SWK Holdings - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was strong: GAAP net income rose to $4.5M ($0.37 diluted EPS) on $11.8M revenue; adjusted non-GAAP EPS was $0.66, reflecting lower credit provisions and gains on asset payoff.
• EPS materially beat Wall Street consensus; S&P Global Primary EPS consensus was $0.29 vs actual $0.66, a significant beat; revenue consensus unavailable (values retrieved from S&P Global)*.
• Capital allocation catalysts: sold the majority of the royalty portfolio for ~$34.0M in early April and paid a $4.00 per share special dividend shortly after quarter-end; buybacks continued year-to-date.
• Book value per share increased YoY; GAAP book value per share reached $23.94 and non-GAAP tangible financing book value per share reached $21.73, up 6.8% and 10.5% YoY respectively.
• Management reiterated a framework (not formal guidance) pointing to ~mid-teens portfolio yields and ~$20M finance segment adjusted non-GAAP net income on the current portfolio, setting expectations for ongoing profitability drivers.

What Went Well and What Went Wrong

What Went Well

• Strong profitability: GAAP net income of $4.5M and finance receivables segment adjusted non-GAAP net income of $8.6M; adjusted EPS $0.66, supported by lower provision for credit losses and Iluvien payoff gains.
• Capital allocation: monetized royalties at approximately book value and paid a $4.00/share dividend; ongoing buyback program contributed to tangible financing book value per share growth.
• Management tone on portfolio quality: “We believe the portfolio remains strong… the most recent credit score reached an all-time high… pick our spots to maintain a high-quality portfolio that can earn a mid-teens return”.

What Went Wrong

• Finance receivables revenue decreased YoY by ~$0.3M due to paydowns/payoffs, partially offset by add-on fundings/new loans; realized yield fell 80 bps YoY despite higher effective yield, indicating less fee acceleration vs prior year.
• Nonaccruals persist: Flowonix ($7.4M carrying value) impaired by $1.0M in the quarter; Best ABT ($2.3M) and Ideal Implant ($3.0M) remained in nonaccrual; warrants posted an unrealized net loss.
• MOD3 Pharma posted operating losses within consolidated results (MOD3 operating loss excluded in finance segment adjusted figures), and management continues to work on monetizing non-core IP assets.

Transcript

Operator (participant)

Okay, everyone. Welcome to the SWK Holdings' first quarter 2025 conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Susan Xu, Investor Relations. The floor is yours.

Susan Xu (Director of Investor Relations)

Thank you, Kelly. Good morning, everyone, and thank you for joining SWK Holdings' First Quarter 2025 Financial and Corporate Results Call. Yesterday, SWK Holdings issued a press release detailing its financial results for the three months ended March 31st, 2025. 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 statement regarding forward-looking statements. Today, we will make 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 factor 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 first quarter 2025 corporate and financial results. Jody, you may go ahead.

Jody Staggs (CEO)

Thank you, Susan, and thanks, everyone, for joining our first quarter conference call. We are pleased with SWK's first quarter performance, headlined by strong financial segment profitability, as well as the successful monetization of the majority of our royalty portfolio. First quarter SWK highlights include $8.6 million of finance segment adjusted non-GAAP net income, bringing the trailing 12-month total to $26 million, a new $15 million financing to an innovative life science company, and continued partnership advancement between our MOD3 Pharma division and its strategic partner. Our non-GAAP tangible financing book value per share grew to $21.73, achieving our stated goal of 10% year-over-year growth. MOD3 adds an additional $0.38 per share of tangible book value, bringing our total tangible book value per share to $22.11. Pro forma for the May 2025 $4 per share special dividend, our total tangible book value per share was $18.11.

