Q2 2025 SWK Holdings Corp Earnings Call

Speaker #2: If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Susan Xu, Investor Relations.

Speaker #2: You may begin.

Speaker #3: 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 three months ended June 30, 2025.

Susan Xu: 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 three 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 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: 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 are Jody Staggs, President and CEO, and Adam Rice, CFO.

Susan Xu: 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.

Speaker #3: Who will provide an update on SWK's second quarter 2025 corporate and financial results? Over to you, Jody.

Speaker #4: Thank you, Susan, and thank you everyone for joining our second quarter conference call. Since we last spoke, SWK has worked to reconcile the gap between how the market prices our assets and our view of the underlying value.

Jody Staggs: Thank you, Susan, and thank you, everyone, for joining our second quarter conference call. Since we last spoke, SWK Holdings Corporation 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 Mod III subsidiary. The sale of these assets was completed for approximately book value, a premium to where SWK Holdings Corporation has historically traded. During the quarter, SWK Holdings Corporation returned $49 million of these proceeds of these sales to shareholders through a $4 per share dividend. Additionally, year to date, SWK Holdings Corporation has returned an additional $3 million of capital to shareholders through the repurchase of approximately 200,000 shares of our common stock.

Speaker #4: During the second quarter, we completed a sale of the majority of our royalty assets, and after quarter close, we completed a sale of the majority of the assets at our Mod 3 subsidiary.

Speaker #4: The sale of these assets was completed for approximately book value, a premium to our SWK, which has historically traded. During the quarter, SWK returned $49 million of the proceeds from these sales to shareholders through a $4 per share dividend.

Speaker #4: Additionally, year-to-date, SWK has returned an additional $3 million of capital to shareholders through the repurchase of approximately 200,000 shares of our common stock.

Speaker #4: 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 assets, or excuse me, these actions have simplified our business and SWK's remaining financial assets: our cash, $234 million of gross performing first lien term loans, with an effective yield of 14.1%; $12 million of gross non-performing real royalties; $5 million of public equity warrants; and approximately 11 private warrants and earnouts, which are carried at $0 for GAAP purposes.

Jody Staggs: 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 Holdings Corporation's remaining financial assets are cash, $234 million of gross performing first-lien term loans with an effective yield of 14.1%, $12 million of gross non-performing reorg royalties, $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.

Speaker #4: 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.

Speaker #4: 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.

Jody Staggs: 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 Mod III assets for a predetermined purchase price totaling $6.9 million, which includes the $3.3 million of payments SWK Holdings Corporation had already received. We view this as a successful outcome and in the best interest of SWK Holdings Corporation shareholders, our former Mod III colleagues, and Aptar Group. We wish Paul and the team the best and look forward to following their success under the Aptar Group banner. With that, I will turn the call to our Chief Financial Officer, Adam Rice, to review the quarter's financial results.

Speaker #4: 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.

Speaker #4: On July 15th, the Avatar Group exercised its option to acquire the majority of the Mod 3 assets for a predetermined purchase price totaling $6.9 million, which includes the $3.3 million of payments SWK had already received.

Speaker #4: We view this as a successful outcome and in the best interest of SWK shareholders, our former Mod 3 colleagues, and Avatar. We wish Paul and the team the best and look forward to following their success under the Avatar banner.

Speaker #4: With that, I will turn the call to our CFO, Adam Rice, to review the quarter's financial results.

Speaker #5: Thank you, Jody. And good morning, everyone. Yesterday, we recorded earnings for the second quarter of 2025. We reported GAAP pre-tax net income of $4.6 million, or $0.37 per diluted share.

Adam Rice: Thank you, Jody, and good morning, everyone. Yesterday, we reported earnings for the second quarter of 2025. We reported GAAP pre-tax net income of $4.6 million or $0.37 per diluted share. Our reported second quarter 2025 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 finance receivable 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 $2.2 million increase in interest and fees earned due to add-on fundings and newly funded finance receivables.

Speaker #5: Our reported second quarter 2025 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.

Speaker #5: The $1.2 million decrease in year-over-year finance 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.

Speaker #5: The decrease was partially offset by a $2.2 million increase in interest and fees earned due to add-on fundings and newly funded finance receivables. The previously mentioned paydown and funding activity is typical as SWK continually manages the return of capital as well as capital deployment.

