Q3 2020 Safeguard Scientifics Inc Earnings Call
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Of operating.
During today's call words, such as expect anticipate and 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 with that curious about.
Thanks, Matt.
Good morning, and thank you for joining us.
I know many of you are eager to discuss our current events and the progress we have made since last quarter. So I will keep my comments very brief.
Overall, I am encouraged by the direction and activities of our ownership interest.
Second and reiterate a few of our achievements this quarter and year to date.
We sold Sunobe, we limited our follow on investments in the portfolio from our earlier expectations, we reduced our operating costs.
The portfolio companies are positioned well exiting 2020, we have no debt and we have sufficient cash to execute on our strategy.
Lastly, we've reduced the minimum cash liquidity threshold.
Love, which we plan on returning cash to shareholders from $25 million to $20 million.
With that I'd like to map, our quarterly highlights against the five key focus areas that we identified last quarter.
One exits to liquidity situation of our company's three performance of our company's for reducing safeguards operating costs and find engaging with our shareholders.
And we'll report on each and each of these in due course.
The second topic is the liquidity at our companies.
Liquidity continues to be managed well this.
This is best evidenced by the narrowing of safeguards range of follow on deployments, which mark will speak to.
This is protect this is a particularly positive results given where we were back in April.
To call out one recent follow on rounds.
Tonic closed a $30 million or financing led by new investor and we invested our pro rata of two and a half million.
It's an amazingly robust achievement.
No Thats six of our eight health care companies are growing revenues above 50% and the other two are growing around 30%.
Again, this is trailing 12 months with one quarter lag.
One company Prognosed crossed over from the 10% to $15 million revenue bucket to the greater than $20 million revenue bucket.
For our non healthcare companies revenue growth was down 10% year on year with a one quarter lag.
And as Weve mentioned some of our digital media companies were and are impacted by hospitality and the travel segments.
Portfolio companies, we become more efficient in how we operate.
We'll also be paying a large portion of employee bonuses in stock to both address cash costs and more importantly to better align the team with stock performance, we're not done with our cost reduction efforts.
And we will continue to focus on all items in our control.
The last item I'd like to touch on is engagement with our shareholders and transparency into the portfolio.
We've done two fireside chat events, which have been well received and the next one is Upton on November 10th at 10 Am We hope you can join.
We continue to welcome discussions and feedback with our investors.
Next I'd like to continue what we introduced last quarter and provide detail on the other five companies that comprise our top 10 physicians in terms of exit values last.
Last quarter, we discussed an equilibrium prognosed zipped, no CES clutch and flash talking today.
We'd like to highlight at Tanah media math, Infobionic Syapse and Moxi.
Rsi chat interview on November 10.
The next company, we'd like to highlight is mediamath.
Mediamath is our largest company by revenue and falls in the $50 million plus revenue bucket.
Weve deployed $16 million in the company and owned 13% on a primary basis, the last financing that media math.
Close was in July of 2018.
Mediamath is the leading independent advertising platform that delivers enterprise grade technology and services to global brands and services.
They offer their service on a managed service basis and a software as a service platform self service model.
Media math is serving a huge addressable market.
Dominated by walled gardens solutions.
For a fee process.
We are particularly pleased to see an organization like Mayo validate info bionics product offering.
From a macro standpoint, the pandemic has accelerated telehealth and is now a key focus is hospitals are shifting to remote and virtual care care, which is a positive tailwind for info bionics.
There's also a shift away from fee for service to value added healthcare, which plays well for info bionics ability to treat higher comorbidity patients outside of the hospital.
The next companies Psi ops.
<unk> is in the $20 million plus revenue bucket.
The company provides a business information platform for oncology, where it takes clinical data from providers or health care systems analyzes this data to offer insights for payers and pharma companies.
These insights and actions can include Anonymised clinical and real world evidence that can improve treatments and inform drug development processes.
That serves a huge addressable marketing apology drug development and commercialization.
Key to success is to continue scaling of its offerings to pharma in biotech.
COVID-19 has delayed some customer sales cycles, but otherwise has not affected the value proposition of its offerings.
Like other tech enables healthcare names psyops is experienced robust revenue growth.
Safecard is deployed $25 million in the company and has a 20% ownership stake.
The last financing for the company was in May of 2020.
The final company would like to highlight is moxie.
Marcy offers a data clearinghouse that enables the exchange of clinical and administrative data between health systems and payers.
Moxie falls in the $1 million to $5 million revenue bucket, which makes it the smallest among the top 10 companies were profiling.
But it is growing extremely rapidly and has a disruptive market opportunity for.