Year-to-date, we have repurchased $1.1 million of our shares, and with the stock trading at a discount to book value and given our excess capital, I expect the board will authorize a new share repurchase program in coming days. At March 31st, 2025, our gross finance receivables portfolio consisted of approximately $220 million of performing first lien loans and $13 million of non-accruals, against which we have a $9 million CECL reserve, bringing net finance receivables to $224 million, and that is pro forma for the sale of the royalty portfolio. We also hold $5 million of public equities and warrants, as well as private warrants and post-workout contingent economic interest carried at zero on our books. Finally, gross cash as of today totaled approximately $22 million, and our revolving credit facility is undrawn. At March 31st, 2025, the finance receivable portfolio had an effective or modeled yield of 14.5%.

If the portfolio repays as modeled, it should generate approximately $32 million of annual interest income. We are pursuing additional financings, including upsizing existing performing borrowers as well as agreements with new partners. The market for high-quality borrowers remains competitive, and we will pick our spots to maintain a high-quality portfolio that can earn a mid-teens return. We believe the portfolio remains strong, and the most recent credit score reached an all-time high. As a reminder, we rank our portfolio from one to five with five the highest score. At March 31st, we had the three non-accruals totaling $13 million and two two-rated credits totaling roughly $20 million. The two-rated credits are both accrual, and we are in regular conversations with both borrowers.

We continue to monitor the ongoing healthcare and general economic regulatory changes, and at this time, we don't believe any of these changes pose outsized risk to our portfolio. Turning to how we are thinking about the pro forma finance segment's go forward economics. As previously mentioned, the current portfolio should generate approximately $32 million of interest income if it repays as modeled. On the expense side, we are targeting approximately $8 million of normalized annual OpEx. The bond interest expense totals $3 million, and our revolver carrying cost is approximately $500,000. A reasonable target is approximately $20 million of finance segment adjusted non-GAAP net income based on the current portfolio size.

To be clear, this is not guidance and does not consider impairments, early payoffs, warrant gains, abnormal OpEx, additional deployments, etc., and is really just intended to provide a framework for how to think about go forward profitability. Turning to our MOD3 CDMO division, first quarter segment revenue was $1 million, and segment EBITDA was a loss of $500,000. During the quarter, we received a $1.8 million option fee from our strategic partner, which is carried in deferred revenue. The partnership remains strong, with both sides collaborating to grow the business. Our team at MOD3 is also working to monetize non-core IP. With that, I will turn the call to our CFO, Adam Rice, to review the quarter's financial results.

Adam Rice (CFO)

Thank you, Jody, and good morning, everyone. Yesterday, we reported earnings for the first quarter of 2025. We reported GAAP pre-tax net income of $5.8 million, or $0.48 per diluted share. Our reported first quarter 2025 net income is $4.5 million after income tax expense of $1.3 million. This includes a $300,000 decrease in finance receivables segment revenue and a $700,000 increase in pharmaceutical development segment revenue. The $300,000 decrease in year-over-year finance receivables segment revenue was primarily due to a $2.4 million decrease in interest and fees earned due to partial paydowns and payoffs. The decrease was largely offset by a $2.1 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 return of capital and capital deployment.

As of March 31st, 2025, our GAAP book value per share was $23.94, a 6.8% increase compared to $22.42 as of March 31st, 2024. Additionally, non-GAAP tangible book value per share totaled $21.73 as of March 31st, 2025, a 10.5% increase compared to $19.66 as of March 31st, 2024. Overall operating expenses, which include interest, pharmaceutical manufacturing, research and development expense, general and administrative expense, and provision for credit losses, were $3.7 million during the first quarter of 2025, compared to $10.3 million in the first quarter of 2024. MOD3 operating expenses were $1.5 million in the first quarter of 2025, compared to $1.7 million in the first quarter of 2024. In finance receivables segment, operating expenses were $2.2 million in the first quarter of 2025, compared to $8.6 million in Q1 of 2024.

The finance receivable operating expenses further break down for the first quarter of 2025 to general and administrative expenses of $2.6 million, provision for credit losses, in this case a gain of $1.5 million, and interest expense of $1.1 million. For the first quarter of 2024, general and administrative expenses of $2 million, provision for credit losses of $5.3 million, and interest expense of $1.3 million. The decrease in finance receivables segment operating expenses was mainly due to a $6.8 million decrease in provision for credit losses. The decrease in provision for credit losses is most notably attributed to $1 million of asset impairments in the first quarter of 2025 versus $6 million of asset impairments in Q1 of 2024.

