SWK Holdings Corporation

to SWK Holdings fourth quarter and full year 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jason Randall from Tiburon Strategic Advisors. Jason, please go ahead.

Good morning, everyone, and thank you for joining SWK Holdings' fourth quarter and full year 2022 financial and corporate results call. Earlier this morning, SWK Holdings issued a press release detailing its financial results for the three-month and full year ended December 31st, 2022. The press release can be found in the investor relations section of swkhold.com under newsreels. 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 the development of consumer and drug product candidates, plans for future potential product candidates, and studies, and our expectations regarding our capital allocation and cash resources. These statements are based on our current expectations, and we should not place undue reliance on these statements. Action results may differ materially due to our risks and uncertainties, including those detailed in the risk factors section of SWK Holdings 10-K file 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 are Jody Stagg, President and CEO, and Yvette Heinrichsen, Chief Financial Officer. They'll provide an update on SWK's fourth quarter and 2022 corporate and financial results. Jody, go ahead.

Thank you, Jason. And thanks, everyone, for joining our fourth quarter conference call. Since appointment of the new leadership team, we have made considerable progress positioning SWK for a multi-year period of value creation. Of course, much work remains. On today's call, I want to update you on four areas of focus, growing the team and anticipation of scaling the business, and tariffs, capital, and the portfolio. Before discussing the four areas of focus, I want to briefly address the current life science finance market environment. The past month was a period of upheaval in our industry, with the gold standard bank collapsing in a matter of days, and other banks active in our space either collapsing or under considerable stress. SWK had no direct exposure to SVB via deposits or shared credit facilities. While some SWK borrowers had deposit exposure, none had undrawn credit lines or revolvers with SVB. Of course, disruption drives opportunity. SWK intended to scale our business prior to the turmoil. However, the SVB bankruptcy drives new urgency as the ability for SWK to deploy capital is as attractive as it's been over the past decade. To quantify, we are currently issuing financing proposals at a mid to high-teens cost above our historical low to mid-teens cost. Our first priority has been expanding our investment team to increase deal sourcing and underwriting capability. I'm pleased to announce we have achieved this goal with four investment hires since the second half of 2022. Recently, we hired a dedicated business development professional who comes from a large private equity firm. Also, a former SWK investment professional will be rejoining the team this month. We believe the investment team is now staffed appropriately to close transaction volume in excess of the approximately $100 million we achieved in 2022, positioning SWK to responsibly grow our finance business over the next several years. Turning to Interis, when the new STPK leadership team took the reins, we spent considerable time reviewing the financial and operational trends at Interis. We identified several valuable assets, but also a business that was burning too much money and where the business plan was not aligned with the original mission nor our current expectations. We took immediate steps to change Interis' direction and reduce burn. First, we replaced the CEO with the COO, Dr. Paul Shields. Second, we reduced the headcount by approximately 50%. We have spent time with Paul and his team reforecasting the business and modifying the business plan. Paul and the team have done an outstanding job of repositioning the business in a short period of time to both reduce costs and work towards securing sustainable CDMO revenue. On the cost side, we expect Cash Off X will decline from approximately $2.6 million per quarter in 2022 to roughly $1.5 million per quarter by the third quarter of 2023. This is driven by the headcount reduction as well as the completion of R&D spend for our two proprietary 505 assets. On the revenue side, Interis has developed an informal partnership with a large pharma service company that is helping us source CDMO work. While the initiative is early, existing CDMO bookings will generate approximately $1 million of revenue in 2023 and we have bid on another $6 million of work. The combination of decreasing costs combined with the potential for improved revenue is expected to drive improved cash flows by the second half of 2023. I'd like to briefly discuss how we think about the value-added tariffs. There are four major assets. The first is the CARA license and associated future cash flows. And at this stage, this is primarily a financial asset. And again, the CARA license is tied to Oral Coursiva, which CARA is studying in three late stage clinical trials. The cleanest look at the value of