Safeguard Scientifics, Inc.
Q1 2022 Earnings Call Transcript

Published: 8 May 2022

[Operator:]

Good day, ladies and gentlemen, and welcome to the Safeguard First Quarter 2022 Financial Results Conference Call. All lines have placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Matt Barnard, General Counsel. Sir, the floor is yours.

[Matthew Barnard:]

Good afternoon, and thank you for joining us for this presentation of Safeguard Scientifics first quarter 2022 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-Q, 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. With that, I would now like to introduce Eric.

[Eric Salzman:]

Thanks, Matt. Thanks for joining us this afternoon for our Q1 2022 earnings call. Today, we will cover the following topics. We'll provide commentary on the recent performance of our portfolio companies. We'll provide an update on capital raises and exit activities. We'll share public market valuation information for our portfolio company peers. We'll comment on our strategic process with Houlihan Lokey. We'll highlight recently announced pending changes to our Board of Directors. I'll then hand the call over to Mark, our CFO, to walk you through our financial results in greater detail. Lastly, we will open the call up for questions. Let me begin by providing some comments on how we're thinking about our portfolio in the current environment. We remain confident in the value of the Safeguard portfolio and the values that can be achieved through normal course exits. We believe that those values are in excess of our current stock price, and we are taking several steps to drive value creation for our shareholders. First, we are buyers of our stock at this level and are executing on the buyback plan that we announced last quarter. Second, we recently launched a process with Houlihan Lokey to help us explore a wide range of strategic alternatives. This process is at an early stage, and we expect to provide you with a more significant update later in the year. Third, we continue to apply a strict capital allocation and capital return strategy, either through paying dividends and/or repurchasing our stock at levels that we view to be accretive to the value of our portfolio. We evaluate every follow-on investment in a portfolio company against several criteria. And in addition, we compare this to the alternative of issuing a dividend or buying back stock. Lastly, we continue to work closely with our companies to drive performance and focus them towards successful exits. This means helping our management teams balance growth and market share gains against steps to achieve cash flow breakeven, particularly in the current choppier macro environment. I'll now discuss recent portfolio company performance. As we've done in past quarters, I'll provide a couple of recent highlights on each company for Q1. Note that this is not a comprehensive review of quarterly performance. Aktana added a new top 10 pharma customer beating out an incumbent competitor, which was a great win. Syapse announced a partnership with Main Line Health of Philadelphia area Health System. Prognos signed two new data partners, one involving electronic health record data and the other with a new diagnostics company that specializes in autoimmune-related disease testing. This expands the company's reach into new use cases to support its pharmaceutical clients. Moxe posted Q1 GAAP revenues that were up over 100% year-on-year and continues to sign new providers with provider logo count up 8% year-on-year. InfoBionic successfully settled a long-running litigation dispute. The company achieved double-digit revenue growth year-on-year and closed a major hospital system in Q1. Trice posted product revenue growth of 25% in Q1 and is building momentum with its Bioventus commercial agreement, launching the mi-ultra product in Europe at the end of Q1 and the 10x product line in Q3. meQuilibrium posted Q1 revenue growth of over 40% year-on-year, had sequential Q1 revenue growth of 17% and launched this new Breathe Coach application in the quarter. Clutch has continued to gain traction with its NCR partnership, ending the quarter with over 4,300 locations live on its OEM product, up from 3,700 at year-end. The company is also expanding its higher education pilot program with Aramark to include 11 universities launching this spring. Lumesis launched several product enhancements as the management team is methodically focused on improving functionality and expanding its customer base. On Bright Health, we own 1.3 million shares of Bright Health Group, which we received as part of the consideration from our sale of Zipnosis. Bright Health has not met investor expectations since its June 2021 IPO, particularly with respect to their medical cost ratios, which is key to their profitability. Having said that, their results announced this week showed some progress on this front, and they guided towards more market-based levels going forward. We will continue to reevaluate our position, their performance and our expectations for their share price as the year progresses. MediaMath, in April, MediaMath completed a recapitalization where it raised new capital from insiders to fund the turnaround of the business. As part of that transaction, Safeguard's equity stake was reduced to below 1%. Safeguard had the opportunity to participate in this new financing, but decided not to for several reasons. The round was not a pay-to-play round, meaning any new money that we funded in the recap would not help our old money recovery. So this would essentially be a stand-alone new capital investment with a likely multiyear holding period. Our new capital would be passive in nature and had very little governance rights. We concluded that we'd be better off using the cash to buy back Safeguard stock at these levels, which offers a better risk-adjusted return. Recall that last quarter, we indicated that we expected a de minimis return from our MediaMath stake, and that is still the case post this recap. I'll now provide an update on exits and capital raises. As I mentioned, we've been spending a lot of time with our management teams on reviewing business models, aligning cost structures, and in certain cases, securing capital to fund our companies in what