Turning to our share repurchase program, we bought back approximately 52,000 shares at a total cost of $900,000 during the quarter, and since quarter close, we have repurchased an additional 11,000 shares for a total cost of $200,000. With that, I'll turn it back over to Jody.

Jody Staggs (CEO)

Thanks, Adam. We are pleased with our first quarter results and believe we are positioned for a successful 2025. We have simplified the business and are focused on earning an appropriate return on our equity capital. The management team and board are focused on achieving value for our shareholders. With that, let's open the call to questions.

Operator (participant)

Certainly. The floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold a moment while we poll for any questions. Once again, if you do have any questions or comments, please press star one. Please hold just a moment while we poll for any questions. We have a question coming from Scott Jensen. Please pose your question. Your line is live.

Good morning, and congratulations, Jody, to you and the team. Great progress.

Jody Staggs (CEO)

Thanks, Scott.

Again, and thank you for the special dividend or return of capital. That was great. I guess my first question is, on those you mentioned the two that scored a number two on your credit, the $20 million, are those loans or are those royalties or is it a combination that gets them?

Yes. Yeah, those are both loans. We have the three non-accruals are post-reorg royalties, is how I'll define them, and those are situations where we've taken them through some type of process, and really we're just largely passive check collectors at this point in time. The two loans are still first lien term loans that where we have the full lien covenants, etc.

Okay. Excellent. I just congratulations on seeing some of these big upsize borrowers, Eton, Journey, both have, yeah, I wish I owned both those stocks this week, and I'm glad that you at least have equity warrants on Eton.

That's right. That's right.

Pushing 20 and DERM up, what, 19% yesterday, and they have an at-the-market offering open so they can keep raising capital, and they've got a pretty good cash balance, so congratulations seeing those borrowers performing well. When you talk about competition out there, clearly there's a lot of focus on private credit and other people. Are you seeing people just in the space in general leaking into your space, or are you at the size where it doesn't really benefit them, the clients that you talk to?

Yes. I think our space is still very interesting, the kind of $10 million-$25 million space, but there are other folks in our space, and you can imagine some of the types of names that you mentioned, those people are going to get hit up to refi, to reprice. I mean, those are big enough to definitely catch people's attention. We have to really be good partners, be proactive in those situations, and new names, how would you frame it? If it is a $20 million or $25 million loan that is just obviously over-collateralized, there are going to be folks around that. We have won some of those. We have to really be creative and thoughtful with the proposals and show excellent customer service.

We need to find some of the tens and fifteens that maybe are not quite as obvious on day one to where we feel, "Hey, look, if it fits our underwriting criteria, we are underwriting to a sub 40% LTV. We feel like this is a loan, not an equity piece, but maybe it is not just so obvious where you can just sort of say, 'Hey, look, this is a $200 million market cap, and they have got a bid on the company, and it is a no-brainer,'" if that makes sense.

Right. Yeah. No, it does. And so when you talk about tangible book and you look on your 10-Qs or Ks and you see things to be determined, like MolecuLight, it says you might have some warrants. That was a really interesting company. I'm not surprised they paid you back. How are those things or Zevra, if you get CVR rights, are those just carried at zero, like a lot of things? My point being that there can be both up and downside. It could stay at zero, but there's potential that some of that stuff could help cover up when challenging times arise. Is that kind of how I should read those sets or potential assets warrants?

Yeah. Yeah. That's right. So I've got the file pulled up here. We have 12 discrete instruments, I'll call them, that are either private warrants or we've got, you mentioned this, CVR. We've got a couple of reorg tail payments. Those are all carried at zero. And some of them are not going to be worth anything, but cumulatively, I think they are worth more than zero. There's a couple of those that could be pretty interesting. The challenge is, A, these private companies, until they sell, you really don't know what they're worth. I think it's just a fool's errand to try to value them like we probably would spend $10,000 a year on stuff. We carry those at zero, and then some of these will work out, some of them won't. Yeah, we do think there is some value there.