What we like about the company is there serving a large unmet need that can benefit from technology adoption and scale key drivers to growth will be more payers and providers on their network.
COVID-19 has made engaging with new providers a bit more challenging but is also driven interest in technology solutions for a market that is dominated by manual processes.
The company has the ability to rapidly achieve scale through a network effect among health systems and payers, we deployed seven $5 million to the company in 130% on a primary basis.
Last round of financing was in October of 2019.
So between the last earnings call on this one we've covered top 10 companies and safeguards portfolio in terms of expected exit values. We hope. This is helpful and combined with a fireside chats provide you with greater insight into our companies.
With that let me know handed over to Mark.
Thanks, Eric.
For the quarter ended September 30th.
2020, safeguards net loss of four $3 million or 21 per share compared with a net loss of $2.5 million 12 per share the same period of 2019.
Safeguards net loss for the nine months in September 30th was $33 million or $1.46 per share as compared with net income of 55 3 million.
Dollars 68 cents per share for the comparable nine month period of 2019.
As you May recall 2019 year to date income was the result of the successful exit the propeller and transact US enter 2020 year to date results included a variety of impairments totalling $17 $3 million.
Our conversation today will be focused on the third quarter's results.
Six guards cash cash equivalents.
And restricted cash at September 30th 2020 totaled $16 $4 million and we have no debt obligations.
Our funding to existing ownership interest continue this quarter, including $2.5 million to Arizona, which resulted in nine $1 million across the portfolio for the year to date period.
We expect that deployments for the remainder of the year and will be minimal if any.
Although we expect to continue.
We continue to expect excuse me our level of deployments to decline as the portfolio matures and we achieve exits.
Our general and administrative expenses were $2.3 million for the three months ended September 30th 2020, which was slightly lower than the $2 $3 million reported in the third quarter of 2019.
Our G&A expenses benefited from lower employee compensation lower professional fees and lower other cough.
Which were offset by higher stock based compensation and insurance costs.
Corporate expenses for the quarter, which represent general and administrative expenses, excluding depreciation stock based compensation seven some retirement costs and other non-recurring and other items for $1.3 million.
As compared with 1.7 million in 2019 at 22, 22% decline.
Further are year to date corporate expenses were $4 million as compared to five $7 million for the comparable period in 2019, a 30% declared.
In addition to the G&A Redactions mentioned or corporate Ah quarterly corporate expenses benefited from the reflection director fees as a stock based compensation item as well as a change announced in the second quarter that will result in a portion of the management's estimated incentive bonus compensation to also be paid invested equity instead of cash.
As we have mentioned before we continue to look for cost reduction opportunities.
Some of the steps were taken and are planning to take a relatively small but every step counts.
So as an example, we expect to further reduce our office related call from 2021, as we've been able to effectively.
Work remotely over the last few months.
As we look out for the full year expectation of our corporate expenses, we expect that they will be below our previously disclosed range of five $6 million to $6.1 million as.
As compared to seven 1 million reported for the full year of 2019 from the continuation of our current run right.
We have not yet announced arrange for 2021, but in general we will expect to continue focusing on lowering the annual corporate expenses.
With respect to our ownership interest at September 30th 2020, we have an aggregate carrying value of 55 $8 million.
As we've discussed before carrying value is a gap term the results from the application of the equity method of accounting that typically reduces the carrying value of our shared.
For our share the losses, the annoying companies and generally does not represent the fair value or an unexpected exit value of those same ownership interest.
If a fair value of any of our ownership interest declines below are carrying value, we consider making a downward adjustment to the carrying value of a recording an impairment.
We also have a few ownership interests that are counted for under the other method, which can have an upward or downward adjustment, resulting from observable price changes if there are transactions in their securities.
The third quarter, including an instance of a downward adjustment of.
45 million, resulting from the unobservable price change as well as an impairment of point $4 million for two of our other ownership interest which are included in other income or loss.
Our share of the losses of our equity method ownership interest for the three months ended September 30th 2020 was three $8 million as compared to six $3 million for the comparable period in 2019.
This decreased and the result of losses net from our equity owners method ownership interest.
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Included a $2.5 million dilution game related to our participation tunnels recent round.
Also is noting the earliest during the third quarter, we exited sunobe for proceeds of $6 $6 million.
This was obviously a positive impact our cash position, but it did not generate a significant gain on sale.
Also we did have the positive impact on the seasonally strong income from sobey through their acquisition date, which is included in our share of the equity with losses net discussed above.
I would also like to remind everyone that we report our share of the losses from the equity method companies on a one quarter lag.
This quarter share of the losses generally reflect the calendar second quarter.
Many of our company saw the initial impact from COVID-19 during the later stages of the first quarter.
