SWK Holdings Corporation

Good morning and welcome to the SWK Holdings third quarter 2022 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Jason Rando with T-Burn Strategic Advisors. Please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' third quarter 2022 financial and corporate results call. Yesterday evening, SWK Holdings issued a press release detailing its financial results for the three months ended September 30, 2022. 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'll be making certain forward-looking statements about future expectations, plans, events, and circumstances, including statements about our strategy, future operations, and the development of our consumer and drug product candidates, plans for future potential product candidates, and studies in 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 details in the Risk Factors section of SWK Holdings 10-K, filed with the SEC, and other filings you 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 on today's call from SWK Holdings is Jody Staggs, President Interim CEO, and Yvette Heinrichsen, Chief Financial Officer. They'll provide an update on SWK's third quarter and year-to-date corporate and financial results. Jody, go ahead.

Thanks, Jason. And thanks, everyone, for joining our third quarter conference call. I'm excited to be speaking to you in my new role at SWK. This has been a productive past few months for the SWK team, and I look forward to sharing our progress. However, before doing so, I want to thank our board for helping to ensure a successful leadership transition, and I also want to thank my predecessor, Winston Black, who has left SWK in a strong position. Winston is a longtime friend and valued mentor. I'm grateful for this opportunity to build on the foundation he's left. I'd like to start with an overview of how I see the current business as well as a vision of where we are going. SAPK's mission is to be the partner of choice for small to mid-size life science companies seeking non-dilutive financing to fuel the development and commercialization of important life-saving technologies. Since 2012, SAPK has completed transactions with nearly 50 parties, funding almost $700 million. We think the results and the numbers produced over the past decade demonstrate that we are fishing in an attractive pond. Our focus is financings in the $5 million to $25 million range, and we have created a niche in non-name-brand sponsored situations, a minimally competitive field. We also focus on smaller off-the-run royalties, while most larger competitors gravitate towards Tier 1 high-profile royalties. We believe and think the numbers demonstrate that the returns in this segment are highly attractive. SIDK targets a low-to-mid-teens return on our financings. During the third quarter, our effective yield was 14.3%, while our realized yield was 17.5%. We believe these returns are at the high end of our comp group. Our sweet spot has been and remains financings in the $7.5 to $15 million range, However, in the third quarter, we closed two $25 million financings with larger borrowers, demonstrating that our platform is valuable to companies on the larger end of our target range. I think about the value of STPK in two buckets. The first bucket is our financial and balance sheet assets, and the second bucket is our intangible assets. I think our financial assets are somewhat obvious to all, and you can certainly review these in the press release in the marketing deck. The first is our existing portfolio of yielding finance receivables and other tangible book value assets, and this is about $19.14 a share. The second is our deferred tax asset, which is on our books for $1.35 a share. And the third are our interest assets, which are on our books for just over $1 a share. What may not be as apparent to everyone is the intangible assets that SFK has built over the past decade. The first of these is our highly motivated and skilled team. Our corporate team currently is six, which will increase to seven next week. We anticipate adding a couple of additional investment professionals in 2023. While the team isn't large, the team does possess a skill set specific to succeed in our market vertical. The second intangible asset is our reputation as a trusted partner. Borrowed partners and referral sources know STPK will do what we say we will do and do so in a timely fashion. They also know that we'll treat our partners with respect. And this asset has taken years to build. It is an asset that we protect. The third intangible asset is an extensive proprietary deal sourcing via our network of executives, board members, intermediaries, co-lenders, and former deal partners. This network also can provide references for potential borrowers. And fourth, we have a strong underlying track record with a 20% IRR and 1.4 times MOIC on our 30 exits. Looking ahead, our leadership team is energized to build upon these valuable assets as we seek to scale our platform and drive per share value. We will do this while maintaining underwriting discipline and always with an eye to protecting and growing our shareholders' capital. The good news is we don't have to reinvent the wheel and can utilize a tried and true path. In the near term, we need to scale the platform. To facilitate this, we are evaluating adding leverage to our balance sheet, and we will do this in a responsible fashion and being mindful to our particular financing assets. While we are flexible and will consider various structures, the path of least resistance to add leverage will have two steps. The first is we need to upsize our existing ABL. Our current $22 million ABL is too small for us to decay, and we're working with our existing lender to address this, and we hope to have an update on this by year end. The second step would be to explore an unsecured bond. As a reminder, earlier this year we filed an S3 in anticipation of exploring this path. The bond market has clearly softened since we made that filing, but based on recent specially financed bond offerings and considering our asset yields, we continue to think this is an attractive alternative. We will need to receive our secure lender's approval to issue a bond. Adding an appropriate amount of leverage has multiple benefits. First, we will improve our return on equity, which is a metric closely linked to how financial equities trade as a percent of vote value. And secondly, the additional capital allows us to pursue more financings, which help develop the SAPK team and our ecosystem. So in the near term, bring on leverage, deploy it, and increase our ROE. In the medium term, we're also exploring a third-party asset management strategy. Many allocators, as well as generalist credit funds, find our life science niche attractive and would like a means of allocating capital to the space. SFPK has a platform, know-how, and track record that is valued. We are in the early stages of exploring what might be possible here, and anything we do will require finding the right partner, and of course, we will need to benefit our shareholders. We have taken an initial concrete step on this strategy by hiring a firm to audit our full investment track record. These initiatives are focused on driving STPK's value per share, which is our North Star. One way we can augment this metric is smart capital allocation, and in particular, repurchasing stock at attractive valuations. During the third quarter, we repurchased over 34,000 shares at a 17.49 average cost BR10B5 program. We've also been buying back stock post the quarter close. It's important our shareholders know we have a sophisticated board which balances the return that can be achieved through buying back stock with return for making additional loans and loyalties. We don't focus on the stock price on a day-to-day basis, but over a reasonable period of time, the board and management team want the stock price to reflect the value of our assets and platform. Given STPK's strong foundation as well as a clear path to scaling the platform and driving shareholder returns, you can understand why the team is energized by the opportunity presented to us. While our portfolio companies are not immune to the current economic and capital market challenges, our outlook for the remainder of 2022 and into 2023 is optimistic. We are in communication with our existing portfolio companies to ensure they have adequate liquidity and are not in denial about the challenging environment. However, we are also playing offense and targeting several financing opportunities as the ongoing market volatility makes our non-dilutive structures attractive to companies in need of capital. With that, I would like to turn the call to our new CFO, Yvette Hendrickson, for an update on our financial performance for the quarter. I've worked closely with Yvette for several years and am excited to see her promoted to CFO. It's a well-deserved promotion, and I'm confident our financial and accounting functions are in great hands. SWK and our shareholders will benefit from initiatives that Yvette is spearheading, including optimizing our capital structure and streamlining processes required to support financial receivables growth. Yvette, I'll turn the call over to you.