is an increasingly more challenging operating environment. While we have not seen a pullback in funding sources in response to the recent declines in the public markets or heightened macro concerns, we have seen a shift in the mindset of investors to focus to a larger degree than previously on path to getting to cash flow breakeven as opposed to focusing solely on revenue growth. We've also seen a shift in the mindset of some of the potential strategic buyers we've spoken to, where in addition to revenue growth, technology differentiation, product market fit, there is an increasing focus on what is needed to get to cash flow breakeven. We'll continue to work with our companies to align to the current environment and adjust accordingly as conditions change. On the M&A front, two of our companies have been exploring sales to strategic parties over the past two quarters. Those efforts did not result in sufficiently attractive interest and we, together with our co-investors and management have decided to continue to operate as stand-alone companies. While both companies are merging leaders in their sectors with differentiated technologies and blue-chip customers, some of the potential suitors wanted to see more progress on the path to profitability. We are confident that both companies have clear path to profitability and sources of capital to fund that path. Two of our other companies are interviewing bankers to be hired to explore strategic M&A in the second half of 2022. Assuming bankers are hired late in Q2, we would not expect to have material feedback from either effort until late Q3 or early Q4, and we will update you as appropriate. Another one of our companies received inbound interest from our strategic acquirer, which we are currently evaluating. This is at an early stage so would not handicap the chances of a deal at this point. Another one of our companies has been in discussions with a large strategic buyer, but this party expressed the need to wait until the end of 2022 before they can engage in further due diligence. This is due to its own internal focus on integrating another recently acquired company. The interest is great validation of our company's attractive product suite and market position, and we'll look to reengage with them towards the end of the year, acknowledging that corporate priorities can change from now to then. On the capital raise side, one of our companies is in discussions with a syndicate of investors for a growth equity round, while reasonably far along in diligence, there can be no assurance that the deal closes. Another company which was gearing up to launch a capital raise process through an investment bank was approached by a private equity investor who wanted to preempt the process based on first half 2022 results. The Board, together with ourselves and management, decided that we were better off waiting until Q2 results are in before either moving forward preemptively with this party or launching a banker-led capital raise process. In short, as you can see, there's a lot of activity but no imminent exits that we can point to at this point. While this is incredibly frustrating for investors and for us, we continue to work with these companies to put them in the best position to transact from a position of strength. I'll now talk about public market valuation multiples. As we do each quarter, we provide enterprise value to revenue multiples and consensus revenue growth rates of our public peers to help investors triangulate around potential valuations. Please keep in mind that this is only one of several valuation methodologies and should not be relied upon exclusively. For our tech-enabled health care companies EV to 2022 revenue multiples for our publicly traded peers are 3.8x with consensus revenue growth for 2022 of 16%. For our single marketing technology position, Clutch, EV to 2022 revenue multiples for the peer group of 3.4x with consensus revenue growth for 2022 of 19%. These numbers, by the way, are from a close of market yesterday. We expect our portfolio companies to grow in excess of 15% in 2022, although macro conditions can impact this estimate. The Houlihan Lokey process. As we mentioned last quarter, we retained Houlihan Lokey to help us explore a range of options to maximize value for Safeguard shareholders. We did this because we recognize that there might be ways to enhance shareholder value beyond our current monetization strategy and wanted to fully explore those options. We are early in the process, currently contacting interested parties and populating the data room, and we'll continue to keep you updated on developments with this process when appropriate. Please remember that these efforts may not result in any transaction. And finally, as you may have seen in our recent proxy statement, there are a couple of proposed changes at the Board level. First, our Chairman, Dr. Robert Rosenthal, has decided not to stand for reelection at this year's annual meeting. Bob has served on the Board of Safeguard for 15 years, including seven years as the Chairman. I have worked closely with Bob since I joined Safeguard in 2019 as Chief Restructuring Officer and have greatly appreciated his counsel, guidance and insights during this time. On behalf of the Safeguard management team, we thank him and wish him the best. In light of that change, the Board determined that a five-person Board would be appropriate and nominated two new independent directors, Ross DeMont and Beth Michelson. Ross DeMont is a longtime shareholder of Safeguard and is currently the Chief Investment Officer at the Rainin Group. We believe his investing experience and especially his position as an investor in Safeguard will be an important voice at the Board level. Beth Michelson is currently a Senior Managing Director at Cartesian Capital, a growth-oriented private equity firm and is on the management team of two SPACs, Cartesian Growth Corporation 1 and 2, where she serves as CFO and as a Director. We believe her extensive experience as a private equity investor and Board member at growth companies will be an excellent addition to our Board, particularly as we evaluate potential opportunities through the Houlihan Lokey process. At this time, I will hand it over to our CFO, Mark Herndon.

