Good morning. Welcome to SWK Holdings Second Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Jason Rando from Tiberend Strategic Advisors. Please go ahead.

Good morning, everyone. And thank you for joining SWK Holdings second quarter 2020 financial and corporate results call. This morning, SWK Holdings issued a press release detailing its financial results for the three months ended June 30, 2020. The 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 statements regarding forward-looking statements. Today, we will be making certain forward-looking statements about future expectations, plans, events, 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 our 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. Winston will provide an update on SWK's second quarter 2020 corporate and financial results. Winston, go ahead.

Thank you, Jason, and everyone for joining our second quarter conference call. Second quarter 2020 continued what has been a significant progress year for SWK, highlighted by improved quarter-over-quarter performance, demonstrated by strong returns from our specialty finance business. We believe this is reflective of the growth potential of SWK’s business and our ability to capitalize on attractive financing opportunities within the small to mid-sized commercial-stage life sciences sector. Looking ahead, we believe that current industry and general economic dynamics, inclusive of the strong underlying demand for healthcare products and services despite the current COVID-19 conditions, should remain favorable throughout the remainder of 2020. These conditions and the credit quality of our portfolio will not only enable us to continue to produce strong results from our current specialty finance portfolio but also to provide new differentiated opportunities for us to deploy capital in a compelling efficient manner to support innovative companies and help them achieve their growth opportunities. When we initiated our strategic growth plan in 2019, we viewed the expansion of our investor base as central for the planned success. The recent addition of SWK to the Russell indexes marks an important step towards achieving this goal. Russell indexes are widely used benchmarks for actively managed investment strategies that should enable SWK to broaden its visibility within the investment community and increase liquidity of our stock as we continue to explore additional avenues to attract new investors and increase shareholder value. This achievement demonstrates both the determination of SWK’s team and the high potential we offer to investors. Before I discuss our second quarter results and achievements, I’d like to provide a brief update on the COVID-19 situation and current position in our subsidiary Enteris BioPharma. As we indicated previously, SWK’s business has been minimally impacted by the COVID-19 outbreak. We remain in regular contact with individual management teams of the portfolio companies and are pleased to report that our portfolio as a whole holds firm against the challenges impacting the broader U.S. economy and healthcare industry, which should be pleasing as illustrated by no new non-accrual positions year-to-date. We also believe this is due to SWK’s focus on investing in differentiated companies, strong intellectual property driving commercial products, and structural demand and revenues within the healthcare system. We remain reasonably well-capitalized with approximately $32 million of cash and revolver availability, executing share repurchases for our partner companies and executing on potential investment opportunities. Unlike BDCs and some similar investment funds, SWK’s balance sheet is not highly leveraged. Regarding our subsidiary, Enteris BioPharma, approximately a year ago SWK completed the acquisition and we remain excited about the opportunities in front of Enteris as we closed the acquisition. Over the 12 months since closing, SWK has worked closely with Enteris to strengthen its operations, advance the expansion of its manufacturing capabilities, and enhance its management team. A critical step in this process occurred during the second quarter with the appointment of Dr. Rajiv Khosla as the company's new Chief Executive Officer. Dr. Khosla has already made substantial improvements on Enteris’ business. He has taken several measures that should enable the company to capture more value-creating opportunities and maximize the potential of our intelligence platform. We continue to believe that our core theses at Enteris regarding technology and commercial platform are yet to realize their full economic potential. For example, Cara Therapeutics utilizes the Peptelligence platform and is licensed for its oral KORSUVA program announced in the second quarter of 2020. They expect to initiate the safety portion of its Phase 3 program for oral KORSUVA for treatment of pruritus patients with moderate to severe chronic kidney disease in the fourth quarter of 2020. This could occur in advance of the end of Phase 2 meeting with the FDA, which is now forecast for the first quarter of 2021. Additionally, Cara now expects to report top-line results in the first half of 2021 for at least two Phase 2 clinical trials of oral KORSUVA in atopic dermatitis and pruritus patients with hepatic impairment due to primary biliary cholangitis. In closing, while the coronavirus outbreak has influenced all aspects of life and business for the foreseeable future, we believe that SWK’s structure and purpose will allow us to withstand these challenges and potentially position us for growth in the near term and certainly once the situation subsides. As of June 30, 2020, SWK’s yielding portfolio of royalties and structured credit backed by royalties totaled approximately $178.7 million across 23 partners. That compares favorably to $178.3 million at the end of the first quarter of 2020 