Safeguard Scientifics, Inc.
Q3 2021 Earnings Call Transcript

Published: 7 Nov 2021

[Operator:]

Ladies and gentlemen hello and welcome to the Safeguard Scientifics Third Quarter 2021 Financial Results. My name is Maxine and I'll be coordinating the call today. . I will now hand over to your host Matt Barnard Safeguard's General Counsel to begin. Matt please go ahead when you're ready.

[Matt Barnard:]

Good afternoon, and thank you for joining us for this presentation Safeguard Sscientifics Third Quarter 2021 Financial Results. Joining me on today’s call and webcast are Eric Salzman, Safeguard’s Chief Executive Officer, and Mark Herndon, Safeguard’s Chief Financial Officer. Following our prepared remarks, we will open the call to your questions. As always today's presentation includes forward looking statements. Reliance on forward looking statements involve certain risks and uncertainties, including but not limited to the uncertainty of future performance of our companies, our ability to make good decisions about the monetization of our companies, the ongoing support of our companies, our inability to unilaterally control our companies, fluctuations in the market price of any of our companies that are publicly traded and the effect of regulatory and economic conditions generally, and other uncertainties described in our filings with the SEC. Many of these factors are beyond our ability to predict or control. As a result of these other factors or past financial performance should not be relied on as indication of future performance. During the course of today's call, words such as expect, anticipate, believe intent will be used in our discussion of goals or events in the future. Management cannot provide any assurance that future results will be as described in our forward looking statements. We encourage you to read safeguards filings with the SEC, including our form 10-K, which describe in detail the risks uncertainties associated with managing our business. Company doesn't assume any obligation to update any forward looking statements made today. With that, I would now like to introduce Eric.

[Eric Salzman:]

