Safeguard Scientifics, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

Good morning, and welcome to the Safeguard Scientifics' Fourth Quarter 2020 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Matthew Barnard, Safeguard's General Counsel. Please go ahead.

[Matthew Barnard:]

Good morning, and thank you for joining us for this presentation on Safeguard Scientifics' fourth quarter and full year 2020 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. During today's call, Eric will provide some corporate and strategic updates, and Mark will discuss our results. Afterwards, we will open up the call to your questions. Today's presentation includes forward-looking statements, and those statements are subject to risks and uncertainties.

[Eric Salzman:]

Good morning. Thanks, Matt. And thank you for joining us this morning. Since our Q3 earnings call, we've continued to make significant progress on our strategic goals of maximizing value, exiting ownership interests and planning to return capital to our shareholders. A lot is happening both at Safeguard and at the portfolio level. We are optimistic that we'll deliver what we define as important wins over the near term. On today's call we will discuss the status of portfolio exits and follow-on deployments, will provide an update on liquidity and share some company highlights, will provide some greater financial disclosure on the portfolio. And we'll share our progress toward continuing to reduce Safeguard's operating costs.

[Mark Herndon:]

Thank you, Eric. For the quarter ended December 31, 2020 Safeguard's net loss was $7.4 million or $0.35 per share, as compared with a net loss of $0.7 million or $0.03 a share in the same period of 2019. Safeguard's net loss for the year ended December 31, 2020 was $37.6 million or $1.81 per share, as compared with net income of $54.6 million or $2.64 per share for the comparable period of 2019. As you may recall 2019 income was the result of a successful exit of Propeller and Transactis and our 2020 year-to-date results include a variety of impairments totaling $20 million. Safeguard's cash, cash equivalents and restricted cash and securities at December 31, 2020 totaled $15.6 million and we have no debt obligations. Our general and administrative expenses were $1.6 million for the three months ended December 31, 2020, which is lower than the $2.1 million reported in the fourth quarter of 2019. Similarly, General and administrative expenses for the 2020 year were $9.5 million as compared to $10 million in 2019. In both periods, our G&A expenses benefited from lower compensation employees, lower office costs, lower professional fees, lower stock-based compensation, and lower other miscellaneous costs, which were offset by severance costs and higher insurance. Corporate expenses for the fourth quarter which represents general and administrative expenses, excluding depreciation and stock-based compensation, severance and retirement costs, and other nonrecurring and other items were $1.2 million as compared to $1.4 million in 2019 at 13% decline. Further, our annual corporate expenses were $5.2 million as compared to $7.1 million for the comparable 2019 period at the 27% decline. In addition to the G&A reduction mentioned above our corporate expenses in both periods benefited from the reflection of Director fees as a stock-based compensation item, as well as the change producing outs during our second quarter that has resulted in a portion of management's incentive bonus compensation to be paid invested equity instead of cash. That change as well as a similar structural shift at the CEO level, that also result in a compensation and that compensation program being effectively funded with equity for over half of total compensation, and made meaningful reductions in our annual corporate expenses, as well as cash outflows of the entity. I also wanted to highlight here or recap one aspect that we had mentioned multiple times over the last year and that's office costs. During the fourth quarter, we moved to a small shared office unit in a large multi-tenant office building. This is the second time and as many years we've reduced our monthly spends for our facility by about 75% to 85%. Said another way, our monthly spend for office space today is about 95% less than it was during 2018. Unfortunately, we believe we will be able to continue to be effective working predominantly on a remote basis in the coming year. We've also taken additional actions in the first quarter of 2021 to structurally reduce our personnel costs by initiating actions that while triggering some short-term severance costs make additional meaningful reduction in our annual corporate expenses during 2021. And we will continue to target other aspects of our cost structure where appropriate to make further improvements. As we look at our 2021 corporate expenses, we expect that they will continue to decline. And that established an initial target of $4.4 million to $4.9 million as compared to the $5.2 million we are reporting to you now for 2020. With respect to our ownership interest at December 31, 2020, we have an aggregate carrying value of $50.4 million. As we've discussed before, carrying value is a GAAP term. That's the result of the application of the equity method of accounting that typically reduces the carrying value of our - for our share of the losses of underlying companies, and generally does not represent the fair value or expected exit value of the same ownership interest. If the fair value of any of our ownership interests declined below our carrying value, we will consider making a downward adjustment to the carrying value by recording the impairment. We also have a few ownership interests that are accounted for under the other method, which can have upward or downward adjustments resulting from observable price changes, if there are transactions in their securities. In 2020, the carrying value of our ownership interest would have declined by our previously disclosed impairments of $20 million, the sale of Sonobi and reductions for the application of the equity method of accounting. These declines were partially offset by the $9.2 million that we deployed into the portfolio during 2014. Dilution gains of $4.2 million and observable price changes that resulted in a net gain of $1.2 million during the year ended December 31, 2020, principally from the $1.5 million gain recorded in the first quarter related to Flashtalking. These observable price changes, gains or losses are included in the other income loss line item. Our share of the losses of our equity method ownership interest for the three months ended December 31, 2020 was $4.1 million as compared to $4.2 million for the comparable period in 2019. And for the year ended December 31, 2020, our shared losses declined to $13.8 million as compared to $26.1 million for 2019. The decreases are the result of lower net losses generated by our companies under the equity method, ownership interests. The fourth quarter's equity income loss net also including impairment of $2.1 million related to QuanticMind. In this case, QuanticMind results were impacted by during 2020 by the loss of customers and the travel and hospitality industry during the time period that the business was being marketed for sale. Investors decided there was no viable path to continue on a standalone basis. So the company entered into a transaction which closed in February 2021. It did not result in proceeds available for investors. The fourth quarter's equity loss also included a $1.1 million dilution gain related to both Moxe and Syapse raising equity during the quarter. I would also like to remind everyone that we report our share of the loss of equity method companies on a one quarter lag, so this quarter share of losses reflects the calendar third quarter, meaning our company saw the initial impact of COVID-19 during the later stages of the first order. The results of their results of the second and third quarters reflected a full quarter of operating in that environment. Some companies have included in their results the benefit from the PPP loan programs and disclose results. We expect to continue to see some of this impact in their fourth quarter results when we receive them, which will be reflected in our first quarter of 2021 reporting cycle. At this point in time, I will turn over to the Q&A segment of the call. So operator, I would ask you to please open the lines up for questions and to provide the instructions on how to ask a question.