[Mark Herndon:]

Thank you, Eric. Safeguard's net loss for the quarter ended March 31, 2022 was $6.7 million or $0.40 per share as compared to net income for the 2021 first quarter of $17.6 million or $0.84 per share. This quarter's results were primarily impacted by the continued decline in the fair value of Bright Health stock, resulting in a non-cash and unrealized loss of Bright Health stock of $2 million. The remaining results were fairly typical with respect to the general and administrative expenses and equity income or loss net. We -- during the quarter, we have continued with our open market purchases announced last quarter, resulting in the purchase of 148,000 shares during the quarter at $5.27 per share and an additional $0.4 million worth of shares at an average price of about $4.71 per share, subsequent to the quarter-end. Safeguard ended the quarter with $19.4 million of cash, cash equivalents and restricted cash, and we continue to have no debt obligations. Our general and administrative expenses were $1.2 million for the first quarter of 2022, which was 50% lower than the $2.5 million reported in the comparable quarter of 2021. This decline was principally attributable to the severance expense charges of $0.8 million recorded in 2021 that did not recur in 2022. Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock-based compensation, severance expenses and nonrecurring and other items were $0.8 million as compared to $1.2 million in the comparable quarter of 2021, a 29% decline. On a sequential basis, this quarter's corporate expenses were essentially flat with the fourth quarter of 2021, about $20,000 higher or 2%. We continue to expect the quarterly level of corporate expenses have stabilized at this approximate value. The declines 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 being paid in equity and a significant portion of management's compensation being paid in equity. With respect to ownership interest, we have an aggregate carrying value at March 31, 2022 of $24.1 million as compared to $26.5 million at December 31, 2021. This quarter's activity included increases from the funding of convertible loans at Prognos and Clutch that aggregated $3.4 million, which was offset by decreases due to the application of equity method accounting. Our share of the losses of our equity method ownership interest for the three months ended March 31 was $3.9 million as compared to $4.5 million for the comparable period in 2021. There were no significant exit events or impairments during the quarter. The $0.3 million reported as a gain on sale and ownership interest represented another installment of the WebLinc transaction. This quarter's decrease in equity method loss is primarily the result of having two less companies in 2022 and a lower level of losses at several companies due to a variety of events, as well as limiting the recognition of losses in a couple of cases where when our carrying value is reduced to zero. I'd also like to remind everyone that we report our share of the losses from equity method companies on a one quarter lag. So this quarter's share losses reflect the fourth quarter of 2021. We have also seen in this quarter annual and -- excuse me. Also, with respect to our ownership interest, the third-party debt at this group of nine companies was approximately $149 million versus $135 million at 2021 year-end. The increase is primarily related to one of our companies raising approximately $10 million of venture debt. Cash at the same group of nine companies has decreased to about $62 million. This decrease primarily related to the quarterly burn at two to three companies and some seasonal factors. And of course, the increased debt was a positive factor for the overall cash flow in the portfolio. In terms of revenue performance, we reported a 16.2% increase at our group of nine for the trailing 12-month period ended December 31, 2021, due to the one quarter lag. We continue to see our fastest growth from meQuilibrium, Moxe, who will now move up a category in our revenue table and Trice, which benefited from the acquisition of Tenex earlier in 2021, but also experienced strong sequential growth. Now we'd like to turn it over to the Q&A segment of the call. So I'll ask the operator to please open the phone lines and start queuing up questions that are available.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Jason Stan from Clayton. Go ahead, Jason?