this asset on our balance sheet is actually the $11.2 million of contingent consideration. And on our balance sheet, that's a liability, so this is a little confusing. That is the 50% of the cash flows owed to the original Interest Seller. Now this is an accounting-driven valuation, and it's not where we would sell our portion, However, it's in the right zip code. The second asset is the Pepteligence intellectual property. As a reminder, Pepteligence converts certain IV drugs into oral dosage, and this is the asset which originally drew STPK's attention to Interis. At this point, there's three primary pieces of value associated with Pepteligence. The first is we do have an additional existing license on a clinical stage drug that carries a low single-digit royalty. We haven't discussed this asset in the past as it was not being developed. However, recently a well-funded private pharma company has acquired the asset and is launching clinical trials. The second piece is we do have another biotech that is in later stage discussions to take a license. There's no certainty this will close, but I think it illustrates the Peptelgent's value in the market. The final piece of value here, and really what's probably the largest piece, is the remaining value if Interis or another third party could close other licenses. As we've disclosed with CARA, these licenses carry material cash flow to Interis. The third piece of the value is the CDMO and the plant. Driven by the work of Paul, Tom Daggs, and the entire team, we now see a path for this business to have more value than simply the PP&E on the books, which totaled $5.8 million at December 31st. What early days, we're optimistic about the potential for the CDMO business and we'll update you throughout the year on the progress. And then the final and the fourth piece of value added to this is our two proprietary 505 drug assets. The first of these assets is oralupralide for a semi-rare pediatric indication. And we did get some positive news last month as the phase two trial was successful. with some doses of overrest achieving the primary endpoint of estradiol suppression. We are reviewing the full data set and will be able to provide a further update later this year. The second 505 asset is a nasal psychiatric product. We're finishing up preclinical work that any licensed partner would want to see before transacting. STPK does not currently expect to fund additional R&D dollars into this program. Instead, as the trial work is completed and the data analyzed, we will seek to partner to fund the next stages of development in exchange for downstream economics to enter us. Turning to the third priority, capital, we are working diligently to secure both balance sheet and off-balance sheet funding to deploy into an attractive opportunity set. While we do not have a specific development today, this is a priority for management as one of our incentive compensation metrics for 2023. Turning to the portfolio, we ended the quarter with approximately $238 million of investment assets, which is an all-time high. During the quarter, we closed a royalty transaction, which including an associated foreign exchange hedge totaled $18.1 million and put an additional $6 million to existing borrowers. In the first quarter of 2023, we have closed one $5 million term loan in advance, approximately $8 million to existing borrowers. In the fourth quarter, we sold the remaining interest in our Narcan royalty for $2.5 million, which was in excess of the $500,000 book value at the end of the third quarter. This was a phenomenal investment for SWK, generating a 2.4 times multiple uninvested capital. SWK also sold shares in BioVentus and Hero Health, generating approximately $4 million of proceeds. During the quarter, we fully reserved our TRT position, which totaled $3.5 million. And then at December 31st, we had $18 million of finance receivables on non-accrual, which is approximately 7.5% of the investment portfolio. We are working with two of these borrowers to position each business for success and will update once resolution is achieved. Our North Star is driving value per share and repurchasing stock below book value is beneficial to this goal. During 2022, SWK repurchased approximately 64,000 shares at an average cost of $17.78 per share under our 10 program. Since the start of 2023, STPK has repurchased roughly 30,000 shares at an average repurchase price of approximately $18.51. Before turning the call to a vet, I want to thank Wendy DiCiccio for her contribution to our board of directors. Wendy chose not to seek reelection to the board of directors due to external professional commitments. Wendy is a talented business executive and contributed considerably to SWK, with a particular emphasis on improving our executive compensation plan to better align with shareholders. I also want to welcome Jerry Albright to our board. Jerry has an impressive professional resume, including serving as the CIO of Teachers Retirement System of Texas. Welcome, Jerry. With that, I would like to turn the call over to our CFO, Yvette Heinrichsen, for an update on our financial performance for the quarter.