Safeguard Scientifics, Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning, and welcome to Safeguard Scientifics Third Quarter 2018 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to John Shave, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

[John Shave:]

Good morning, and thank you for joining us for this update on Safeguard Scientifics' third quarter 2018 financial results. Joining me on today's call and webcast are Brian Sisko, Safeguard's President and CEO, and Mark Herndon, Safeguard’s new Senior Vice President and CFO. During today's call, Brian will provide a corporate and strategic update and review recent highlights, including developments of Safeguard and our partner companies, and Mark will discuss our results. Afterwards, we will open it up to your questions. As always, today's presentation includes forward-looking statements and those statements are subject to risks and uncertainties. The risks and uncertainties that could cause actual results to differ materially include, among others, our ability to make good decisions about the monetization of our partner companies for maximum value or at all and distributions to our shareholders, the ongoing support of our existing partner companies, the fact that our partner companies may vary from period-to-period, challenges to achieving liquidity from our partner company holdings, fluctuations in market prices and publicly traded partner company holdings, competition, our ability to attract and retain qualified employees, market valuations in sectors in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Act of 1940 and risks associated with our partner companies including the fact that most of our companies have a limited history and a history of operating losses, face intense competition, may never be profitable, the effect of economic conditions in the business sectors in which Safeguard’s companies operate and other uncertainties described in our filings with the SEC. Many of these factors are beyond the company's ability to predict or control. As a result of these and other factors, the company's 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 our 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. With that, here is Brian.

[Brian Sisko:]