and $173.3 million as of the year-end 2019. During the second quarter of 2020, the company deployed $0.6 million to existing borrower Harrow Health and we deployed an additional $2 million to another existing borrower Eton Pharmaceuticals in the first quarter. At the end of the second quarter of 2020, the weighted average projected effective yield of the finance receivables portfolio was 13.2%, inclusive of non-accrual positions, versus 13.9% as of the end of the second quarter in the previous year. SWK reported book value per share of $18.09 as of June 30, 2020. This includes an aggregate $0.40 per share of non-cash charges during the quarter, which was comprised of $0.26 per share negative impact from amortization of Enteris-related intangibles, and $0.14 per share loss due to the increase in the fair value of estimates of the Enteris acquisition-related contingent consideration liability. These items were offset by approximately $0.08 per share positive impact from the mark-to-market changes on equity-related securities. This compares to a book value per share of $18.31 as of December 31, 2019 and $17.31 as of June 30, 2019. The tangible specialty financing book value per share, which includes the deferred tax assets, intangible assets, goodwill, and contingent consideration payable, totaled $16.08. Management views tangible financing book value per share as a relevant metric to value the company's core specialty finance business. For the second quarter of 2020, SWK reported total revenue of $7.9 million compared to $5.7 million in the second quarter of 2019, which was driven by an increase of $1.8 million in royalty income and a net $300,000 increase in fees and interest earned on finance receivables portfolio. Revenue primarily consisted of interest and fees earned on the portfolio and royalty payments generated by portfolio companies, as well as pharmaceutical development revenue generated by Enteris. The increase in the royalty payments in the second quarter was higher than we would typically expect. As a revenue stream, royalty payments can be a bit irregular and lumpy, which can result in fluctuations from quarter-to-quarter. Income before tax for the second quarter of 2020 totaled $1.3 million compared to $4.3 million for the same period the previous year. The decline is driven by a $3.4 million expense for Enteris intangibles amortization and a $1.8 million loss due to the increase in the fair value estimate of Enteris acquisition-related contingent consideration, along with a $1.7 million operating loss for Enteris. These are partially offset by a $1 million gain as a result of the fair market value increases of our equity-related positions. A quick reminder about the Enteris acquisition accounting, you're amortizing the purchase price value attributed to intangible assets, which resulted in a $3.4 million charge in our expense cash during the quarter. Additionally, the $1.8 million loss in the quarter related to the increase in the fair value of the contingent consideration was caused by our increased expectation for the value of that consideration. Unfortunately, even though we have greater expectations for the potential value of cash payments under the existing license agreements, GAAP doesn’t allow for an offsetting increase in the assets. GAAP net income for the second quarter ended June 30, 2020 was $0.9 million or $0.07 per diluted share, compared to $4.3 million or $0.34 per diluted share for the second quarter of 2019. For the second quarter of 2020, the non-GAAP adjusted net income was $4 million and the specialty finance segment reported an increase to non-GAAP earnings of $5.7 million versus $4.3 million for the second quarter of 2019. From a portfolio perspective, our income-producing assets, which includes our finance receivables and corporate debt securities reached an all-time high during the quarter at $178.7 million as of June 30, 2020. This increased compared to $169.7 million as of June 30, 2019. As demonstrated by these results, our specialty finance business continues to perform well. We're working hard to target new transactions that leverage our areas of expertise and the growing need among small to mid-sized life sciences companies to access capital. We're well capitalized to meet the continued demand and what we expect to be increasing for our financial products. At Enteris, our focus continues to be on supporting our licensed partners, performing business development functions generally, which includes evaluating our own asset opportunities for future development and potential out-licensing, and expanding our manufacturing capabilities. All these activities are focused on crystallizing our overall future growth strategy. To that end, we have added personnel to Enteris’ team with a new CEO and CMO working to expand the company's manufacturing facilities, which continues according to plan. Furthermore, regarding our overall business development strategy, the hiring of Dr. Khosla as Enteris' new CEO marks a key development at a critical time for Enteris. He brings through his new role a wealth of experience as an industry executive and as a consultant advising biopharmaceutical companies on monetization of intellectual property, as well as development experience and deep knowledge of all drug delivery technologies critical to Enteris as the company targets multiple growth opportunities to maximize the value of intelligence. We anticipate providing a more thorough update regarding Enteris in early 2021. In conclusion, the second quarter continued a path of sustained growth for SWK, made possible by the diligent efforts of our SWK Holdings team. I would once again like to thank our employees for their dedication, loyalty, and our stakeholders for their continued support as we evolve our model throughout SWK. With that, I will now open the call to your questions.