Thanks for Matt. Thanks for joining us this afternoon for our Q3 earnings call. Today, we will cover the following topics. We'll review our major achievements for Q3. We will provide an update on exit activities in the portfolio. We will provide an update on capital raises by our portfolio companies. We will share Q3 highlights for each company. We will share publicly listed comparable trading statistics and we'll provide some commentary on our expected follow on deployments for the balance of 2021. Mark will then take you through the financial review for the quarter and we'll open it up to Q&A. I'll start with our Q3 achievements. We've had a productive third quarter with two notable achievements which delivered on our strategy to maximize portfolio company value and return capital to our shareholders. Flashtalking completed a strategic sale in August, which delivered $45 million in cash to safeguard these proceeds provided us with a liquidity to launch a $35 million self tender in September. We were able to upsize ourselves tender to $39 million, which allowed us to buy back approximately 20% of our outstanding shares at $9 per share. We viewed $9 as an accretive price for Safeguard to repurchase its stock in tender and we continue to hold that view today. We are excited about our remaining portfolio interests and consistent with our strategy. We continue to work with our companies to find exits, and return capital to Safeguard's shareholders. To remind our shareholders we have established $18 million as the target balance sheet cash threshold above which we would look to return cash to our shareholders via buybacks and dividends. This target is based on our expectations of future operating costs, follow-on deployment requirements, and a range of exit time horizons. Note that the $18 million threshold is subject to adjustments based on developments with our companies so it could change up or down. I will next move to exit activities in the portfolio. During our Q2 earnings call in August, we shared that one company had just launched an M&A process, one company was planning to launch an M&A process in September, and the third company was in varying degrees of strategic discussions. The update from that August disclosure is as follows. The company that launched its process in August, has now signed an LoI with a strategic buyer. This process moves along quickly which is a positive sign. While we are not certain that the LoI will result in a sign purchase and sale agreement, we are now cautiously optimistic that this transaction should close. Although the specific timing is harder to predict. And of course, there are always deals specific risks involved in any transaction. If completed, the proceeds would be meaningful and at that time, we would evaluate the range of options and timing to return capital to shareholders. The company that was planning a September launch of its sale process delayed the launch until mid October in order to complete its Q3. Our reach to prospective buyers is currently underway. It is too soon to assess the probability of a deal, but should one come together, we believe it would be a 2022 events. The third company that was in varying degrees of strategic discussions, did recently signed an LoI and is working through diligence. There is a fair amount of complexity in this transaction, and it is difficult to handicap the chances of a deal closing. On its current terms if this deal were to close, the proceeds to Safeguard would not be meaningful relative to our aggregate portfolio fair market value. In addition to what we said in August, a fourth company is engaged in early merger discussions with another private company. The discussions are at an early stage and we cannot handicap the probability of this deal getting to the finish line. If this merger were to close, it would be a stock for stock deal and Safeguard would retain a preferred equity interest in the combined company, meaning there would not be cash to Safeguard as part of this deal. Having said that, we believe that the upside of the combined companies could be superior to our company's standalone plan. We will provide you further updates as they develop. Let's now touch on portfolio capital raises. A ton of raise capital this past quarter to fund its operations and growth and Safeguard deployed 1.7 million in the transaction. Trice closed an equity round with strategic investor Bioventus and as part of that transaction, Safeguard and the other choice shareholders converted their existing notes into the equity round. For Safeguard, this was the $1 million, which we deployed in Q1 that was converted into the Bioventus led round. Three other portfolio companies have begun to explore capital raises to support their growth in 2022. It is too soon to determine whether Safeguard would be participating in these transactions. Also, as of now, we expect these to be primary capital raises. So we would not expect an exit or partial exit opportunity for safeguard as part of these financings. Of course, there's no assurance that any of these