Safeguard Scientifics, Inc.
Q4 2021 Earnings Call Transcript

Published: 9 Mar 2022

[Operator:]

Good afternoon. Thank you for attending today's Safeguard Scientifics Fourth Quarter 2021 Financial Results Conference Call. I would now like to pass the conference over to our host, Matt Barnard, General Counsel at Safeguard Scientifics. Please go ahead.

[Matt Barnard:]

Good afternoon, and thank you for joining us for this presentation of Safeguard Scientifics fourth quarter and full year 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'll open up the call to your questions. As always, today's presentation includes forward-looking statements. Reliance on forward-looking statements involves certain risks and uncertainties, including, but not limited to, the uncertainty of the outcomes of corporate strategic transactions, if any, uncertainty of the 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 prices 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 and other factors, our past financial performance should not be relied on as an indication of future performance. During the course of today's call, words such as expect, anticipate, believe and intend 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 Safeguard's filings with the SEC, including our Form 10-K, which describe in detail the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today. I would now like to introduce Eric

[Eric Salzman:]

Thanks, Matt. Thanks for joining us this afternoon for our Q4 2021 earnings call. Today, we will cover the following topics

[Mark Herndon:]

All right. Safeguard's net income for the year ended December 31, 2021, was $27 million or $1.36 per share as compared to a net loss for the year ended December 31, 2020, $37.6 million or $1.81 per share. Safeguard's fourth quarter of 2021 resulted in a net loss of $8.6 million or $0.51 per share as compared to a net loss of $7.4 million or $0.35 per share for the comparable period of 2020. This quarter's results were positively impacted by the resolution of an earn-out contingency related to a 2018 sale of AHS that resulted in an additional $2 million to Safeguard, and the continued decline in general and administrative costs. The quarter's results were negatively impacted by the continued decline in the fair value of Bright Health stock was opened in a noncash and unrealized loss on that stock of $6.3 million. The fourth quarter also included our Dutch auction self-tender offer that resulted in the repurchase of 4.3 million shares of common stock at a cost of $39 million. When combined with our open market purchases earlier in the year, we repurchased 4.5 million shares at an aggregate price of $40.6 million or $8.95 per share. To quickly recap Safeguard's annual results, we were positively impacted by the exit transactions of Flashtalking, resulting in $44.8 million in cash and Zipnosis, WebLinc, Velano Vascular and T-REX grew, which returned in the aggregate cash proceeds of $13.6 million. The Zipnosis transaction also provided us with preferred equity at Bright Health, which was converted to 1.3 million common shares at their June initial public offering, resulting in the unrealized gain. Unfortunately, as we disclosed quarterly this value has declined throughout the year, and we ended the year with that position valued at $4.5 million. Safeguard has also ended the year with $24.8 million of cash, cash equivalents, restricted cash. And we continue to have no debt obligations. Our general and administrative expenses were $1.1 million for the fourth quarter of 2021, which was 30% lower than the $1.6 million reported in the comparable quarter of 2020. For the full year of 2021, our general and administrative expenses were $7.2 million as compared to $9.5 million for the full year of 2020, a 24% decline. Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock-based compensation, severance expenses and other nonrecurring items and other items were $0.8 million as compared to $1.2 million in the comparable quarter 2020, a 33% decline. For the full year of 2021, these corporate expenses were $3.9 million as compared to $5.2 million for the full year 2020, a 25% decline. On a sequential basis, this quarter also represents a decline of 6.8%. While this also marks the fifth consecutive quarter of decline in corporate expenses, we generally expect that the quarterly level of corporate expenses will stabilize at approximately this level. As a result, we have established initial expectation for corporate expenses in 2022 of $3.5 million to $4 million. The decline that we have experienced this year with respect to both general and administrative costs and corporate expenses have been the result of reductions in cash-based employee compensation costs, professional fees, office costs and insurance expenses. The corporate expense measure also continues to benefit from director fees that are being paid in equity and a significant portion of management's compensation in pain equity. With respect to our ownership interest, we had an aggregate carry value at December 31, 2021, of $26.5 million as compared to $50.4 million at December 31, 2020. This decrease