Our first question is from Kyle Bauser from Colliers Securities. Please proceed.

Hey Winston, good morning. Thanks for all the updates here. Maybe can you talk a little bit about upcoming catalysts we should keep an eye out for within the Enteris business line? I know you've walked through a couple of them, but I didn't quite catch them. I just want to make sure we know to look out for over the next 12 months?

Sure. So as we generally don’t like giving forward guidance, the things that we're looking for that demonstrate the advancement of the business will be on the manufacturing side is the continued build-out and completion of that expansion project. Then, of course, any public announcements that are made by our various licensees of our intelligence technology in Cara, and of course we’ll be watching to see how they continue to hit their milestones. Also, we’ll be looking for new updates regarding various feasibility studies and specialty licenses regarding the business. So that’s certainly the things that we're going to be looking at that demonstrate advancement there.

Okay. And I think you mentioned Q4 of this year and then the first half of next year, and what milestones were that? I think it was with Cara and clinical trial activity?

Sure. So, yes, I am not talking about things they haven't announced publicly. So from their second-quarter update, a week or so ago, they announced that they intend to begin the safety portion of their Phase 3 patient trial in the fourth quarter of this year, and they expect to have the FDA end of Phase 2 meeting during the first quarter of 2021. They also expect to have additional Phase 2 results in the first half of 2021 for their other two Phase 2 trials in atopic dermatitis and pruritus patients with hepatic impairment due to primary biliary cholangitis.

And as we think about deployment of cash, do you have a preference for share repurchases or to make it through COVID and conserve cash to support the current portfolio? Or do you think you have enough fresh capital to deploy for new investments? Just trying to understand how you’re prioritizing deploying cash through COVID here?

Sure. Well, yes, it’s to point out, thankfully the portfolio continues to perform well. The capital that we have today is not a static pool. Those continue to generate healthy cash flow. As we think about deploying both the further cash flow that we'll be getting over the coming quarters and years plus the liquidity we have today, it really is a balancing game. We seek to invest our capital in the highest return areas, because there are many ways for companies to build shareholder value. We are always evaluating share repurchases, and we’re looking at new transactions, and we want to ensure there's enough liquidity to support further companies as circumstances change. Because as everybody knows, these are uncertain times and while we feel great about how things are going generally, there may be surprises. That’s what we must address to help the companies’ worth, and of course, we also look at opportunities with Enteris, ensuring we fully understand our opportunities on some of the owned asset development potential, and maybe we decide that those will be greater than prices deployed in other resources. In summary, we would like to allocate capital in the most judicious way possible while building the book and entering into new partnerships and returning value to shareholders.

And it’s certainly a lot of fresh capital that you can deploy for each of those and including Enteris which I didn't mention. So appreciate that. And as it relates to the specialty finance side of the business, is it a competitive market out there? I mean what's the activity like, as you evaluate new deals? Is there less activity from other competitors bidding on deals? Is it a little bit easier to avoid those types of situations where it comes down to competition and you're going up against some other people or is it still pretty active, and there are still other companies looking to deploy capital to some of these high-quality names?