capital raises will occur. Moving on to portfolio highlights with the exit of Flashtalking Safeguard's portfolio consists of minority stakes in seven private healthcare companies, our 1.3 million share position in publicly traded Bright Health group, one ad tech company MediaMath, one marketing tech company Clutch and one fintech company Lumesis as we've done in past quarters, we will provide a quick one bullet recap of Q3 highlights on each of these portfolio companies. Note that this is not a comprehensive assessment of each company, and specific risks apply to each name. For Aktana, Q3 represented its largest booking quarter ever. Syapse entered into a research collaboration agreement with Merck. Prognose continues to expand its health data marketplace, which is the largest real world data marketplace with anonymized data on 350 million patients. Moxe continued to sign up new provider sites Q3 was a record and is on track to meet or exceed its 2021 goals. meQuilibrium is experiencing robust revenue growth which was up over 50% year-on-year. InfoBionic saw double digit revenue growth in Q3, had positive EBITDA and accelerated its Mayo Clinic deployments. Trice as we mentioned, closed a strategic equity round led by publicly traded Bioventus and is partnering with them on an international distribution agreement for Trice's products. Clutch saw significant early traction with NCR hospitality and is executing on integrations with Pfizer to support a number of rollouts in early 2022. Lumesis is on plan for 2021 and is experiencing steady growth. For Bright Health group, we're looking forward to their Q3 earnings on November 11 to hear more about their progress as they build out their vertically integrated tech enabled health insurer. Note that our IPO lockup expires in late December. MediaMath released its new product platform to all clients expanding its identity solutions and continue to experience strong momentum in a package. However, we want to note that MediaMath does not represent a material components of our total portfolio fair market value nor do we expect it to be a material part of our total exit values. Also note that this assessment was factored into our determination that $9 was an increase of price to buy back Safeguard stock and ourselves tender and has no meaningful impact on our calculation of the exit value or the upside potential of the portfolio. So on balance, our companies are making good progress toward executing on their business plans and we're excited about their prospects to return meaningful value to Safeguard shareholders. Next, we'd like to share relevant publicly listed comparable trading statistics. As we've done in prior quarters, we provide certain metrics on publicly traded comparable companies that we track against our portfolio. We use these both quantitatively as part of our internal valuation methodology as well as qualitatively as we track company and industry developments. We look at enterprise value to forward revenue multiples and projected revenue growth as the two most important metrics to follow. The following stats are as of the end of October. I'll start with revenue multiples. For publicly traded healthcare comps the median enterprise value to revenue multiples on 2021 and 2022 were 5.3 times and 4.1 times respectively down 0.09 turns and 1.1 turns respectively from our August earnings call. For publicly traded adtech comps the median adtech enterprise value to revenue multiples on 2021 in 2022, were 5.4 times and 4.4 times respectively down 0.08 turns and 0.03 turns respectively from our August call. For publicly traded marketing tech comps the median enterprise value revenue multiples on 2021 and 2022 were 3.7 times and 3.6 times respectively, down 0.03 turns from August. Now I will turn to revenue growth expectations. For publicly traded healthcare comps the analyst consensus for median revenue growth was 35% for 2021 and 24% for 2022. For publicly traded adtech comps, the analysts’ consensus for median revenue growth was 38% for 2021 and 25% for 2022. For publicly traded marketing tech comps, the analysts’ consensus for median revenue growth was 19% for 2021, and 15% for 2022. For comparison purposes, the aggregate revenue growth rate projected for Safeguard's portfolio excluding Bright Health is over 20% for 2022, although not every company is experiencing that growth rate, some higher and some lower. Lastly, I want to comment on follow on deployments for the balance of the year. As you read in our press release, we've deployed $2.7 million year-to-date in the portfolio, including $1.7 million to Aktana in Q3 and $1 million in Trice in Q1. We don't expect further deployments in the portfolio for the balance of the year. As a point of reference, the $2.7 million compares to our 2021 guidance or $5 million to $7 million, so we will come in meaningfully better than planned. We had budgeted $2 million to $3 million of additional deployments in two companies in Q4, which if these were to happen would occur in 2022. At this time I will hand it over to our CFO Mark Herndon.