Thanks, John. Good morning, and thank you for joining us today. First, I would like to introduce Mark Herndon, our new Senior Vice President and Chief Financial Officer. We are looking forward to working with Mark as a senior member of the team as we execute against the objective of maximizing the realized value from the portfolio companies we have and returning the net proceeds to our shareholders. Mark is a former partner in the Philadelphia Office with PricewaterhouseCoopers. In that role, he focused on serving clients in the life sciences, technology and healthcare industries during his 27-year tenure. Mark succeeds Dave Kille as our CFO and he has been on the job since late September. If you haven't already spoken with Mark, you will have an opportunity later in today's call when he summarizes the company's financial results and participates in the Q&A segment. Welcome Mark. Let's move on. I want to begin by reminding everyone of what we are, what the basic tenets of the strategy are, what we've done and are doing to on a day-to-day basis under the new strategy and the value of the portfolio partner companies as a whole. We hold significant minority interest in growth stage companies that operate within two broad categories, healthcare and technology. That number doesn't include holdings, what we don't have as much day-to-day involvement. While we are not pursuing any new partner company deployments, we are continuing to support our existing partner companies with capital and resources. Given the stage of development of the companies in the portfolio, we anticipate that the follow-on capital necessary to foster the ultimate exit of these partner companies will be relatively small as compared to the amount of capital which we've already deployed into the portfolio and to the portfolios current and expected value. Our ultimate objective is to maximize the value to us of these companies and to return the net proceeds of those efforts to our shareholders. We anticipate that the majority of the exit activity will occur within the next three years. We also anticipate that there will be some further wind down period during which remaining holdings will be managed and liquidated. We think that could take up to another two years to accomplish as an estimate. Our specific plans for returning capital to our shareholders have not yet been finalized, but we can say that it is our intention to begin to distribute net proceeds from our monetization to our shareholders as soon as practicable once the debt facility has been repaid. We have significant influence regarding the strategic initiatives of our 22 companies, but we typically share that influence with other capital providers at each of these companies. We work cooperatively with management of these companies and the other involved capital providers. The chart that path forward that won’t be ultimately and mutually beneficial and which will have the best chance of producing significant profitable exit activity and oversee the execution against those planned paths. I bring this up because it directly addresses the question that we get asked consistently by shareholders. Why aren't you initiating more exit activity? I can't emphasize enough that we are constantly discussing and pursuing potential exit activity, but that effort is within the context of; number one, a venture growth stage portfolio; number two, syndicate management dynamics at each of the companies; and three, individual company circumstances. Each of those factors contributes to an unpredictable exit timeline for us. Sometimes the exploration of possible exits scenarios involves formal sales processes and sometimes it doesn't. Ultimate results from inbound increased from potential acquirers to our partner companies to us or to the partner companies financial advisors. At any given time, there are multiple partner companies engaged in substantive dialogue concerning potential exits for strategic transactions. As I previously referenced, sometimes that involves a formal process where an investment banker is hired and sometimes it is a direct conversation with potential acquirers. Those conversations may result in a proposed transaction or transactions that would be beneficial for all involved or they may not based on price, terms and other factors. For obvious reasons, we can't disclose the names or amounts of specific proposed transactions before they are consummated even if formal offers have been received. But based on present circumstances, we do expect to consummate another profitable exit either later this year or early next year. There is no guarantee that the transaction will ultimately go forward and be consummated. But if the transaction moves ahead, which we do expect it to do, we will disclose the specifics of the transaction when it closes. So what are we done to date under the new strategy? A lot, in a very short period of time I might add. First, we repaid approximately $41 million of convertible debentures, maturing in May. Second, we revised minimum liquidity and other covenants under our senior debt facility. And third, we provided for sufficient working capital to allow us to continue to support our partner companies and to operate this company in the absence of certainty regarding the timing of future exit activity. Within a few weeks of the announcement of the new strategy, we first structured our senior debt facility to make the financial covenants consistent with the new strategy to allow us to borrow additional funds to payoff the convertible debt and to provide some additional borrowing capacity to ensure that we had sufficient liquidity during the first stage of operations under the new strategy. These changes allowed us to avoid issuing new more expensive convertible debt. Then we negotiated and executed the sale of our interest in AHS to provide us with some cash cushion against our remaining debt covenants. We also negotiated and sold a significant portion of our interest in MediaMath back to the company and then the process returned significant amount of capital to our balance sheet, de-risked our holdings and maintained our opportunity for continuing upside in MediaMath. Fourth, we consummated the sale of Cask to return $11.5 million initially and up to $2.4 million of additional proceeds in 2019 if certain conditions are met. In aggregate, year-to-date, we have realized $80 million in cash proceeds principally from the exit transactions involving AHS, Beyond, Cask and MediaMath. We also consummated the merger of Spongecell and Flashtalking, a transaction that didn't produce the current cash return to the balance sheet, but did better position us for a shorter term cash return concerning our original deployment. Most profitable among the transactions we have consummated to share was the MediaMath third quarter repurchase of 39.1% of our equity position. We realized $45 million on this transaction representing 4.5x cash-on-cash return. You will also recall that the terms of the transaction grant MediaMath the rights to repurchase an additional 10.9% of our stake from $12.5 million. That would represent 4.5x cash-on-cash return as well. The exercise of that option lies totally in the discretion of MediaMath and their decision whether to exercise the option will be made in the context of their overall capital allocation strategies as they weigh acquisition and growth opportunities et cetera against the possible exercise in that option. Before going to achievements it put us in a position where we have been able to continue to fund and support our partner companies’ needs in due course. This continues to be our number one priority as we seek to maximize the potential of the portfolio. We accomplished all the foregoing while we restructured and reduced our staff from 34 to 13. We are pleased with what we've accomplished here today, particularly in light of the circumstances under, which it has been achieved. Now let me address the value of the partner companies as a whole. The increasing value of the partner companies in the overall and steady growth and maturation of the portfolio as a whole is evidenced by couple statistics. Recently, four of our partner companies have undertaken equity related financing raises that were based on valuations exceeding their respective prior rounds. All four rounds were led by new investors. In the past nine months, our portfolio as a whole has raised in excess of $100 million in equity funding of which Safeguard has had to contribute less than 15%. We have nine partner companies at present that have trailing 12-month revenue run rates that are in excess of $10 per annum. I focus on this $10 million milestone because it seems to become the new standard for judging the normal course potential for our company to be a strategic acquisition target. Nine companies with over $10 million in annual revenues are certainly a reason for a significant optimism. As the portfolio matures and develops, we are constantly making decisions about the care and feeding of the individual companies and the allocation of our financial and professional resources across the portfolio. As our companies go through capital raises, which are sometimes coupled with discussions regarding potential exit scenarios, we decide on a case-by-case basis whether and with how much capital we will participate. We take into account among other things, other participants, prevailing valuations and terms and our previously deployed capital. We generally look to continue to participate where initial deployment protects our eventual interest in projected exit value or otherwise allows us to reach our cash-on-cash return goals. As noted above, recently our partner companies as a whole have raises a very significant amount of capital to fund their continuing growth, and in most instances we have participated with our capital in those financing transactions. But it is the nature of venture capital style finance that we sometimes have to decide to stop funding a company even if we believe the company as the opportunity to be successful. If the company is behind plan, if the company is unable to source sufficient additional third-party capital in our view and/or the amount of additional capital required to move the opportunity forward is greater than the amount of capital we have available or which to allocate to that opportunity given the risk inherent in the opportunity. That sort of decision making process led us to write down the carrying value of our interest in CloudMine this quarter. Since the company has not identified a new third-party source of capital nor entered into an arrangement to be acquired, but despite the fact that we took that write-down, we continue to work with CloudMine to pursue a strategic transaction. I’ll now ask Mark to review the quarter’s financial results.

