SWK Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2025

There are 6 speakers on the call.

Operator

Day, everyone. Welcome to the SWK Holdings First Quarter twenty twenty five 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.

Speaker 1

Thank you, Kelly. Good morning, everyone, and thank you for joining SWK Holdings First Quarter twenty twenty five Financial and Corporate Results Call. Yesterday, SWK Holdings issued a press release detailing its financial results for three months ended 03/31/2025. 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.

Speaker 1

Today, we will make 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 ten ks 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 twenty twenty five corporate and financial results.

Speaker 1

Jody, you may go ahead.

Speaker 2

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 $8,600,000 of finance segment adjusted non GAAP net income bringing the trailing twelve month total to 26,000,000 a new $15,000,000 financing to an innovative life science company and continued partnership advancement between our Mod three 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. Mod three adds an additional $0.38 per share of tangible book value bringing our total tangible book value per share to $22.11 Pro form a for the May '4 per share special dividend, our total tangible book value per share was $18.11 Year to date, we have repurchased $1,100,000 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.

Speaker 2

At 03/31/2025, our gross finance receivables portfolio consisted of approximately $220,000,000 of performing first lien loans and $13,000,000 of non accruals against which we have a $9,000,000 CECL reserve bringing net finance receivables to $224,000,000 and that is pro form a for the sale of the royalty portfolio. We also hold $5,000,000 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 $22,000,000 and our revolving credit facility is undrawn. At 03/31/2025, the finance receivable portfolio had an effective or modeled yield of 14.5. So if the portfolio repays as modeled, it should generate approximately $32,000,000 of annual interest income.

Speaker 2

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 31, we had the three non accruals totaling $13,000,000 and two two rated credits totaling roughly $20,000,000 The two rated credits are both accrual and we are in regular conversations with both borrowers.

Speaker 2

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 form a finance segments go forward economics. As previously mentioned, the current portfolio should generate approximately $32,000,000 of interest income if it repays as modeled. On the expense side, we are targeting approximately $8,000,000 of normalized annual OpEx. The bond interest expense totals $3,000,000 and our revolver carrying cost is approximately $05,000,000 So a reasonable target is approximately $20,000,000 of finance segment adjusted non GAAP net income based on the current portfolio size.

Speaker 2

To be clear, this is not guidance and does not consider impairments, early payoffs, warrant gains, abnormal OpEx, additional deployments, etcetera. And it's really just intended to provide a framework for how to think about go forward profitability. Turning to our Mod three CDMO division, first quarter segment revenue was $1,000,000 and segment EBITDA was a loss of $05,000,000 During the quarter, we received a $1,800,000 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 Mod three is also working to monetize non core IP.

Speaker 2

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

Speaker 3

Thank you, Jody, and good morning everyone. Yesterday, we reported earnings for the first quarter of twenty twenty five. We reported GAAP pretax net income of $5,800,000 or $0.48 per diluted share. Our reported first quarter twenty twenty five net income is $4,500,000 after income tax expense of $1,300,000 This includes the $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 $2,400,000 decrease in interest and fees earned due to partial paydowns and payoffs.

Speaker 3

The decrease was largely offset by a $2,100,000 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 03/31/2025, our GAAP book value per share was $23.94 a 6.8% increase compared to $22.42 as of 03/31/2024. Additionally, non GAAP tangible book value per share totaled $21.73 as of 03/31/2025, a 10.5% increase compared to $19.66 as of 03/31/2024. Overall operating expenses, which include interest, pharmaceutical manufacturing, research and development expense, general and administrative expense, and provision for credit losses were $3,700,000 during the first quarter of twenty twenty five compared to $10,300,000 in first quarter of twenty twenty four.