Adam Rice: The previously mentioned paydown funding activity is typical as SWK Holdings Corporation 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. When 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. Mod III operating expenses were $1.2 million in the second quarter of 2025, compared to $2.5 million in the second quarter of 2024.

Speaker #5: As of June 30th, 2025, our GAAP book value per share was $20.23, an 11% decrease compared to $22.72 as of June 30th, 2024. When 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.

Speaker #5: 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.

Speaker #5: Mod 3 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.

Adam Rice: 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 were $2.2 million, provision for credit losses were $4.1 million, and interest expense was $1.1 million. The decrease in finance receivable segment operating expenses was mainly due to a $3.3 million decrease in provision for credit losses. The decrease in provision for credit losses is most notably attributable to $500,000 of asset impairment in the second quarter of 2025 versus $4.3 million of asset impairments in the second quarter of 2024.

Speaker #5: The finance receivables operating expenses further break down for the second quarter of 2025 to a general and administrative expense of $2.2 million, a provision for credit losses of $800,000, and interest expense of $1.2 million.

Speaker #5: And for the second quarter of 2024, general and administrative expenses of $2.2 million, provision for credit losses of $4.1 million, and interest expense of $1.1 million.

Speaker #5: The decrease in finance receivables segment operating expenses was mainly due to a $3.3 million decrease in the provision for credit losses. The decrease in the provision for credit losses 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.

Speaker #5: Returning to our share repurchase program, we bought back just under 60,000 shares for a total of $900,000 during the quarter. Since quarter close, we have repurchased an additional 88,000 shares for a total cost of $1.3 million.

Adam Rice: Turning to our share repurchase program, we bought back just under 60,000 shares for a total of $900,000 during the quarter. Since quarter close, we have repurchased an additional 88,000 shares for a total cost of $1.3 million. With that, I'll turn it back over to Jody.

Speaker #5: With that, I'll turn it back over to Jody.

Speaker #4: 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.

Jody Staggs: Thank you, Adam. The management team and board 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.

Speaker #4: With that, let's open the line to questions.

Speaker #2: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Scott Jensen, a private investor.

Speaker #2: A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker #2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

Speaker #2: Your first question for today is from Scott Jensen, a private investor.

Speaker #6: Hey, good morning. Jody and Adam, congratulations on a nice quarter. With the Mod 3 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 Avatar?

Scott Jensen: Hey, good morning, Jody and Adam. Congratulations on a nice quarter. With the Mod III sale, obviously, we will see a bump in revenue in the third quarter. 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? What would that maybe SG&A impact be now that Aptar owns it?

Speaker #6: 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 Avatar owns it?

Speaker #5: Yeah, 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.

Jody Staggs: Let me take the first stab at that. I wanted Adam Rice maybe to speak a little bit to this as well and some of the accounting around it. Third quarter will be a little bit messy because we did agree to a transition services agreement, which runs through mid-September. We are getting those costs reimbursed. All the cost of the business went to Aptar Group on the close. There is no ongoing cost at Mod III. It was an asset sale. We still own the Mod III shell, and there is some IP in there that we will try to monetize, but all the costs have gone. There may be a little bit of challenges or some lingering costs in the third quarter.

Speaker #5: But 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 cost of the business went to Avatar on the close.

Speaker #5: There's no ongoing costs at Mod 3, so it wasn't an asset sale. We still own the Mod 3 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 some lingering costs in the third quarter.

Speaker #5: You know, in terms of the costs going forward, if I just look at our finance segment, financials, which is everything but Mod 3, that includes all the corporate costs. You know we have $2.3 million of G&A in the quarter.

Jody Staggs: In terms of the costs going forward, if I just look at our finance segment financials, which is everything but Mod III, so that includes all the corporate costs, we had $2.3 million of G&A in the quarter. I think when we looked through that, there were a few transactions going on in the quarter. Of course, we had legal spend. Normalized SG&A was in the ballpark of $2 million, which is our goal, is to be at that level. I think that that is a reasonable level, obviously assuming no sort of one-off legal spend.

Speaker #5: Now, I think when we look through that, you know there were a few transactions going on in the quarter. Of course, we had legal spend, so sort of normalized SG&A was, you know, in the ballpark of $2 million, which is our goal to be at that level.

