Operator: Good morning, and welcome to SWK Holdings third quarter financial results conference call. [Operator Instructions] Please note that this event is being recorded.

Now I'd like to turn the conference over to Mr. Jason Rando, Tiberend Strategic Advisors. Please go ahead.

Jason Rando: Good morning, everyone, and thank you for joining SWK Holdings Third Quarter 2020 Financial and Corporate Results Call. Friday afternoon, SWK Holdings issued a press release detailing its financial results for the 3 months ended September 30, 2020. 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 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 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 on today's call is Winston Black, Chairman and CEO of SWK Holdings, who will provide an update on SWK's third quarter 2020 corporate and financial results. Winston, go ahead.

Winston Black: Thank you, Jason and everyone for joining our third quarter conference call. The third quarter of 2020 continued what has been a very strong year for SWK, underscored by an improved quarter-over-quarter performance that was driven by both returns of our specialty finance business and our subsidiaries, Enteris BioPharmas, earning of a milestone payment related to its Peptelligence technology licensee, Cara Therapeutics. We believe this combination is reflective of the potential of SWK's business model and our ultimate focus on monetizing life science products and associated intellectual property.

We believe industry dynamics will remain favorable for our specialty finance business throughout the remainder of 2020 and into 2021. And we anticipate this momentum will enable us to not only generate consistent returns from our current finance receivables portfolio, but to also enhance our position as we go to specialty financing firm for small- and mid-sized commercial stage life science companies and need capital to fund their growth strategies.

Before I discuss our third quarter results and achievements, I'd like to provide a brief update on the ongoing COVID-19 situation, our capital position in our subsidiary, Enteris BioPharma. As we've communicated previously, SWK as a business has been mainly impacted by the COVID-19 outbreak. We remain in regular contact with the individual management teams of our portfolio companies. We are pleased to recently report the impressive advances our partner companies have made over the past several months in this challenging environment.

Collectively, the progress we witnessed from our partner companies demonstrates the soundness of our focus on investing differentiated companies with strong intellectual property, producing commercial products that fill demand within the health care system. This remains the foundation of our business and we believe will drive our business going forward, even amidst the challenges impacting the broader U.S. economy and health care industry due to COVID-19.

Characteristic of this strategy was a pair of royalty acquisitions we completed over the past few months. In October, we purchased from Trio Healthcare certain royalty interests on a portfolio of products marketed in the ostomy market. This was preceded in August by the purchase of the royalties for Coflex, Kybella and Zalviso from PDL BioPharma. These were opportunistic transactions very much in keeping with our approach to investments. In addition, in October, our own position in Aimmune Therapeutics was repaid in conjunction with the sales of Nestle, resulting in Nestle realizing approximately 20% IRR on the transaction.

Also benefiting SWK, we remain reasonably well capitalized with approximately $30 million of cash and revolver availability to support our partner companies and capitalize on potential investment opportunities. Unlike business development companies, BDCs, and some investment funds, SWK's balance sheet is currently not leveraged.

We are also pleased with the progress of our subsidiary Enteris BioPharma, led by CEO, Rajiv Khosla, PhD. SWK continues to work closely with Enteris to strengthen its operations, advance the expansion of its manufacturing capabilities and the enhance its management team. In this regard, Enteris is nearing the completion of a manufacturing facility expansion that will provide the company with the ability to manufacture at a scale necessary for late-stage clinical trials and potentially product commercialization.

Overall, Enteris continues to improve its value, executing a two-pronged growth strategy to maximize the potential of the company's Peptelligence platform through external partnerships and advancing its own internal pipeline. This potential was affirmed by the recently announced $2.5 million milestone payment to Enteris from Cara Therapeutics for the ongoing development of Oral KORSUVA, which has to be paid [ in total ] received $1.5 million for the contractual splits agreed to in the Enteris acquisition agreement. SWK is also eligible to receive additional potential milestone payments for the next several quarters, subject to the achievement of certain development milestones for Oral KORSUVA.

Receipt of this first milestone from Cara Therapeutics is an exciting moment for SWK and our shareholders, and it only highlights the value proposition that Enteris represents to SWK but also illustrates the monetization opportunity that Enteris' Peptelligence platform offers in development of oral tablet formulation of peptides and small molecules. Importantly, for future potential partners, we believe the successful completion of the milestone validates the breadth and depth of Enteris' comprehensive pharmaceutical capabilities.

As of September 30, 2020, SWK's portfolio of royalties and a structured credit backed by royalties totaled approximately $183.5 million across 24 partners. That compares favorably to last quarter's $178.6 million -- excuse me, $175.5 million as of September 30, 2019.

At the end of the third quarter of 2020, the weighted average projected effective yield of the finance receivables portfolio was 13.4%, including nonaccrual positions, which was up modestly sequentially from the second quarter of 13.2%.