[Jason Stankowski:]

Hi, guys. I found the correct number to get on the call. So the prior press release set out a little bit of a dyslexic beginning to the call and number just so you know when putting out the press release next time. And you guys -- I didn't see you talk about any possible exits. Is there anything on the horizon or anybody with LOIs on kind of the state of the portfolio?

[Eric Salzman:]

Yes. Jason, we provided a fair amount of detail on what the activities are as it relates to exits. We talked about companies interviewing bankers to launch processes to companies...

[Jason Stankowski:]

Well that's just earlier in the call, I was trying to call in on the number based on the press release and done them in April and couldn't get in, so I just need to go to the transcript for that.

[Eric Salzman:]

Yes, you can do that. Or just kind of follow-up with us afterwards and we can kind of review we disclosed. The short answer is banker discussions -- nothing imminent continue to work with our portfolio companies in the current environment. And take a look at the transcript, we can follow up and answer any questions.

[Jason Stankowski:]

Okay. Yes. Sorry about that.

[Eric Salzman:]

No worries.

[Jason Stankowski:]

And then have you -- have you guys given any thought or has the Board given any thought to the appropriateness of the $18 million cash need, maybe your future deployments into the portfolio were discussed as well, and I just missed that. But any context around whether that can be revisited given the good work you've done on working on the overhead burn is curious.

[Eric Salzman:]

Yes, it's a good question. So we had last quarter provided a kind of a range of $5 million to $9 million follow-on in the portfolio for 2022, of which where we've deployed $3.4 million to date. We evaluate that every quarter as we should because as time goes by and the passage of time and as we get closer to an exit or a final exit, you would imagine mathematically that number to go down. So we did discuss it this quarter. It's something we're going to revisit after our Q2 given kind of macro conditions and a few other developments at a few other companies.

[Jason Stankowski:]

Okay, and remind me again, when does your window open again for repurchases after this call and the disclosure? Is it a couple of working days after? Or what's -- assuming you don't have any deals on the table walking you.

[Eric Salzman:]

What we put in place a 10b5-1 plan last quarter. We had a very short window open, and we put a plan in place to allow us to buy -- actually our broker to buy based on a pricing grid and based on the kind of regulatory volume limitations that exists. So we are in the market buying every day. It's just not directed by us because once it's set and then it continues on its own. That's operating.

[Jason Stankowski:]

Are more for management or for the Board or that might be restricted that thinks it's a good value at these levels.

[Eric Salzman:]

Yes, so it's also a good question because we had a -- and Matt since chime in because we pushed them pretty hard on this question. Apparently, what we learned, and you learn everything -- you learn something new every day, the volume limitations under our 10b5-1 purchases by officers and directors get factored into the maximum we can buy on a daily basis. So what that means is that if I buy in an open window, assuming there's a window open or the Board buys a Mark or Matt, it reduces the amount of shares the company can buy. So we discussed from a fiduciary standpoint, whether -- well, it didn't make sense for us to crowd the company out in buying. I think when the window opens, I don't know what else we can do about that. But Matt, I got that correct, right, as it relates to the limitations on the 10b5-1.

[Matthew Barnard:]

That's correct. And I would just point to our Section 16 filings to track Officer and Director of purchases.

[Jason Stankowski:]

Right. And so -- okay. So that crowds out the volume restrictions. So -- and is it correct that you have no restrictions on block trades in terms of volume, if someone comes to you for the block of stock, you're able to transact that sort of as a separate -- or comes to your broker, I guess. Is that right?

[Matthew Barnard:]

No, there are restrictions, but you are allowed to have larger volumes for block trades when and if they become available. So there are some limitations.

[Jason Stankowski:]

Great. Okay. I'll take a look at the transcript and follow back up. Thanks.

[Matthew Barnard:]

Okay.

[Operator:]

[Operator Instructions] And as it appears, we have no further questions at this time. I'd now like to turn it back to management for any remarks.

[Eric Salzman:]

Yes, thank you for joining us on the call today. And as we do every quarter, please feel free to follow up with Mark and me if you want to schedule some one-on-one time. Thanks a lot. Have a good evening.

[Operator:]

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.