was the result of the application in equity method of accounting, the $2.5 million impairment in the second quarter at other partnership interest as well as the exit of the Zipnosis, Flashtalking, T-REX, Velano Vascular and WebLinc, that each removed carrying value. These decreases were partially offset by increases due to our $2.7 million aggregate deployments at Trice in the first quarter and Aktana in the third quarter, the addition of the Bright Health position and the dilution gains aggregating to $9.3 million from Syapse in the first quarter and Trice in the third quarter. These dilution gains are reported as a component of equity income or loss line item. And as a reminder, our carrying value of ownership interest where we apply the equity method is a GAAP term where we typically reduce the carrying value for our share of the losses of the underlying companies and it generally does not represent the fair value or an expected exit value of those same ownership interests. If the fair value of any of our ownership interest declines below our carrying value, we would consider making a downward adjustment for the carrying value by recording an impairment. We've also had a few ownership interests that are not accounted for of the equity method and do not have a readily determinable fair value those interest can have an upward or downward adjustment from time to time resulting from observable price changes if there are transactions in their securities. These impairment price changes are recorded as gains or losses in other income or loss net. Our share of the losses of our equity method ownership interest for the 3 months ended December 31, 2021, was $3.6 million as compared to $4.1 million for the comparable period in 2020. The quarter's decrease in loss is primarily the result of having 2 less companies in 2021 and a lower level of losses at several companies due to a variety of events, including some nonoperating onetime gains in the underlying companies, and limiting the recognition of losses and when our carrying value is reduced to 0. I'd also like to remind everyone that we report our share of the losses from the equity method companies on a 1-quarter lag. So this quarter's share of losses reflect the third quarter of 2021. We have also seen in this quarter an annual period, the income statement benefit to our company resulting from PPP milling programs, when those loans are officially forgiven. Also, with respect to our ownership ventures, we can update you to the total third-party debt and cash in our companies. As a reminder, with Flashtalking exiting the third quarter, we are now also excluding MediaMath in this disclosure. Also, as an other ownership interest, these disclosures will continue to exclude Bright Health too. With those notes in mind, the third-party debt at this group of 9 companies was approximately $135 million. That is up about 10% since last quarter. Cash at that same group of 9 companies has decreased to about $73 million. Within this group, the most notable changes related to additional bank debt at a couple of companies and a decrease in cash resulting from quarterly derates. In terms of revenue performance, we reported a 7.1% decrease at our group of 10 ownership interest for the trailing 12-month period ending December 30, 2021, due to the 1 quarter lag. In addition to the revenue decline at MediaMath, the decline was primary attributable to what we have previously disclosed about a single customer event that resulted in a nonrecurring revenue increase in the fourth quarter of 2019. As Eric mentioned earlier, we're seeing the fastest growth from a few companies like meQuilibrium, Moxe and Trice, which -- Trice also benefited from the acquisition of Tenex earlier in 2020. Now it is time for us to turn to the Q&A segment of the call. So I will ask our operator to open the phones up for a few questions, and we'll start lining those up.

[Operator:]

First question comes from the line of Daniel Han with Kansai Capital. Please go ahead.

[Daniel Han:]

Just had a quick housekeeping one. I think historically, you guys have provided LTM revenue broken out between digital media and health care. Can you provide that for 2021?

[Mark Herndon:]

Yes, we've essentially stopped doing that now because it was limited to just the one company. So..

[Daniel Han:]

I see. Okay.

[Mark Herndon:]

So -- yes, that's why we did not provide that earlier.

[Eric Salzman:]

Daniel, the point being, if we disclosed it, then you would know the revenue of a private company, which doesn't disclose its revenues publicly. So...

[Operator:]

Currently, there are no questions leaning at this time. I would like to pass it back to the management team for any closing remarks.

[Eric Salzman:]

Thank you for joining us on the call today. We appreciate your continued interest in Safeguard and we'll be following up as we do each quarter to set up one-on-one calls with the management team. Thanks, and have a good evening. Take care.

[Operator:]

That concludes the Safeguard Scientifics Fourth Quarter 2021 and financial results conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.