[Mark Herndon:]

All right. Thank you, Brian. I am happy to be here at Safeguard and I am eager to help us execute our plan. I look forward to working with you, the rest of the team, the Board as well as with all of the other of the company’s stakeholders towards our goals. Over the next few minutes, I want to highlight our third quarter results, update partner company holdings, and provide a summary of our cash and debt balances. Our third quarter resulted in net income of $32.1 million or $1.56 per share on a basic and fully diluted basis as compared with a net loss of $18.7 million or $0.91 per share on a basic and fully diluted basis for the same quarter of 2017. Financial results for the third quarter reflect the previously disclosed $50.5 million of gains from the exit of Advantage Healthcare Solutions and from MediaMath repurchase of Safeguard’s equity ownership stake. The third quarter’s results also include an impairment of $4.8 million related to CloudMine. Losses we record based on our ownership percentage in our partner companies of $11.2 million and delusion gain of $3.6 million that resulted from our partner companies new financing. For the nine month period, Safeguard’s net income was $1 million or $0.05 per share on a basic and fully diluted basis, compared with a net loss of $69.8 million or $3.42 per share for the same period of 2017. Results for the nine months ended September 30, also include the previously disclosed gains, the $9.5 gain related to next repayment of a note, a $3.8 million gain on the merger of Spongecell and Flashtalking, both of which were recognized during the first quarter, the impairment of Apprenda for $6.6 million and a $4.2 million gain from the sale of our interest in Cask, both of which were recognized during the second quarter. Our total losses, we record based on our ownership percentage in partner companies with $37.7 million and unrealized dilution gains that result from our partner companies new financing were $6.7 million. Safeguard’s interest expense was $3.3 million for the third quarter as compared to $2.6 million, the same period last year. Interest expense was $9.4 million for the year-to-date period as compared to $6 million for the same period last year. Stock-based compensation was $243,000 for the third quarter as compared to $560,000 for the same period last year. Stock-based compensation was $853,000 for the year-to-date period as compared to $806,000, the 2017 year-to-date period. Staff reductions announced in January and April resulted in an aggregate severance charge of $3.8 million, of which $1.1 million was recognized during the first quarter and $1.7 million was recognized in the second quarter, and $1 million was recognized in the third quarter. We expect additional severance charges of $0.2 million to be reflected in the fourth quarter from these previously announced decisions. For the third quarter, corporate expenses excluding interest, depreciation, severance, and stock-based compensation were $2.2 million as compared with $3 million in the third quarter of 2017. For the nine months ended September 30, 2018, these same expenses were $9.4 million compared with $11.8 million in 2017. We are pleased to restart targeted goal of $8 million to $9 million of annualized corporate costs. While we do not expect further dramatic expense to our cost levels over the next two to three years, we will continue to look for ways to extract further efficiencies from our operations as we continue to support our partner companies. Now with respect to this partner company holding at September 30, 2018, we had 22 partner companies representing an aggregate cost of $274 million and having a carrying value of $98 million. Our average capital deployed in this partner companies at September 30 was $12.5 million and the weighted-average length of time that Safeguard is going to shareholder in this company is five years. During the third quarter, we deployed $7 million of capital in eight existing partner companies, bring in the year-to-date total of follow-on funding through September 30, the $15.2 million. We expect that we may deploy an additional $2 million in follow-on capital to existing partner companies during the fourth quarter of 2018. And as Brian mentioned, the timing of additional deployments can change with the circumstances of individual companies. Furthermore, we expect for the aggregate 2019 deployments will be lower than 2018. Also we are updating the revenue guidance previously provided with respect to our partner companies. Our new range is $400 million to $415 million for the group, which is a reduction from our previous guidance of $420 million to $440 million. The reduction is principally the result of slow growth across the digital media sector, which has impacted several of our portfolio companies. However, we remain optimistic about each of these companies impacted as they continue to execute on their respective strategies. Safeguard’s cash, cash equivalents, marketable securities and trading securities at September 30, 2018 totaled $70.9 million as compared to $29 million at the end of 2017. At September 30, 2018 Safeguard’s barrowings under our credit facility totaled $85 million. As a reminder, proceeds from this credit facility and cash on hand were used to repay in full the $41 million of convertible senior debentures on their maturity date of May 15, 2018. We continue to retain the $50 million of borrowing capacity of the secured credit facility through 2018 year-end, but we do not expect to borrow any of those amounts. The terms of our debt facility require that qualified cash over $50 million be used to make an early repayment of debt alongside with associated make-whole interest. Accordingly, on October 15, we paid $16.4 million of principal and $3.2 million of interest to our lender as an early repayment. I would also note that as we proceed through the execution of our strategy and prior to the full repayment of our credit facility, we will on a quarterly basis for accounting purposes estimate the value of our derivative liability under the credit facility based on our expected quarterly ending cash balances, considering follow-on deployments, expected exits and ongoing corporate expenses. Additionally, with respect to our lending agreement, the company continues to be in compliance with all of its debt covenants. As a reminder, under the terms of the credit facility, the company is restricted from repurchasing shares of its common stock and/or issuing dividends until such time as the credit facility is repaid in full. Now, here's Brian to share some final thoughts and lead us through the Q&A segment of the call.