SWK reported book value per share of $18.44 as of September 30, 2020, which includes a $0.20 per share negative impact from the amortization of Enteris intangibles compared to $18.31 as of December 31, 2019, and $17.63 a year ago.

Tangible financing book value per share, which excludes the deferred tax asset, intangible assets, goodwill and contingent consideration payable, totaled $15.52. Management views the tangible financing book value per share as a relevant metric to value the company's core specialty finance business.

For third quarter 2020, SWK reported total revenue of $10.6 million compared to $6.3 million for the third quarter of 2019. Revenue primarily consisted of interest and fees earned on our finance receivables and royalty payments generated by portfolio companies as well as pharmaceutical development revenue generated by Enteris, including the Cara milestone. The $4.3 million increase in revenue was primarily driven by the $2.5 million milestone and $1.6 million aggregate increase in interest fees and royalties earned on our portfolio.

Income before taxes for the third quarter of 2020 totaled $3.9 million compared to $3.5 million for the same period the previous year. The increase is driven by the increase in revenue, partially offset by a $2.3 million increase in the expense related to the amortization of Enteris intangibles and $1 million increase in the overall operating expenses, excluding this amortization.

The GAAP net income for the third quarter ended September 30, 2020, totaled $4.3 million or $0.34 per diluted share compared to $4.2 million or $0.32 per diluted share for the third quarter of 2019. For the third quarter of 2020, the non-GAAP adjusted net income was $6.7 million compared to $5.1 million for the prior year's period.

For the third quarter of 2020, non-GAAP net income generated by specialty finance business totaled $6.2 million as compared to $6.5 million in the prior year, which the prior year included a $1.8 million gain related to receipt of Misonix stock from the exercise of our Solsys Medical warrants during the quarter ended September 30, 2019.

Income-producing assets, which defined as the finance receivables and corporate debt securities, totaled $183.5 million as of September 30, 2020, which is an increase compared to last year's $173.6 million and up sequentially from the second quarter's $182.3 billion.

Our specialty finance business continues to perform well, and we are working hard to target new transactions that leverage our areas of expertise and the growing need among small- to mid-sized life science companies to access capital. We are reasonably well capitalized to meet this continued environment and what we expect will be increasing demand for these financial products.

In Enteris, the company's overall growth strategy continues to take shape as we remain pleased with the progress evident as the company works towards its mission to be the leader in the development of orally delivered peptide small molecule therapeutics.

During the year, we have added personnel to Enteris' team. The work to expand the company's manufacturing facility continues according to plan. In the short time since we named CEO, Dr. Khosla continues to make a substantial impact on Enteris' business, including a more robust and targeted business development efforts and prioritizing potential owned pipeline opportunities that enable the company to capture more value-creating opportunities and maximize the potential of its Peptelligence platform.

As I mentioned previously, Peptelligence forms the backbone of Cara's Oral KORSUVA program, which currently encompasses 3 separate clinical studies, each of which is expected to meet important clinical and regulatory milestones in 2020 and early 2021. Enteris continues to evaluate its internal product pipeline of oral tablet reformulations of existing molecules that address significant treatment opportunities for which there is no oral delivery option. These products, which are in varying stages of development, could provide SWK with attractive out-licensing opportunities.

We look forward to being an active and supportive partner as Enteris seeks to advance its external and internal programs as well as development of new licensing partnership opportunities that leverage the Peptelligence platform. We persist and are confident that the opportunities at Enteris remain attractive and anticipate providing a more detailed update on Enteris progress in early 2021.

Lastly, I'd like to note that our 10b5-1 share repurchase program expired on September 30, 2020. We repurchased 70,176 shares during the third quarter. In aggregate, since commencing the repurchase program, SWK has repurchased 348,368 shares for approximately $4.2 million. The Board will continue evaluating additional share repurchase programs.

In conclusion, the third quarter continued what has been a sustained period of performance for SWK. All this was made possible by the diligent efforts of our SWK Holdings' and Enteris' team. I, once again, like to thank our employees for their dedication and loyalty and our stakeholders for their continued support as we evolve our model and grow SWK Holdings.

With that, I will now open the call to questions.

Operator: [Operator Instructions] First question comes from Kyle Bauser, Colliers Security.

Kyle Bauser: Thanks for all the updates here. A really nice milestone with the Cara partnership. And I think you recognized $2.5 million, but you said $1 million of that is to be distributed to the sellers of Enteris. Was that distribution recognized in Q3? Or is that more of a Q4 event?

Winston Black: Yes, that's a good question. So the milestone was recognized during the quarter, and the payment was received in October. And then the payment of the sale was also made during October. So you'll see the receivable on the balance sheet, and then that's -- it'll work through in the fourth quarter.

Kyle Bauser: Got it. Great. And so this is the first milestone from Cara. And I think the next milestone would be a payment of 25%. This first one was 60%. Can you talk about what the next milestone is that we're looking for? I think it's a development one versus regulatory. But just kind of any color on what the cadence is of these and what they are?