Speaker #5: So I think that that's a reasonable level, obviously assuming no sort of one-off legal spend.

Speaker #1: Okay, thank you.

Scott Jensen: Okay, thank you.

Speaker #5: Yeah, and I would just add to that that Jody's really nailed it. You know, there will be some third quarter noise related to ins and outs as we sort of see Mod 3 out of our ecosystem.

Adam Rice: Yeah, I would just add to that that Jody's really nailed it. There will be some third-quarter noise related to ins and outs as we sort of see Mod III out of our ecosystem. Then the ongoing costs are pretty minimal, especially when you consider, if you look at the guaranteed revenue agreement we had in place and how Mod III was carried over the last several quarters, it was relatively neutral on a net basis. I think that's really what you'll see. I do not think you should see any big surprises one way or another.

Speaker #5: But, and then the ongoing costs, you know, pretty minimal. Especially when you consider, if you look at our the guaranteed revenue agreement we had in place and how Mod 3 was carried over the last several quarters, it was it was relatively neutral on a net basis.

Speaker #5: So I think that's really what you'll see. I don't think you should see any big surprises one way or another.

Speaker #1: Okay, great. And then I've got some kind of kind of higher level questions. And that is, 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?

Scott Jensen: Okay, great. I have some higher-level questions. The first is, do you see, or what is 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?

Speaker #1: Do you see any impact or risk, you know, things like that, due to some of the changes that seem to be going on?

Speaker #5: Yeah, you know, we've spent a fair amount of time talking about regulatory changes and risks in the portfolio. You know, initially it was tariffs.

Jody Staggs: Yeah, you know, we've spent a fair amount of time talking about regulatory changes and risks in the portfolio. You know, 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. You know, I think there's maybe like three or four different regulatory things going on. One is sort of FDA. I mean, it's a little hard to sort of, you know, hypothesize on where this leads out. But near term, I guess the current thought is that there could be fewer drugs approved. That doesn't really impact our portfolio. You know, we don't have any drug companies or device companies that are pending some type of approved product. So not a big concern there.

Speaker #5: We reviewed all of our companies and had them do an analysis, and we felt that we had sort of minimal exposure there. You know, I think there are maybe three or four different regulatory things going on.

Speaker #5: You know, one is sort of FDA. I mean, it's a little hard to sort of, you know, hypothesize on where this leads out, but near term, I guess the current thought is that there could be fewer drugs approved.

Speaker #5: That doesn't really impact our portfolio. You know, we don't have any drug companies or device companies that are pending some type of approved product, so it's not a big concern there.

Speaker #5: You know, broadly speaking, our call is about pricing risk—pharma pricing risk—and this takes all kinds of different forms. We don't think anything we have is putting any of our borrowers too at risk.

Jody Staggs: The second, broadly speaking, our call is like pricing risk, pharma pricing risk, and this takes all kinds of different forms. We don't think anything we have is any of our borrowers are too at risk. If you look at the specialty pharma companies we have, Eton Pharmaceuticals is a rare disease situation, and that's kind of a whole unique pricing structure. But nothing we've seen thus far really scares us there. A couple of our companies, you know, are not that, but are fairly low priced. If you look at Ocufer, the shield product, it's a low-priced product. I don't worry too much about rebates or sort of negotiations there. So, and then Journey is, you know, dermatology, and a lot of that's cash pay. So I'm not too worried about that.

Speaker #5: You know, if you look at the specialty pharma companies we have, you know, Eton is a rare disease situation. And that's kind of a whole unique pricing structure, but nothing we've seen thus far really scares us there.

Speaker #5: A couple of our companies are not that, but are fairly low priced. You know, if you look at OcuFer, the Shield product, it's a low price product.

Speaker #5: I don't worry too much about rebates or sort of negotiations there. And then Journey is, you know, dermatology, and a lot of that's cash pay.

Speaker #5: So I'm not too worried about that. The area that probably we've had a little more concern about has been NIH, sort of scientific funding cuts.

Jody Staggs: The area that probably we've had a little more concern about has been, you know, NIH sort of scientific funding cuts. We've got a couple of companies that are, you know, vendors into the sort of that channel. We've got one CDMO, and then there's a company we have that sells life science tools. And they definitely have 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 worth saying that that whole space has really had a tough go the last couple of years. If you look at the biotech, their customer base went through kind of a classic boom-bust cycle, and we're, you know, potentially kind of in the bottom of that bust cycle.