[Brian Sisko:]

Thanks Mark. I'd like to close with a discussion regarding our share price. We continue to be optimistic that realized exits from a portfolio will eventually result and improve share price and we believe that the value of the group far exceed Safeguard’s current market capitalization. Consider that the total cost of our partner company is $274 million. Our target aggregate cash-on-cash return is 2x, and if you apply that to the cost basis, plus a modest amount of follow-on capital that we believe will be required that would yield approximately $525 million in gross proceeds to us. To that total, we then add our current cash, subtract our debt obligations, and an estimate for operating expenses over the expected return period, let's call it four years, okay. We get a net aggregate of approximately $400 million or more. Let's use that as the top end of a range. And for the lower end of the range, if we apply our historical cash-on-cash return that’s something close to 1.5x instead of 2x, we arrive at a net aggregate of approximately $300 million. If you then divide those net aggregate amounts by the fully diluted number of Safeguard’s shares outstanding which was approximately $21 million at quarter end, you get a per share value between $14 and $20. You can apply whatever discount factor you wish to reflect the return period that we envision. And obviously, there is a lot of supposition in those calculations. But the disparity between current trading price and the potential value range is fairly obvious. I hope this information helps answer some of your valuation questions. John outlined some important disclosures and cautions regarding forward-looking statements earlier in the call. And I want to reemphasize here that our assessment of this valuation range – this potential valuation range is subject to a lot of risks and assumptions and we certainly can assure you that things will work out exactly as described, but the numbers speak for themselves. Operator, let's open the phones for any questions.

[Operator:]

[Operator Instructions] Your first question comes from Bob Labick with CJS Securities. Your line is open.

[Peter Lukas:]

Yes. Hi, good morning. It’s Pete Lukas for Bob.

[Brian Sisko:]

Hi Pete.

[Peter Lukas:]

Hey, how are you? And welcome Mark. You mentioned you are in compliance with all your debt covenants, just want to ask how the recent exits impacted the covenant, specifically the $350 million portfolio valuation covenant. And how does that work with sales without triggering punitive covenants on the credit facility?

[Brian Sisko:]

So Pete that credit facility has built such a way to take that into account, so there's a – the provision that you're referring to takes into account cash in excess of our minimum required cash, so it adjust accordingly. So we’re not any closer to devolve than we were last quarter. We are in the same sort of position. We are very well protected. We feel that covenant doesn't present any challenges whatsoever for us. We don’t anticipate issues with any of the covenants actually. But that one in particular, that’s an easy answer.

[Peter Lukas:]

Helpful, thanks. And sticking with the credit facilities, any subject to prepayment penalties that we should be keeping an eye on?

[Brian Sisko:]

Well, the way the facility is structured, we don't have any prepayment penalties. It’s built in a fashion that recognizes that they got it, the lender got into this transaction for reasons different than where we're ultimately going with this portfolio. So what we have under the facility is a required make good on interest. So despite the fact that we're paying off principal early as required under the facility, we don't get the benefit of any interest reduction. So there's no penalties for prepaying. In fact we are required to prepay. We won't go beyond what the required prepayments are to make any additional prepayments unless we're at that point where we are so close that we want to start distributing capital and that will be taken into account when we get to that point, but there are no prepayment penalties in that.

[Peter Lukas:]

Very helpful, thanks. And last one for me. Just to make sure I understood, and understanding exits unpredictable can't disclose names or amounts there, you’d mentioned. So if I understand correctly, one at least in a process that could possibly take place possibly of course by the end of the year or beginning of next year. But just wondered and then as far as financing for the current companies for next year will be less than it was in 2018, but any more specifics you can give us on how many companies currently looking for financing in the near-term?