The results of the second quarter reflected the full quarter of operating in this environment.
Some companies have included in their results the benefit from the TPP Miller programs and this quarter's results.
And we expect to continue to see some of this impact and their third quarter results. When we received them, which will be reflected on our fourth quarter reporting cycle.
Now it's time for us to turn to the Q&A segment of the call. So operator and ask you to open up the phone lines for a few questions.
And at this time, if you would like to ask a question. Please press star than the number one on your telephone keypad again set with star than the number one to ask a question.
[noise].
Thank you everyone for all that we're we're just still waiting for a couple of questions queued up in the line here.
Operated one of our <unk> the information on how to ask a question.
Yes, and if you would like to ask a question simply Crestar number one on your telephone keypad again that will star than the number one.
Okay.
And we do have a question from a line of Lee Alper.
Good morning.
Can you share.
The value of water carnivores valued at on your last financing.
Kind of a follow up.
The valuation of autonomy for the purposes of the the $30 million around was not made public.
Obviously, that's not something that we could share publicly unless the company.
Had shared it as part of their.
Either.
Form D file.
Okay. So.
We're not a physician to them.
Alright.
Revised compensation agreements or your son sure performance bonuses can you share the metrics on.
What kind of value that you're.
We will happen for them to get the.
Bonuses.
For which which individuals.
The one you just restarting if you choose okay. So we're talking about you talking about my deal. This is our yes, yes sure. So as you as you may have seen.
So the more than I extended or re signed my involvement or my agreement through the end of next year.
All of those components are publicly filed so you could see that.
I'm, taking a significant the vast majority of the majority of my comp in stock.
The stock components that his performance space is driven by three milestones.
One is asset sales.
Two is a reduction and safeguards operating costs and then third is a discretionary <unk>.
Component.
That the board.
Comp committee of the board will be determining.
Can you give us an idea of what the.
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Asset sales.
Or that structure Tonight.
I don't believe that's going to be publicly shared but I think the main ideas. While the main concept is that I'ma line.
Personally.
With monetizing assets those assets also have a.
Valuation component to them. So it's not they have to be sold within a certain sort of evaluation band.
And.
As I think you've seen that I'm.
Extremely bullish on the opportunity that we have to to monetize this portfolio return value to shareholders and that's basically how I am going to be compensated and that is the reason why I took this opportunity.
And.
Super excited, particularly how we've positioned the portfolio in Q3 and.
And moving forward.
Okay. Thank you.
And our next question comes from a line of Andrew Gordon.
Hey, good morning, guys and thanks for taking my question.
Good morning.
Hey, I just had a quick question into a media math I would certainly encouraged to hear that.
It sounds like you're.
The company is seeing year over year games.
Recovering from some of the headwinds related to Covid.
Has the company, giving you much visibility into the forward expectations for 2021 or sequentially Heather.
Looking.
The fourth quarters do you expect continued tailwind and then at one point you mentioned.
You see longer term tailwind further I guess that's.
Specifically in the next 12 months, how are we seeing a resumption of their participation in those longer term tailwind.
Sure I'll try to I'll try to provide some color on that and there really is a number of factors going in going involved so.
Are clearly secular tailwind with the adoption of.
Kind of programmatic digital AD spend linear television et cetera show the space itself is experiencing secular growth and media amount being the number two independent DSP is a beneficiary of that secular tailwind.
There are cyclical headwinds that the company has experienced in certain of its customer segments hospitality travel et cetera.
And if you look and I think I mentioned this in the lost earnings call overall sort of AD spend was down roughly 25% around the Q2 ish timeframe and media math is not immune to that and an experienced a similar.
Headwind, if you will or pullback in spending by it's by its customers.
Super excited to see.
Kind of a resurgence of certain customers are spending more and didn't certain segments and then those segments, which are have been hurt hospitality travel et cetera.
Haven't yet come back but.
But the company is seeing as I mentioned year on year AD spend growth from where we were back in kind of the March April may timeframe.
The company had done is just a pretty.
Aggressive cost cutting measures to align it's cost structure, both kind of fixed costs and some of the variable costs and then can you manage to be in a position to achieve better operating leverage and a lower breakeven point on a on a daily outspend basis.
So the combination of.
Those sectors, which are spending and they're picking up market share in those sectors.
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A a better sort of operating margin.
Structure, and your income statement and an expectation that.
Some of those sectors, which are not spending will start to spend at some point next year, we don't know exactly when sets the company up for positive.
2021.
Performance.
But it is a large company and a lot of things, obviously still need to to work and it's failure favor, but we're very encouraged by the steps. The company has taken themselves as well as what we're seeing in the macro environment, particularly as you said geographies where there.