Speaker 3

Mod three operating expenses were $1,500,000 in first quarter of twenty twenty five compared to $1,700,000 in first quarter of twenty twenty four. And finance receivables segment operating expenses were $2,200,000 in first quarter of twenty twenty five compared to $8,600,000 in Q1 of twenty twenty four. The finance receivable operating expenses further break down for first quarter of twenty twenty five to general and administrative expenses of $2,600,000 provision for credit losses, in this case, a gain of 1,500,000 and interest expense of 1,100,000.0 And for first quarter of twenty twenty four, general and administrative expenses of $2,000,000 provision for credit losses of $5,300,000 and interest expense of $1,300,000 The decrease in finance receivables segment operating expenses was mainly due to a $6,800,000 decrease in provision for credit losses. The decrease in provision for credit losses is most notably attributable to $1,000,000 of asset impairments in first quarter of twenty twenty five versus $6,000,000 of asset impairments in Q1 of twenty twenty four. Turning to our share repurchase program.

Speaker 3

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.

Speaker 2

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 aboard are focused on achieving value for our shareholders. With that, let's open the call to questions.

Operator

Certainly. The floor is now open for questions. If you have any questions or comments, please press 1 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.

Operator

Once again, if you do have any questions or comments, please press 1. 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.

Speaker 4

Good morning, and congratulations, Jody, to you and the team. Great progress again, and thank you for the special dividend 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 20,000,000. Are those loans or are those royalties or is it a combination that Yes.

Speaker 5

Yes. Gets them

Speaker 2

Yeah. Those are both loans. So we we have three. The three non accruals are post reorg royalties is how we'll define them. And those are situations that where we've taken them through some type of process and and really we're just largely passive check collectors at this point in time.

Speaker 2

The two loans are still first lien term loans that where we have the full lien covenants, etcetera.

Speaker 4

Okay. Excellent. And I just congratulations on seeing some of these big upsized borrowers, Eton, Journey, you know, both of yeah. I wish I owned both of stocks this week. You know, and I'm glad that you at least have equity warrants on e Eaton or Eton.

Speaker 2

That's right. That's right.

Speaker 4

Pushing 20 and Durham 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. So when we when you talk about competition out there, you know, clearly, there's a lot of focus on private credit and and other people. Are you seeing people just in the space in general leaking into your space?

Speaker 4

Or are you at the sides where it doesn't really benefit them, the clients that you talk to?

Speaker 2

Yes. So I I think our space is still very interesting. The kind of 10 to $25,000,000 space and but there there's other folks in our space and, you know, you can imagine some of these some of the name the 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. So, we've got to really be good partners, be proactive in those situations.

Speaker 2

And new names, I mean, would frame it, if it's a 20,000,000 or $25,000,000 loan that's just obvious, obviously over collateralized, there's going to be folks around that. So we have won some of those. We have to really be creative and thoughtful with the proposals and show excellent customer service. And then we need to find some of the tens and fifteens that maybe aren't quite as obvious on day one to where we feel, hey, look, fits our underwriting criteria. We're underwriting to a sub 40% LTV.

Speaker 2

We feel like this is a loan, not an equity piece. But maybe it's not just so obvious where you can just sort of say, look, this is a $200,000,000 market cap and they've got a bid on the company and it's a no brainer, if that makes sense.

Speaker 4

Right. Yeah. No, it does. And so when you talk about like tangible book and I you know, you look on your your 10 Qs or case and you see things like, you know, to be determined, like molecular light. You know, it says, you know, you you might have some warrants.

Speaker 4

That was a really interesting company. I'm I'm not surprised they paid you back. You know, how are those things or Zevra, if you get CVR rights, like, are those just carried at zero like a lot of things? So Yeah. My my point being that there's there can be both up and downside.

Speaker 4

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?

Speaker 2

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, you know, we've got you mentioned the CVR.

Speaker 2

We've got a couple of reorg tail payments. Those are all carried at zero. And some of them are not gonna be worth anything but they're Yeah. I think I think they are worth more than zero. You know, there's a couple of those could be pretty interesting.

Speaker 2

The the challenge is a, you know, these private companies until they sell, you really don't know what they're worth. So I think it's just a fool's errand to try to value them like we probably would

Speaker 4

spend Yeah.