[Brian Sisko:]

Let me think Pete, I think we’ve got - truly out looking for financing. I think we have an expectation of two of our companies raising capital, and let's call it the next three or four months, one of which we probably will contribute some component to consistent with our prorate one of which we probably wanted to be a larger round that's led by a third party. But to get back to your other point about and sort of mix the question about the capital raises versus exit activity. You use the term process when you referred to that, the comment that we made during the scripted portion of the call, that wasn't even a company that was in a process. It’s a good opportunity for me to point that out. The company that we referred to there, it falls into that category of companies being bought not sold. So it's not a company that was in a process. And we do believe that it will result in a transaction, which will be I would call a significant transaction. And we do expect it to close before the end of the year or early in the early part of the year, and in early part of next year.

[Peter Lukas:]

Great, very helpful. That's it for me. Thank you.

[Operator:]

Your next question comes from Jim Macdonald with First Analysis. Your line is open.

[James Macdonald:]

Yes. Good morning, guys.

[Brian Sisko:]

Hey Jim.

[James Macdonald:]

Hey, and welcome Mark. So just following up on the last question, I guess, first there are sort of four companies that you seem to be repetitively investing in quarter-after-quarter, which to me indicates there haven't finalized the funding round, maybe you could talk a little bit more and you mentioned a little bit about CloudMine, InfoBionic, NovaSom and Sonobi?

[Brian Sisko:]

You mean CloudMine, Sonobi...

[James Macdonald:]

InfoBionic and NovaSom, which didn’t raise this quarter, but it has been raising pretty much in every quarter.

[Brian Sisko:]

So let me start with InfoBionic. InfoBionic made an announcement within the past two months, I think we did it in September. They raised a round that we've been contributing to a bridge financing for InfoBionic over the course of prior periods. But we brought in a third-party investor and closed a total of $50 million financing with InfoBionic. So I would view that company is fully funded. And John can refer you to the specific press release that was done by the company announcing that transaction alongside of a very significant commercial transaction they undertook with a distributor that sort of lines up perfectly with the fact that they now have a significant part of growth capital. CloudMine and Sonobi fall into the category of earlier stage companies. Even though Sonobi is one of those companies, it's above $10 million in revenue run rate. We still consider them development stage, early stage. So we have done some bridge funding for them. As you see from the reference to the CloudMine write-down that we took this quarter, that is a company where we have basically been the only capital at the table. And one of the important tenants of how we're going about this, the pursuit of our strategy now is trying not to be in that position where [indiscernible] and dribbling capital in with no particular end result obvious to us. So CloudMine has been out looking to raise some capital also looking to transact or in conversations with a number of different companies about strategic path forward for CloudMine. Sonobi is – I think there will be an announcement of some nature that will be of interest to you regarding Sonobi’s path forward within the next couple of months. We don't anticipate a significant amount of additional capital from us in the context of those discussions. And NovaSom sort of a different animal. That's a very well scaled company and we are in the market at present continuing to fund that company to that next milestone of scale that is important in that sort of non-repetitive, excuse me non-recurring revenue kind of business. But we do not anticipate having any significant obligation or need to fund over some as we go forward.

[James Macdonald:]

Okay. That's helpful. I want to dive in a little bit to the digital marketing slowdown that you talked about affecting your partner company revenue. Is that affecting all your digital marketing companies similarly? Or are there some that are more affected and what does that say to timing of exits for those digital marketing companies?

[Brian Sisko:]

Well, I guess I'm going to – I'm looking to Mark to correct me if I'm wrong. But I think it's fair to say that it's a fairly evenly spread level of peanut butter across those companies in terms of how the slowdown in their growth trajectories has affected our portfolio companies. And for obvious reasons I'm trying not to point specific things, but we see the companies as a whole are being affected by that slowing rate, I think fairly equally. We haven't necessarily baked into our thinking any change in our ultimate exit time horizons for those companies. Good companies will continue to get sold, especially if what we're talking about is sort of an industry-wide change. Obviously, if dollars into that category slow that could change our thinking, but at present that's not how we are thinking about it.

[James Macdonald:]

And then one more for me. So you have – a number of companies that are bigger in number that are smaller, what are your thoughts on some kind of a bulk sale maybe of the some of the smaller companies in your portfolio?

[Brian Sisko:]

Well, we are constantly willing to and do talk with potential counter parties. We talk with our financial advisors about the prospects for that and what sort of return dynamics or return profiles that could provide to us. At present we don't have any specific plan to do that. I would suggest that some of the companies that we have in the portfolio that are “smaller” may end up proving to be not necessarily even in the long-term, but in a shorter timeframe very profitable transactions that contribute significantly to the overall outcome here. So I don't view the company simply as being categorized into large or small in terms of how we view their contribution to the overall outcome here. But we will get to some point for sure, down the path here where it will be more beneficial to everyone involved to look at some sort of bundle sale, but that's not something that at the moment is being negotiated or that we're now trying to do.