Experiencing double digit revenue growth, so I hope that clarifies there as I said a number of.
Of of of interrelated developments going on at the company.
Very helpful. Yes, and just one more question I, just can't help but focus on the fact that media mass carried such a substantial valuation.
Their last financing around which are over I think that was July of 18.
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Seems to your state today at that same valuation would be worth more than all of safeguards current E. B I believe enterprise value.
And I was also encouraged to hear that song a b R. Synovia pronounce.
Pronounce it but have very.
Are you able to complete a sale and there's interest in the AD Tech space. So.
The question is.
Are you seeing a resurgence of this are broader interest how would you characterize the broader interest.
And the private market.
Space for per add tech.
We're trying to.
Yeah. So so thanks, thanks for Ah, Yes, we were excited with.
To Gnome transaction tough we can we mentioned was tough M&A environment. It is a it's not a very large company.
It's an exciting company that has some great product.
Great product and great customer logos, so getting a deal done was.
Was encouraging for us I mean adtec is.
I don't want to say a tale of two cities, but its tail of many cities. There are certain companies that are doing better than others.
If you look historically.
Add tech has been a.
An industry, where there have and they are have nots right. There would be too simplistic for us to point to the trade desk and say Gee go look at that multiple and.
I can't media amount, there shouldn't be any amount the b b worth that.
That would be that would be too simplistic a way to think about it. So we're encouraged by the progress that accompanied by company level were super focused on helping at a micro level each of the companies sort of overcome whatever challenges they have and and execute on the opportunities.
But.
If you look at public trading multiples.
And add tech.
There just to put it in perspective.
They've been pretty stable Q2 to Q3 in terms of kind of what we look at our public peers. They trade it roughly.
Two five times forward revenues.
And and the.
Public peers that we look at an AD tech or sort of growing around mid.
Mid to high single digit revenue growers. So I think the industry is not immune from.
Kind of.
Overall macro spending pullback by CPG or other companies and it really is accompanied by company.
Answer to your question, because if you listen to the flash talking.
Higher side that we that I alluded to.
Companies, they're picking up market share and they're growing in certain ways.
That's not experienced by every company space weather or is there anyone else out there. So it really is a named by name.
Situation I will stay on the <unk> on the emanate front, there's definitely increased activity, both by strategic and private equity sponsors and the space as evidenced by the sudden there'll be deal.
Yep Fantastic. We appreciate all the effort. Thank you.
Okay.
And our next question comes from the line of Bruce Count.
And Bruce your line is open.
Hi, guys.
I was wondering if you could give any more guidance on the amount of follow on that might be needed next year.
Sure I can take that verse.
Recognize we took a.
Abroad statements and they're opening remarks, and I'm just going to keep it there.
As we expect them to come down substantially.
As we have seen in the.
This year 2020, they'd come down substantially for 2019, and we expect that trend to continue right I mean, it's.
As we've talked about there when you look at the individual circumstances of all of the companies a lot of them are in late stages and.
And are trending towards circumstances, where you're either.
We would have an expectation of an exit transaction or we'd have.
Or there an expectation that they would get toward.
Self sustaining.
Cash flow position right. So we're not necessarily looking for a lot of big round from.
Multiple entities within the company.
Or we have other circumstances, where.
The company is already there, where we've made a decision where we're not.
And we don't intend you don't need to make any further investments in those companies. So.
Well, we haven't put the exact number out there we're going to continue to take meaningfully maybe.
Meaningful step downward.
Respected deployments in 2021.
Okay.
Yes, and if I could first if I could just want to add one thing to that thanks Mark.
And maybe this goes without saying, so I'll say it anyways, we're not in the venture capital investing business.
I mean, safeguard as a storage history being in the venture capital investing because we're not in the venture capital investing business at this time, we're in the venture capital harvesting business.
And we're super excited about the harvesting opportunities, but that then informs.
How we think about a follow on investments and as Mark said, we put 17 into the portfolio $17 million into the portfolio of 19 2019 guidance for this year is nine to 10 and we'd be disappointed of next year. We put in we didn't continue in a similar to decline curve as Mark indicated.
Okay. Thanks.
And again, if you would like to ask a question simply press star than the number one on your telephone keypad again that will star than the number one.
Okay.
Are there any other questions.
Okay, and we have no question at this time.
Okay. Thank you.
And thanks to everybody for joining us on the call today.
We do appreciate your continued interest confidence and support.
And we look forward to updating you again.
Next quarter. Thanks.
Thanks, so much.
This concludes today's conference call you may now disconnect.