Speaker #5: We've got a couple of companies that are vendors in the sort of channel. We've got one CDMO, and then there's a company we have that sells life science tools, and they've definitely seen some impact from these cuts.

Speaker #5: 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 worth saying that that whole space has really had a tough go the last couple of years.

Speaker #5: If you look at the biotech, their customer base went through kind of a classic boom-bust cycle. And we're, you know, potentially kind of at the bottom of that bust cycle.

Speaker #5: So it's been a tough go for all those folks for really a couple of years.

Jody Staggs: So it's been a tough go for all those folks for really a couple of years.

Speaker #1: 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. Everybody's coming in and raising funds, and people who probably have no business coming into the space.

Scott Jensen: Understandable. My other kind of global question is, we have just seen so many, and it is 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 does not prevent them if they have got access to capital. How do you see that affecting deal flow, people willing to take more risks than you would be willing to? Are you comfortable just sitting back, buying back stock, waiting for a better pitch? How do you see that development in the marketplace?

Speaker #1: But that doesn't prevent them if they've got access to capital. How do you see that affecting deal flow? Are people willing to, you know, take more risk than you'd be willing to?

Speaker #1: Are you comfortable just sitting back, buying back stock, and waiting for a better pitch? How do you see that development in the marketplace?

Speaker #5: Yeah, you know, and thanks. You've sent me a bunch of articles, and I know we've traded notes on that. There is definitely more capital coming over the last couple of years, and you know we've talked a bit about some of these retail product general funds and private BDCs and the need to deploy capital.

Jody Staggs: Yeah, you know, and thanks, you've sent me a bunch of articles. I know we've traded notes on that. There definitely is more capital that has come in over the last couple of years. You know, I know we've talked a bit about some of these retail products, interval funds, and private BDCs, and the need to deploy capital. We are aware of that. I think if you look year to date, we've been fairly tempered on the deployment side. You know, we've been able to add some onto existing performing borrowers, which is always great. I think we've made one new loan to an Australian company that was a little bit off the run, and we felt good and fine about that one, kind of a core deal for us. So we've been pretty disciplined.

Speaker #5: So, you know, we are aware of that. And I think if you look here to date, we've been fairly tempered on the deployment side.

Speaker #5: You know, we've been able to add some onto existing performing borrowers, which is always great. I think we've made one new loan to an Australian company that was a little bit off the run, and we felt fine about that one. It's kind of a core deal for us.

Speaker #5: So we’ve been pretty disciplined. I think there’s still, you know, the ability to put money to work in a small fund setting, like SWK. But I mean, the fact of the matter is it’s capitalism.

Jody Staggs: I think there is still, you know, the ability to put money to work in a small fund setting like SWK Holdings Corporation. The fact of the matter is it's capitalism. You know, money comes in, returns come down. So we've got to just be a bit more careful and given our cost of capital in particular. That probably explains some of the, I think, measured pace we've had on deployments this year.

Speaker #5: You know, money comes in, returns come down. So we've got to just be a bit more careful, given our cost of capital in particular.

Speaker #5: So, that probably explains some of the, I think, measured pace we've had on deployments this year.

Speaker #1: So, thank you. I'll get online and see if anybody else has questions. Congratulations, thanks.

Scott Jensen: Thank you. I'll get online and see if anybody else has questions. Congratulations. Thanks.

Speaker #5: Thank you.

Jody Staggs: Thank you.

Speaker #2: Once again, if you would like to ask a question, please press star one. We have reached the end of the question-and-answer session, and I will now turn the call over to Jody for closing remarks.

Operator: Once again, if you would like to ask a question, please press star one. We have reached the end of the question-and-answer session, and I will now turn the call over to Jody Staggs for closing remarks.

Speaker #4: Great. Well, thanks everyone for joining the call. Thanks for continuing to support SWK. Hope everyone has a wonderful day and a fantastic weekend.

Jody Staggs: Great. Thanks everyone for joining the call. Thanks for continued support of SWK. Hope everyone has a wonderful day and a fantastic weekend. Bye-bye.

Speaker #4: Bye-bye.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.