[James Macdonald:]

Right, thanks a lot.

[Operator:]

Your next question comes from John Francis with Francis Capital. Your line is open.

[Brian Sisko:]

Hi John.

[John Francis:]

Good morning. How many companies are currently in a formal sale process and do you have any LOIs in hand?

[Brian Sisko:]

So John, the references that we made earlier in the scripted portion of the call concerning, which company’s – how we look at whether a company – what we're trying to ultimately communicate to our shareholder population is the level of activity that's being undertaken concerning these partner companies. I don't want to get caught up in trying to delineate, which companies are in a process as defined by having a banker in place that’s out marketing the companies for a sale [indiscernible]. We have as many companies that are in that sort of situation as we do have companies that are having one on one dialogues or one on two dialogues with and without the involvement of financial advisors, concerning the potential exit or sale. So as previously said in any given time period, we have more than a handful and I would suggest that more than a handful right now is at least six companies that are in some version of those sorts of more granular dialogues and that doesn't include companies who are consistently fielding soft inquiries from potential strategic about whether they aren’t ready to discuss a potential transaction.

[John Francis:]

Okay, great. And then has management of the Board formalized the distribution policy at this time?

[Brian Sisko:]

No when I was trying to refer to during the call was that – to make sure everyone understood that there is no intention to hold the product cash and wait till the end to distribute cash. We will start distributing cash in some way shape or form as soon as we've dealt with the credit facility and made sure that we have enough capital on hand just to continue to run the business, which Mark has giving us some guidance as to what that cost will be. But what we just had a Board meeting this week and one of the Q4 projects that we have is to put some meet around that plan. So we would hope that let's call it in the early stages of 2019 being more descriptive to you about what that plan will look like. We’ve got to take into account the advice of the financial advisor, legal advisors, how to go about how’re going to go about doing this. So we would hope to have further guidance for you early on in 2019 at the latest.

[John Francis:]

Okay, and then how achievable is the company's 2x Cash return target, given the recent track record? I mean do you think it's still reasonable to expect?

[Brian Sisko:]

We're still comfortable saying that that our expectations to try to achieve a 2x return with our existing portfolio is still something that, we’ve dialogue about and are still comfortable pursuing and as companies do get sold out of portfolio, there will probably be – there will be some time where we have to revisit that. I would guess because if there are some big wins that come out of the portfolio earlier rather than later will change that. But for the moment, we believe in the aggregate the guidance can remain that we believe that our target of 2x is a rational and a target supported by the modeling that we've done around the portfolio.

[John Francis:]

Okay, and then can you walk through your valuation methodology again for me please, both from…?

[Brian Sisko:]

Well, let me be careful not to call it a valuation methodology so much as it is, just to kind of give you a sense of a Broadway to look at the math. So historically we've produced something around and by historically we're talking about I think since 2006 when the company undertook it’s first – undertook to become something other than the operating company. So from 2006 on the cash-on-cash return metrics for closed transaction has been something in the range of 1.5. We stand by as I just said our continuing target to produce a 2x return on our portfolio. So using those is two wins toward the goalposts, just to give somebody a sense of if we fall in that range, how that compares to what our current stock price is. I take the current cash deployed into that – into the existing portfolio, and I look at the small amount of additional capital that we view as “reserved” or potential further deployment into that portfolio by take into account the cash that we have available to us, our debt obligations and our operating costs over that, the expected period of bringing that capital back to the balance sheet. And then just do some simple math based on aggregate proceeds that you might expect dividing that by our fully diluted share number. And if you use that range, you’ll end up with $14 to $20 per share as a rough goalpost to look at. So I hope that it's a little bit more helpful and they maybe my scripted dialogue was.

[John Francis:]

That’s helpful. And then finally last question, what impact are the new Board members having and where do you see them adding value?

[Brian Sisko:]

Well, both Ira and Russell are extremely well credentialed people. I've known Ira for an extremely long period of time. I don't know Russell as well, but both of them of sort of fit right into the board. I've gotten some questions where people thought – they sit on one side of the table and everybody else sits on the other, which is totally [indiscernible] it plays out for anyone that sat on a public company board, and maybe it's different if you're sitting on Time Warner and some and there's dissidents that’s pounding the table. But we're very small team both management wise and now a Board of five, so it's pretty incumbent upon us to all work together, which is basically how it's been working today. There's been no acrimony, its two more smart people around the table contributing to a dialogue. I can tell you that every decision that's been made since they got on the board has been unanimous. There's been no sort of division between the old and the new, so it has worked pretty darn well, actually nothing that I would complain about it all.