[Mark Herndon:]

Thanks Eric. For the quarter ended September 30, 2021 Safeguard reported net income of $18.3 million or $0.88 per share compared with a net loss of $4.3 million or $0.21 per share in the same period of 2020. This quarter's results were positively impacted by Flashtalking acquisitions that resulted in $45 million of cash proceeds and a gain of $32.3 million. The quarter's results were negatively impacted by the non-cash unrealized loss on breakout stock of $11.9 million resulting from the market value changes in that company's publicly traded stock. Both of the transactions are reported as a component of other income or loss net. Safeguard's cash, cash equivalents and restricted cash at September 30, 2021 totaled $64.2 million and we have no debt obligations. However, subsequent to this quarter's end we used $38.7 million to repurchase approximately 4.3 million shares and the Dutch options self tender. Our purchases of stock under the prior market plan were insignificant during the quarter. Our general and administrative expenses were $1.6 million for the three months ended September 30, 2020, which was 31% lower than the $2.3 million reported in the comparable quarter of 2020. Corporate expenses for the quarter which represent general and administrative expenses, excluding stock based compensation, severance expenses, and non-recurring and other items were point $0.9 million as compared to $1.3 million in the comparable quarter of 2020 a 32% decline. On a sequential basis, our quarterly corporate expenses also continue to decline. This quarter was about 8%. We continue to expect this approximate level of corporate expenses for the remainder of 2021 which we indicated last quarter so that our total corporate expenses for the calendar year will likely be below $4 million. With respect to both general and administrative costs and the corporate expense amounts, we have continued to reduce the cash based employee compensation costs, professional fees, office costs, and insurance expenses. The corporate expense measure continues to benefit from director fees being paid in equity, and a significant portion of management's compensation being paid in equity. This quarter's Flashtalking transaction resulted in certain LTP thresholds being met, which resulted in $2.1 million of payments being made during the fourth quarter. We continue to view these LTP payments as fully funded by the proceeds of the exit transactions. Since this plan was enacted in 2018, Safeguard has collected approximately $254 million of gross proceeds from asset sales and is paid an aggregate of $2.5 million under the LTP plan. With respect to our ownership interest at September 30, 2021, we have an aggregate carrying value of $36.3 million as compared to $50.4 million at December 31, 2020 last year end. This decrease was the result of the application of the equity method of accounting, a $2.5 million impairment last quarter, as well as the exits of Zipnosis Flashtalking, that were all removed carrying value. These decreases were partially offset by increases due to our $2.7 million of aggregate deployment of Trice in Q2 and Aktana this quarter. The addition of the Bright Health position and dilution gains aggregating to $9.3 million from Syapse and Q1 and Trice this quarter. Note that these dilution gains of $2 million in the third quarter and $9.3 million year-to-date are reported as a component of the equity income loss line item. As a reminder, our carrying value of ownership interest where we apply the equity method accounting is a GAAP term, where we typically reduce the carrying value for our share of the losses of the underlying companies, and then generally does not represent the fair value or an expected exit value of the same ownership interest. If the fair value of our ownership interest declines below the carrying value, we would consider making a downward adjustment to the carrying value by recording an impairment. We also have a few ownership interests that are not accounted for under the equity method and do not have a readily determinable fair value. Those interests can have upward or downward adjustments from time to time resulting from observable price changes if there are transactions in this security. These observable price changes are recorded in gains or losses in other income or loss net. Our share of the losses of our equity method ownership interest for the three months ended September 30, 2021 was $3.1 million as compared to $3.8 million for the comparable period in 2020. The quarter's decrease in loss is primarily the result of having four less companies in 2021 accounted for under the equity method and also included lower level of losses at several companies. And the remainder of the equity method entities our results were relatively were consistent. I would also like to remind everyone that we report our share of the losses from the equity method companies on a one quarter lag. So this quarter share of losses reflects the second quarter of 2021. Many of our companies saw their initial impact of COVID-19 during the later stages of the first quarter of 2020. Their results for the remainder of the 2020 year reflected full quarters operating in that environment. We've also seen this quarter and expect to see later quarters income statement benefits to our companies resulting from PPP loan programs when those loans are officially forgiven. Also with respect to ownership interest, we can update you to that total third party debt and cash in our companies. The Flashtalking’s exit that during the quarter we are now also excluding other large company MediaMath from disclosure. Also as another ownership interest these disclose we also continue to exclude Bright Health. With those notes in mind that third party debt at this group of nine companies was approximately $143 million which is unchanged as compared to last quarter on a comparative basis. Cash at this same group of nine companies was also essentially unchanged at about $97 billion. Within this group, the most notable changes relates to the conversion of incentives, the equity of Trice as part of its recent equity capital raise. So overall, the net debt position did not change substantially across this group of nine companies. The cash that did burn in certain companies was sourced from their prior capital ratings at those companies. In terms of revenue performance, we reported an 11% decrease at our group of 10 ownership interest for the trailing 12 months period ended June 30, 2021, due to the one quarter lag. And again, just note that this excludes Flashtalking due to their exit transaction and Bright Health, as well as other ownership interests. The decline was attributable to a few different aspects. The most significant related to a single customer events that resulted in a non recurring revenue increase in the fourth quarter of 2019 that we've talked about previously. This was also impacted by the growth characteristics at our digital media ownership interest since late 2020. The rest of the companies as a group grew approximately 23%. Now it is time for us to turn the call back to the Q&A segment. So I'm going to pause here and ask the operator if you can open the line for few questions.

[Operator:]

[Eric Salzman:]

Okay, thank you, Charlie. Thanks for joining us in the call today. Thank you for your continued interest. As always, we'll be following up for one on one calls. And if you have any follow up questions on the quarter or about our strategy feel free to reach out to us and sign up for a time for a one on one call. Thanks and have a good evening.

[Operator:]

This concludes today's call. Thank you for joining. You may now disconnect your lines.