump in revenue in the third quarter. But what about the costs associated with that business going on to Aptar, do you have any recurring costs that remain on your side of the ledger? And then kind of what would that maybe SG&A impact be now that Aptar owns it?

Yes. Let me take the first stab at that, and then I wanted Adam maybe to speak a little bit to this as well and some of the accounting around it. The third quarter will be a little bit messy because we did agree to a transition services agreement which runs through mid-September. Now we are getting those costs reimbursed. So all the costs of the business went to Aptar when we closed. There's no ongoing cost at MOD3. So it was an asset sale. We still own the MOD3 shell and there is some IP in there that we'll try to monetize. But all the costs have gone. Again, there may be a little bit of challenges or lingering costs in the third quarter. In terms of the cost going forward, if I just look at our finance segment financials, which include everything bought from MOD3, that includes all the corporate costs. We had $2.3 million of G&A in the quarter. Now I think when we look through that, there were a few transactions going on in the quarter. Of course, we had legal spend, so sort of normalized SG&A was in the ballpark of $2 million, which is our goal to be at that level. So I think that's a reasonable level, obviously, assuming no sort of one-off legal spend.

I would just add to that. Jody's really nailed it. There will be some third quarter noise related to ins and outs and also as we sort of see MOD3 out of our ecosystem. The ongoing cost will be pretty minimal, especially when you consider, if you look at the guaranteed revenue agreement we had in place and how MOD3 was carried over the last several quarters. It was relatively neutral on a net basis. So I think that's really what you'll see. I don't think you should see any big surprises one way or another.

Okay. Great. And then I've got some kind of higher-level questions. The first is do you see or kind of what's your read on changes at the FDA affecting underlying portfolio companies and some of the companies that you invest in? Do you see any impact risk, things like that due to some of the changes that seem to be going on?

Yes. We've spent a fair amount of time talking about regulatory changes and risks in the portfolio. Initially, it was tariffs. We reviewed all of our companies and had them do an analysis and felt that we had sort of minimal exposure there. I think there are maybe three or four different regulatory things going on. One is the FDA. It’s a little hard to hypothesize on where this leads out. But near term, my current thought is that there could be fewer drugs approved. That doesn't really impact our portfolio. We don't have any drug companies or device companies that are pending some type of approved products. So not a big concern there. The second, broadly speaking, I'll call pricing risk. For a pricing risk, this takes all kinds of different forms. We don't think anything we have is - our borrowers are too at risk. If you look at the specialty pharma companies we have, Eton is a rare disease situation, and that's kind of a unique pricing structure, but nothing we've seen thus far really scares us there. A couple of our companies are not that, but are fairly low price. If you look at Ocufer, the Shield product, it's a low-priced product. I don't worry too much about rebates or negotiations. And the Journey is dermatology and a lot of that is cash pay. So I'm not too worried about that. The area that we've had a little more concern about has been NIA scientific funding cuts. We've got a couple of companies that are vendors into that channel. We’ve got one CDMO and then there's a company we have that sells life science tools. They have definitely seen some impact from these cuts. I don't think it's drastic or material to the ongoing business, particularly as a lender. But I know they've lost some orders along the way, and it's probably fair to say that whole space has had a tough go the last couple of years. If you look at biotech, their customer base went through a classic boom-bust cycle, and we're potentially kind of in the bottom of that bust cycle. So it's been tough for all those folks for the last couple of years.

Understandable. And then my other kind of global question is we've just seen so many, and it's the talk of the town, private credit and everybody coming in and raising funds and people who probably have no business coming into the space, but that doesn't prevent them if they've got access to capital. How do you see that affecting people willing to take more risk than you'd be willing to? Are you comfortable just sitting back, buying back, waiting for a better pitch? How do you see that development in the marketplace?

Yes. And thanks. You sent me a bunch of articles. I don't know we've traded notes on that. There are definitely, over the last couple of years, and I know we've talked a bit about some of these retail products, interval funds, and private BDCs, and that needs to deploy capital. So we are aware of that. We've been fairly tempered on the deployment side; we've been able to add some to existing performing borrowers, which is always great. We made one new loan to an Australian company that was a little bit off the run, and we felt good about that as a core deal for us. We've been pretty disciplined. I think there's still the ability to put money to work in a small fund setting like SWK, but the fact of the matter is, it's capitalism, money comes in, returns come down. So we've got to just be a bit more careful, given our cost of capital in particular. So that probably explains some of the measured pace we've had on deployments this year.

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

Great. Well, thanks, everyone, for joining the call. Thanks for your continuing support of SWK. I hope everyone has a wonderful day and a fantastic weekend. Bye-bye.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.