[John Francis:]

Okay. Thank you.

[Operator:]

Your next question comes from Lee Zimmerman with Baird. Your line is open.

[Lee Zimmerman:]

Hi Brian.

[Brian Sisko:]

Hi Lee.

[Lee Zimmerman:]

Good morning. It was nice to see so many companies go up in your chart from low traction to high traction and developing and some of them went up to two slots in one quarter, I’ve never seen that. It looks like you've got one company that you're pretty confident will sell, which is good. Do you think in 2019 you’ll have a number of sales in possibly the returning capital to us long waiting shareholders?

[Brian Sisko:]

Well, Lee I certainly – if we're not producing some expert activity in 2019, I’ll be extremely surprised. And we're not talking about $2 million here or $3 million there, we're talking about transactions that produce significant dollars back to the balance sheet that we will be turning around and returning to shareholders. That being said, obviously I can't predict, but we're in a position that mid-year 2019, we've done a couple of transactions that have allowed us to pay off the debt facility. We certainly will be talking about returning capital quickly thereafter. The big if is if that's where we are in mid-year, but we certainly don't anticipate a [indiscernible], where we should be hitting a stride here where because of where these companies are unless the economy goes completely in the tank and M&A activity goes out the window. We certainly anticipate that there will be sort of a groundswell that starts to become obvious with these companies and will be planning accordingly. So that is direct as I can be with you that about what our intentions are. Timing is a different issue.

[Lee Zimmerman:]

When you first change the policy to liquidate the company, we were told it would be about a three year process. And where you just being conservative today when you said its a three year process from here. Do you hope to do it significantly quicker than that?

[Brian Sisko:]

Well I absolutely would love to do this is as quickly as possible. I'm just trying to set rational expectations about what it will probably look like. I would love nothing more, I remember an old mentor of [indiscernible] under promise and over deliver. So I would much rather be straightforward with the instated. This could take – it really could. I'm not sandbagging here. It's a lot of companies to take through a lot of transactions and that just sometimes takes time, but I certainly would rather surprise you on the high side and get a lot of this done sooner and beyond to everyone's next project and if I did so if I could get this done and we could get this done, all within that three year timeframe, I'd be a happy camper.

[Lee Zimmerman:]

Happy you hired any investment bankers to sell the whole company?

[Brian Sisko:]

No, we haven’t hired anybody, the Board dialogues about that whether that's rational and I've been asked to continue to provide data points to them to understand what that could possibly look like and that's something we've done over the course of time through that not nothing that's different from previous periods. But given where our stock price et cetera. I'm always being asked by the board. This new board as well as the old board to provide that kind of data for the purposes of a discussion about whether or not that is a path that they – that we all should look to go down. But no not as of now there's been no decision and nor has anybody been hired to undertake that for us.

[Lee Zimmerman:]

Is that board given you any incentives to make this happen quicker. Are you under any incentives as they thought about that?

[Brian Sisko:]

Well I can guarantee it Lee, as I spoke all together of my self that obvious pace and I wasn’t in response to our question. We will be we the management team, if we were able to produce let's say reduce or – produce a result of X, dollars and in two years versus three years I guarantee at, we will all more money if we do it in two years, will be rewarded for doing that because of the time value of money and the fact that we won't have to expand as much in the way of operating cost over the return period as would otherwise be the case. So yes, I'm incentive to do this faster.

[Lee Zimmerman:]

Okay. And thank you for being more descriptive on this call, it was very helpful.

[Brian Sisko:]

Appreciated.

[Operator:]

The next question comes from [indiscernible]. Your line is open.

[Brian Sisko:]

Hey, Susan, I don't think we've spoken before. How are you?

[Unidentified Analyst:]

How are you? And as we were just talking about overhead expenses, can you talk a little bit more about that going forward?

[Brian Sisko:]

Yes, let me hand it off to Mark if I could.

[Mark Herndon:]

Sure, I think the punch line related to that would be our expectations before looking operating costs haven't changed this time from our previously stated goal of $8 million to $9 million of annualized corporate costs. It's something we continue to monitor that level and certainly refine as new information becomes available. But we are in a pretty steady state operations here now and we’re looking to play out the interest costs are relatively fixed not entirely, but relatively fixed, and again our corporate costs are stable.