Yes, I think the first part of the answer to that question is exactly what you asked. The first thing is that we continue to see a multitude of very attractive opportunities. I think we’re a little lucky in that we can be very selective in evaluating different deals. We’re thankful for that and it's a testament to the platform we’ve built here. Regarding competition itself, it really depends on what segments you're looking at. In some places, it's getting fairly competitive. In other places, there are simply too many other potential lenders around. As for the level of competition, it doesn't necessarily indicate the credit quality of an asset from our perspective. I don’t know if there's been any significant increase in competition. In certain segments, we continue to see high-quality opportunities, and we're still able to do reasonable deals that yield typical returns. It's a mix, and I don’t think it's all that different from prior periods where certain segments become competitive and then fade away.

Our next question is from Nat Stewart from N.A.S. Capital LLC. Go ahead.

Hey Winston, great job. Nice to see the credit portfolio hold up so well. Honestly better than I expected, given all the crazy stuff that’s going on. I just had a few questions. I noticed very synthetic royalty perform very well. If I remember, it has a step down on the royalty rate once some targeted returns are met. I was just curious where that synthetic royalty is and if there are any details just on how the strong performance has occurred?

Sure. Yes, I guess first on the strong performance, the team has just done a great job in growing that product suite. We are obviously benefiting from that and we're very thankful for their strong execution. The way that deal works is until we receive a 1.7, 6.25 times the cash on cash return from the initial $10 million invested, we tend to receive the higher royalty rate. Then once that’s achieved, it steps down to 5%. The royalty can be terminated by buying it out on a change of control like transaction. In terms of how much further we have to go until we hit that multiple, I don’t have that number at the top of my head, but I think it's north of almost $5 million. I'll look that up and get back to you afterward. All the capital we receive is obviously sensitive and could be figured out in those public documents.

Yes, it looks like it shows the quality of these different royalties and the credit agreements you've arranged. I can look at them and in a number of them I can determine they're really worth more than the book value. But my second question was on the contingent consideration. I think it's probably a little confusing for many people. How the Enteris deal was accounted for with the amortization and kind of the divergence in accounting values, because I think you're actually building value there. But for the time being, the short-term, that's kind of hidden by the accounting treatment. Curious about the contingent consideration, because that has increased, which is a good thing? Is there any more detail you can provide on that?

Sure. I guess first on the accounting itself. GAAP requires us to disclose the value of any payments that would have been made to the Seller as part of the deal to remember. We did have sharing of the proceeds of our license agreements, as well as any sort of proceeds on the initial period on the assets that the company had regarding product candidates. We have to work the full value of that as an asset, meaning the full 100% would be paid out on an adjusted basis, and the amount that will be paid out to the Seller is the contingent liability. You're exactly right that our general expectations based on kind of developments of the license have increased. As a result, that liability results in a loss on the P&L and an increase to the liability, even though with no offsetting amount on the asset side. It’s indeed counterintuitive. We have lower expectations of marking assets down effectively due to gain, and while it’s lumpy, I agree it’s still a good thing. You’re right in that the value of the purchase price attributed to existing licenses, because we do expect sales, we noted during the initial conference call that we expect to see cash proceeds in the near to medium term. That results in these assets being amortized over that period, which if you look at it, I still think the business has increased in value that we are yet to take on our balance sheet.

It's going to be a discrepancy for a period of time, but I think it will resolve itself over a period of years or as things further develop on the revenue side, so I just wanted to clarify that.

Yes, I think that's right. I appreciate that. Yes. Thank you for that.

At this time, we have no more questions. This concludes the question-and-answer session. I would like to turn the conference back over to Winston Black for closing remarks.

In closing, thanks, everyone. I really appreciate your time and attention and look forward to providing future updates as we continue to advance SWK Holdings. I'd also like to extend my sincere wishes and good health to all.

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