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% and $5 million of gross nonperforming reorganization royalties, public equities warrants worth approximately $5 million and around 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 while achieving our stated goal of over 10% 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 in the past 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 was $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% 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 a 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 of $2.2 million, provision for credit losses of $4.1 million, and interest expense of $1.1 million. The decrease in Finance 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. 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 the 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. But 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. So all the costs of the business went to Aptar close. There's no ongoing cost at MOD3. So we had an asset sale. We still own the MOD3 shell. 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. In terms of the cost going forward, if I just look at our finance segment financials, which is everything related to MOD3, so 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 kind of one-off legal spend.
Yes. And 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. And then 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. I have some broader questions. First, what is your perspective on how changes at the FDA may impact your portfolio companies and the firms you invest in? Do you perceive any risk or impact from these changes?
Yes. We have spent considerable time discussing regulatory changes and the associated risks within our portfolio. Initially, we were focused on tariffs and conducted a thorough analysis of our companies, concluding that our exposure was minimal. Currently, there are a few regulatory developments occurring, one of which involves the FDA. It’s challenging to predict the outcomes, but the prevailing thought is that there may be fewer drug approvals in the near future. This shouldn’t have a significant impact on our portfolio as we do not have any companies awaiting product approvals. The second area of concern is pricing risk, which manifests in various forms. However, we believe that none of our borrowers are facing substantial risks. For instance, Eton, which specializes in rare diseases, has a unique pricing model, and we have not encountered any alarming issues so far. A couple of our companies have lower-priced offerings, like Ocufer's Shield product, and I am not particularly concerned about rebate negotiations. Additionally, the dermatology firm Journey primarily operates on a cash pay basis, which also lessens my worries. A greater concern for us has been the funding cuts from NIA, affecting some of our vendor companies. We have one contract development and manufacturing organization and a company providing life science tools that have felt the impact of these cuts. Although the situation isn’t drastic or material to our ongoing business, we are aware some orders have been lost. The entire industry has faced challenges over the past few years, especially in biotech, where their customer base has experienced a classic boom-bust cycle and we may currently be at the low point of that bust. Overall, the situation has been tough for these companies for quite some time.
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 you'd be willing to? Are you comfortable just sitting back, buying back waiting for a better pitch, kind of how do you see that development in the marketplace?
Yes, thank you. You shared several articles with me, and while I'm not sure we’ve discussed them fully, it's clear that there have been changes over the past few years. We've touched on some retail products, interval funds, and private BDCs, which all require capital deployment, and we're aware of that need. Our approach to deployment has been cautious. We have managed to continue lending to existing reliable borrowers, which is beneficial. Recently, we extended a new loan to an Australian company that was somewhat unconventional, but we felt positive about that as a core deal for us. We have maintained a disciplined strategy. There is still potential to invest in small fund settings like SWK, but the reality is that as more capital enters the market, returns tend to decline. Therefore, we must be more discerning, especially given our cost of capital. This likely accounts for the cautious pace of our deployments this year.
We have 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.