Speaker 2

No. A thousand a year on stuff. So we carry those at zero and then, you know, some of these will work out, some of them won't. But yeah, we do think there there is some value there and again, those are all carried at at zero. You know, and then the other thing, and we haven't talked much about this and again, this is this is not a, you know, a huge piece of value, but we do have a couple of pieces of IP at mod three, in tariffs actually.

Speaker 2

Well, the current mod three

Speaker 4

that Yeah.

Speaker 2

Would fall outside the APA of the purchase option agreement that, you know, we've we've said is is out there. And there's a couple of interesting things there. Can we find a way to to get something for those? I don't know. And I I doubt it would be a a big chunk upfront, but maybe there's some tail payments there as well.

Speaker 2

So, to your point, there's some of the portfolio, there's always some risk there versus how we think things play out. But there's also number of things marked at zero on our books where there could be some upside too.

Speaker 4

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

Speaker 2

Thank you, Scott.

Operator

Once again, if you do have any questions or comments, please press 1 at this time. Please hold a moment while we poll for any additional questions. You have a question, from Davana Ladaby with Canal. Please pose your question. Your line is live.

Speaker 5

Hey. Is this for me Stefano? This is for me.

Speaker 2

Hey, Stefano.

Speaker 5

Hey. How are you, Jody?

Speaker 2

Good. Good. Thanks for the question.

Speaker 5

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

Speaker 2

Great question. That kind of is the question. Look, we're kind of mentioned the pro form a book values, tangible book values, 1811 and laid out where there could be some upside. So I think it's buying back stock is really interesting here. We know the portfolio, we can buy into a situation that we know that's diversified.

Speaker 2

So 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 don't think that we're in a position to use all that capital on that. So that would be one, I think we should do. We did pay the special dividend.

Speaker 2

I think that shows that the board is open to that. And at this time, there's nothing else like that planned, but I think the Board showed you that they'll do that. And so that could be a use. And the third I think is high selective additional loans really keeping kind of right in 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 is easy for everyone to see that, hey, look, this is value, what we say it's valued at and should trade there. So, I mean, I think it's kind of those three things.

Speaker 2

It's pretty simple.

Speaker 5

Thank you, Jordi. And one more, in terms of possible loans you can do in here, how would you configure 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?

Speaker 2

Yeah. If you'd asked me two months ago, I would have said, it's actually really pretty interesting. Everyone had pulled back. There was a little bit of fear. We've kind of in sixty days switched to, okay, that's a little bit more animal spirits have pulled back in.

Speaker 2

So pipeline is probably, I would say, roughly the same as it's been over the past year. It's not I'll call it neutral. It's not extremely attractive like it might have been seventy five days ago, sixty days ago. But there's still there are still some opportunities, particularly our neck of the woods where some of the smaller companies still have a hard time getting capital. So I would call it kind of neutral over the past twelve months and maybe modestly worse opportunity set sequentially given that we've kind of moved away from some of the fear around the tariffs.

Speaker 5

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

Speaker 2

Absolutely. Thank you.

Operator

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.

Speaker 2

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.

Speaker 2

And just to say it, 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

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.

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Key Takeaways

  • Finance segment delivered $8.6 M of adjusted non-GAAP net income in Q1 (TTM $26 M), and the current portfolio’s 14.5% modeled yield implies ~$32 M of annual interest income, forming the basis for a potential ~$20 M run-rate of segment profit.
  • Non-GAAP tangible book value per share rose 10.5% YoY to $21.73 (pro forma $22.11 after the May special dividend), while GAAP book value per share increased 6.8% YoY to $23.94.
  • Year-to-date share repurchases totaled $1.1 M with an upcoming buyback program expected, complementing the May special dividend, and management remains open to deploying capital into selective new first-lien financings.
  • Net finance receivables of $224 M comprised $220 M of performing first-lien loans and $13 M of non-accruals (covered by a $9 M reserve), backed by $22 M cash, an undrawn revolver, and $5 M of public and private equity instruments.
  • Mod three CDMO posted $1 M revenue and a $0.5 M EBITDA loss in Q1, received a $1.8 M option fee from its strategic partner, and is actively pursuing non-core IP monetization.
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Earnings Conference Call
SWK Q1 2025
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