[Brian Sisko:]

Susan, I would add to that. As the portfolio gets smaller, if there is a significant reduction in the portfolio that will be our next opportunity to determine whether there are some amount of reduction in cost that might end up being material. But as of right now, I would suggest that other than for subletting the space that we're in, in a fashion that saves us maybe $1.5 million over the course of the facility, I wouldn't be baking in any models, any significant reductions. We still are a public company until we get out of that, we're going to have that cost. And our headcount is down as I said earlier from 34 to 13, over the course of the past year it will fall a little bit more by the end of the year in a planned exercise. But others than that, we've got a portfolio 22 companies that we're trying to manage with a fairly small team and that in and of itself is a limiting factor for how we can cut those costs further until the portfolio gets smaller.

[Unidentified Analyst:]

And so when you're talking about the probability of getting smaller, presumably you're speaking about numerosity of companies rather than by value, correct?

[Brian Sisko:]

Yes, because it really is. When you talk about how much time we do spend and should spend with each of these companies, it's not just showing up for a quarterly board meeting, it's a significant level of activity beyond that, and we would be shortsighted if we view this as a passive portfolio as opposed to what we know it to be which the results tend to be better when we are actively involved in those companies, which takes hands and time cycles et cetera.

[Unidentified Analyst:]

And can you remind me again that the 22 companies, do you hold board seats on all 22?

[Brian Sisko:]

Yes. Let me take that back. In MediaMath because – part of the transaction we did with them, I took an observer seat and we agreed to fill our board seat with an industry executive who they haven't yet announced, but I think they will be making a public announcement of that person. But other than that case, we don't have a formal board seats and a vote, every other case we have at least one board seat.

[Unidentified Analyst:]

Right. You are an observer, so you are still showing up for meetings participating, correct?

[Brian Sisko:]

I'm sorry, say it again.

[Unidentified Analyst:]

You said you’ve retained, yes…

[Brian Sisko:]

Yes, I’m on every call and we have full information rights et cetera, et cetera. Yes.

[Unidentified Analyst:]

Great. Okay. Thank you very much.

[Brian Sisko:]

Nice to talk to you.

[Operator:]

[Operator Instructions] Your next question comes from Sam Rebotsky with SER Asset Management. Your line is open.

[Brian Sisko:]

Hello Sam.

[Sam Rebotsky:]

Hi. Could you help me with the amount that you care – you’re carrying the MediaMath at zero. It should be worth $70 million, even though you got $45 million. And the accounting rules don't permit you to list the valuation and you talk about the 525, could you sort of indicate how many companies you have like the MediaMath and how they break down to the 525?

[Mark Herndon:]

Well, you are correct. The accounting rules would not allow us to write up the values and the companies to their expected value. So everything that you've seen there is characterized out there, cost less adjustments for the application of equity method accounting. So the valuation relative to the portfolio in a different process entirely.

[Sam Rebotsky:]

But is $70 million conservative for MediaMath in the 525 or…?

[Mark Herndon:]

Yes, so that would be conservative within the concept of the overall portfolio. And I think that prize is consistent with what was the transaction that just happened in the repurchase.

[Sam Rebotsky:]

Okay. And as far as the cash as of now, you haven't paid off any of the debt subsequent to now?

[Mark Herndon:]

One correction there, as of October 15, which is about a week ago, 10 days ago, we repaid $16.4 million of principal. So as we sit here today, $85 million of principal is now have been reduced to roughly $68 million.

[Sam Rebotsky:]

And based on your carrying cost, would you reduce the debt so that your costs expenses are lowered which you really don't expect to be investing significant amounts of money?

[Mark Herndon:]

So our plan will be to repay the debt as resources become available, and in particular when our cash balances exceeded the $50 million threshold specified in the agreement.

[Sam Rebotsky:]

Okay. And one further and last question, you have a significant tax loss carryforward as you expect to payoff to shareholders you will not utilize that fully. What do you expect to do with the balance of the NOL or is there any thought there?

[Mark Herndon:]

Yes. I mean that’s something to be evaluated. I think that the first step for us and just for context as of the end of last year, it's roughly $250 million of NOLs. So right now those are there for us to use off that future taxable income as we monetize our portfolio. And we'll evaluate any other options we can take on those when the time comes based on the number of gains that we have in the portfolio in the future.

[Sam Rebotsky:]

Okay. Well, good luck. Hopefully, we achieve our goals.

[Brian Sisko:]

Thanks Sam.

[Mark Herndon:]

Thank you. End of Q&A

[Operator:]

There are no further questions at this time. I will turn the call back over to Brian Sisko for closing remarks.

[Brian Sisko:]

Thanks, everybody for joining us. I look forward to – this is my second call, Mark’s first. We look forward to a couple more release where we continue to provide you with some good information about the portfolio and the results that we start to see going forward.

[Operator:]

This concludes today's conference call. You may now disconnect.