Winston Black: Sure. Great question. I wish I could answer with complete transparency. But unfortunately, as you know, the milestones and the Cara agreement have been redacted in terms of what they're actually for and the amounts. So the -- I think as we talked before, the only thing I can probably share is that this agreement is pretty typical for other formulation-type agreements, where there's various milestones that happen along the way during development. So yes, I think it's far safe to say there'll be additional milestone payments that occur as the program continues to advance.

Kyle Bauser: Got it. Yes. No, that's fair. And also, I didn't catch it, but regarding AIMT's acquisition by Nestle, I think you were able to record $4.4 million. So nice exit there. Will that be recognized as revenue in Q4 as well?

Winston Black: Sure. Yes. So that was -- that's going to be a fourth quarter transaction or event in the financials. And that $4.4 million isn't all gain, of course, because the principal, we paid back, but that was the quantum cash that we received, which was both for principal and interest and royalty payment fees.

Kyle Bauser: Okay. Okay. Got it. And then on the specialty finance side of things, just lastly here, obviously, steady results, and you've been very active in adding new assets. I think you mentioned you have about $12 million in cash with access to an additional $20 million on your revolver. I'm guessing that's plenty of capital to be able to continue seeking out additional assets despite COVID ramping up again and wanting some buffer for your portfolio companies. But is that fair to say that you'll continue to kind of make additional investments in the specialty finance business in the balance of the year? And...

Winston Black: Yes, I mean -- yes, that's -- yes, that's right. So in addition to this roughly $32 million, put those 2 numbers together, plus the portfolio flows, we'll continue to reinvest in the opportunities as they come along. We're extremely active on looking at new opportunities. And so we hope to land some additional ones here in the near future. And then, of course, we'll evaluate additional share repurchases and other uses of the capital, we'll do it. The goal is to remain great stewards of our shareholders' capital and putting it to the best risk-adjusted return use that we can.

Operator: [Operator Instructions] Next question comes from Steve Hale of Hale Partnership.

Steven Hale: Good quarter. You mentioned a couple of things that are related questions, though. The company does not have debt like most BDCs. The company also does not have kind of a stated systematic return of capital via dividend or share repurchase. And you mentioned that the repurchase expired September 30. Great that you bought back 3% of shares. That repurchase kind of turned on and turned off multiple times over the last 12 months. Does the company have any plans to kind of say, here's how we return capital to be more in line with other financial-related entities? Or what does that look like?

Winston Black: Appreciate the question, Steve. Yes, that's obviously something that we've spoken about before. And you're right, we don't have a stated goal in terms of what amount of portfolio cash flow that we intend to redeploy into either the stock or if we buy back some dividends versus executing additional transactions. As we've -- yes, that's one thing that the Board has agreed to discuss. And yes, I think to some extent, it depends on the opportunities that remain before the company in terms of where to deploy capital.

I continue to believe that repurchasing stock is a great use of our capital. It's particularly investing in things that we know in our own portfolio. And that -- I wish I had a concrete update to give you on that, but that -- yes, that remains something that the Board is discussing. And hopefully, we'll have additional updates in the future about that.

Steven Hale: Terrific. And if I can do one more, Winston. You mentioned not having leverage. You guys have obviously -- you've executed well, cleaning up the portfolio, growing the portfolio, the uplisting. Very happy with your work in the chief executive seat. When you think about that -- the credit facility, and you mentioned you guys don't have credit facility, obviously, that served you well during COVID when everything was uncertain, not being levered. And obviously, COVID is still not gone. She's still around, although the vaccines are looking good. But when you think about the balance sheet and having levers like other financial entities, is that something where you guys are on principal thinking that you remain unlevered? Is that how we think about long-term SWK, right, outside of just right now or during COVID?

Winston Black: That's a great question, Steve. And yes, I think there's -- yes, I hate to say -- use the term [ bully lots ] for that. But yes, I think we can definitely deploy or take on more leverage to continue to grow the portfolio. And I think as we -- where we sit today with the kind of the more kind of constant performance and I appreciate your comments on the portfolio being cleaned up over time, I certainly would agree. I think we definitely can take on some leverage, and that's something that we continue to evaluate. Yes, the current revolver is $20 million, and then it expires at the end of June of 2021. So that will -- that time will be here pretty quickly. So it's probably safe to say we're evaluating what the kind of opportunities are to refinance that or to end up with a near-line potentially larger, and that's something that we will definitely look at executing.

Operator: This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Winston Black for any closing remarks. Please go ahead.

Winston Black: Thank you. In closing, I appreciate your time and attention and look forward to future updates as we continue to advance SWK Holdings. I'd like to also extend my sincerest wishes of good health to all. Thanks, everyone.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.