SWK Holdings Corporation 9.00% Senior Notes due 2027 Q2 FY2025 earnings call

• Completed the sale of the majority of royalty assets and the majority of assets at MOD3 subsidiary during the second quarter, with the sales completed for approximately book value. - Returned $49 million to shareholders through a $4 per share dividend and repurchased approximately 200,000 common stocks, returning an additional $3 million year-to-date. - Remaining loan book is healthy, with non-GAAP adjusted net income for the second quarter totaling $4.6 million, and non-GAAP tangible financing book value per share was $18.47, a year-over-year increase of 11.7% after considering the special dividend. - On July 15, Aptar Group exercised its option to acquire the majority of MOD3 assets for $6.9 million.

For the second quarter, both non-GAAP adjusted net income and finance segment adjusted non-GAAP net income totaled $4.6 million. SWK's remaining financial assets include $234 million in cash, $234 million of gross performing first lien term loans with an effective yield of 14.1%, $5 million of gross nonperforming reorg royalties, $5 million of public equities warrants, and approximately 11 private warrants and earnouts (carried at $0 for GAAP purposes), with an $8.8 million general loan loss reserve. The finance segment's non-GAAP adjusted net income contributed to the overall results.

• The second quarter's results are seen as a reasonable proxy for the earnings power of the business going forward. - The non-GAAP adjusted net income of $4.6 million is considered a reasonable run rate for the business. - The non-GAAP tangible financing book value per share increase of 11.7% achieved the stated goal of 10% plus book value per share growth.

• Regulatory changes such as FDA impact: Near term, fewer drug approvals are thought, but it doesn't impact the portfolio as there are no pending approved products from the portfolio companies. - Pricing risk: Different forms of pricing risk exist, but borrowers in the portfolio are not too at risk. - NIA scientific funding cuts: Some portfolio companies, including a CDMO and a life science tools company, have been affected, but it's not drastic or material to the ongoing business as a lender.

Q: 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?

A: Yes. Let me take the first stab at that, and then I wanted to 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. Now we are getting those costs reimbursed. So all the cost of the business went to Aptar close. There's no ongoing cost at MOD3. So we 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 sort of 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 bought 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 was 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 is to be at that level. So I think that's a reasonable level, obviously, assuming no sort of one-off legal spend.

Q: And 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? Do you see any impact risk, things like that due to some of the changes that seem to be going on?

A: 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's maybe like 3 or 4 different regulatory things going on. One is sort of FDA. I mean, it's a little hard to sort of hypothesize on where this leads out. But near term, I get the 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 is like pricing risk, for a 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 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 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 sort of negotiations. So, and the Journey is dermatology and a lot of that is cash pay. So I'm not too worried about that. The area that probably we've had a little more concern about has been NIA sort of scientific funding cuts. We've got a couple of companies that are 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 we're saying 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 potentially kind of in the bottom of that bus cycle. So it's been a tough go for all those folks for really a couple of years.

Q: And 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?

A: 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. And I think if you look -- we've been fairly tempered on the deployment side, we've been able to add some on 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 fine about that on kind of a core deal for us. So 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 I mean 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 and given our cost of capital in particular. So that probably explains some of the, I think, measured pace we've had on deployments this year.