Those are all carried at zero. The other thing, and we have not talked much about this, and this is not a huge piece of value, but we do have a couple of pieces of IP at MOD3, Enteris, actually. The current MOD3 that would fall outside the APA of the purchase option agreement that we have said is out there. There are a couple of interesting things there. Can we find a way to get something for those? I do not know, and I doubt it would be a big chunk upfront, but maybe there are some tail payments there as well. To your point, there is some of the portfolio, there is always some risk there versus how we think things play out, but there are also a number of things marked at zero on our books where there could be some upside too.

Okay. Awesome. Thank you. I'll get out of the queue, and congratulations again. Nice progress.

Thank you, Scott.

Operator (participant)

Once again, if you do have any questions or comments, please press star one at this time. Please hold a moment while we poll for any additional questions. You have a question from Stefano Latepy with Cannell. Please pose your question. Your line is live.

Stefano Latepy (Head Trader)

Hey, is this for me, Stefano? It's for me.

Jody Staggs (CEO)

Hey, Stefano.

Stefano Latepy (Head Trader)

Hey, how are you, Jody?

Jody Staggs (CEO)

Good. Good. Thanks for the question.

Stefano Latepy (Head Trader)

Of course. What is the best use of capital at this point for you guys?

Jody Staggs (CEO)

Yeah. Great question. That kind of is the question. Look, we kind of mentioned the pro forma book values, tangible book values, $18, $11, and laid out where there could be some upside. I think buying back stock is really interesting here. We know the portfolio. We can buy into a situation that we know that's diversified. I think that's a great use of capital for us. We, of course, have a fair amount of excess capital to do that, and I do not think that we're in a position to use all that capital on that. That would be one I think we should do. We did pay the special dividend. I think that shows that the board is open to that.

At this time, there's nothing else like that planned, but I think the board showed you that they'll do that, and that could be a use. The third, I think, is selective additional loans, really keeping kind of right in our sweet spot to make sure we've got a portfolio that is stable to maybe modestly growing, that is sort of somewhat homogenous, and that it's easy for everyone to see that, "Hey, look, this is valued what we say it's valued at and should trade there." I mean, I think it's kind of those three things. It's pretty simple.

Stefano Latepy (Head Trader)

Thank you, Jody. One more. In terms of possible loans you can do in here, how would you compare the current situation and the current pipeline of possible loans versus, let's say, sequential quarter over quarter and last year? Do you think it has improved? There are more opportunities, the same?

Jody Staggs (CEO)

Yeah. If you'd have asked me two months ago, I would have said, "Wow, it's actually really pretty interesting. I want to pull back." There was a little bit of fear. We've kind of, in 60 days, switched to, "Okay, that's a little bit more animal spirits have pulled back in." The pipeline is probably, I would say, roughly the same as it's been over the past year. I'll call it neutral. It's not extremely attractive like it might have been 75 days ago, 60 days ago, but there are still some opportunities, particularly in our neck of the woods where some of the smaller companies still have a hard time getting capital. I would call it kind of neutral over the past 12 months and maybe modestly worse opportunity sets sequentially, given that we've kind of moved away from some of the fear around the tariffs.

Stefano Latepy (Head Trader)

Okay. Thank you, Jody. Thank you for taking my question.

Jody Staggs (CEO)

Absolutely. Thank you.

Operator (participant)

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Jody Staggs for closing remarks.

Jody Staggs (CEO)

Hey, great. Thank you for joining the call. Thank you for the questions. Adam and myself will be around today. Feel free to call if you have any questions. If anyone does have blocks that they want to talk about as it relates to capital allocation, please call myself or Adam. Happy to take those calls and discuss it with you. Hope everyone has a great Friday. Bye-bye.

Operator (participant)

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.