[Operator:]

Your first question comes from the line of

[UnidentifiedAnalyst:]

Good morning. To say the least the liquidation process and the results you've gotten so far are less than we were hoping for. But going forward, I mean, you had talked about getting multiples of your investment for your returns, are you still looking at those kinds of numbers?

[EricSalzman:]

I can start with that. So we - this quarter, clearly, the QuanticMind and WebLinc is not that - are disappointing to say the least. And we would have liked to pair news on QuanticMind and WebLinc with positive news, timing doesn't always line up that way. This quarter didn't line up that way. We are optimistic and confident that we will have, let's call it more satisfying exit news to share with you in the near term. As it relates to the actual relationship, our exit value versus our cost; what we've said, since I've been in this position, and since this management team has been working together since the middle of last year, is that the stock price is lower than fair market value, fair market value is lower than the exit values. So we're looking at returns based on optimizing every investment and maximizing value in some cases that will result in a multiple of cost. In some cases, that will not result in a multiple of cost. But on an aggregate basis our mission is to optimize the value of the fixed portfolio that were missed that we're managing. And in some of these markets, as we've highlighted and touched on, there are opportunities to play for some really large enterprise value creation, particularly in tech enabled healthcare, which is for instance why Syapse raised the amount of money that it raised. So we can't say that on a line-by-line basis, every company is going to make a multiple of cost. But on the aggregate basis, we believe the churns will be attractive to our shareholders. And that's what we get up every morning, working to do working with the companies and balancing where we want to put our capital and effort in the areas that going to drive the most attractive outcomes. I hope that's helpful in addressing your question.

[MarkHerndon:]

While other questions are coming in operator, just please continue to queue those up for us. But I didn't see a written in question that are out there. And this is a question about the depth at the portfolio level. And of that, can we explain how much stake our own or the debt is applicable to Safeguard? I just would like to reiterate that this is debt that's at the portfolio level. So this is debt that's spread across the group. It's within those businesses, and it's just something that's layered into their applicable capital structures. And then I'd also like to add that it was as we mentioned, Eric mentioned in his prepared remarks, it's concentrated in a few of the higher revenue companies at the portfolio. So just wanted to clarify that. So again, it's at the corporate level of the entities not at Safeguard, at Safeguard, we have no debt. And there's similarly there's $100 million of cash we mentioned, it's also spread out across the portfolio of companies.

[EricSalzman:]

Operator, can you refresh the instructions to make sure that people are aware and asked to line up further in the queue?

[Operator:]

There are no further questions at this time. You may continue.

[Eric Salzman:]

Thanks. Thank you for joining us today. If you have any follow up questions we are, please feel free to reach out. As I mentioned, we are working to optimize the value of the creation of the portfolio and return capital. We will provide investors with transparency and communication and accessibility and look forward to following of our discussions in the balance of the quarter. And we look forward to providing some additional news as it develops on the portfolio in the near term. Thank you very much. Have a great rest of the day.

[Operator:]

Thank you, presenters, and thank you ladies and gentlemen for joining us today. That concludes today's conference. Thank you all for joining. You may now disconnect.