Q4 2020 Safeguard Scientifics Inc Earnings Call
Good morning, and welcome to 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 General Counsel. Please go ahead.
Good morning, and thank you for joining us this presentation on safeguard scientifics fourth quarter and full year 2020 financial results joining me on today's call and webcast for Eric Salzman, Safeguard Chief Executive Officer, Mark Herndon, Safeguard Chief Financial Officer during today's call Eric will provide some corporate strategic updates and Mark will discuss our results. Afterwards, if you want to call to your <unk>.
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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 shipper interest for maximum value for at all and the return of value to our shareholders don't go on to support for our existing ownership interest. The fact that our ownership interest may vary from period to period.
Challenges to achieving liquidity from ownership interest fluctuations in the market prices of any publicly traded ownership interest competition, our ability to attract and retain qualified employees current evaluations and sector isn't much on arch about interest operate our inability to control our ownership interest our need to manage our assets to avoid registration under the investment Company Act 19 for.
And risks associated with our ownership interest, including the fact that most of our ownership interest to have a limited history and history of operating losses based on some.
Intense competition and may never be profitable.
For the economic conditions in the business sectors much on ownership interest operate including the impact of COVID-19, and other uncertainties described in our filings with the SEC. Many of these factors are beyond our ability to predict or control as reasonable on 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 for events and the future management cannot provide any assurance that future results will be as described on 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.
Safeguard does not assume any obligation to update any forward looking statements made today.
I'd now like to introduce Eric.
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 interest in planning to return capital to our shareholders.
A lot is happening both at safeguard and at the portfolio level and we are optimistic that we will deliver what we define as important wins over the near term.
On today's call, we will discuss the status of portfolio exits in follow on deployments.
We will provide an update on liquidity and share some company highlights will.
I will provide some greater financial disclosure on our portfolio and we'll share our progress towards continuing to reduce safeguards to operating costs.
I'll start with exits in follow on deployments.
We are continuously evaluating fundamentals of each company and which we have an ownership interest.
We assess its competitive advantage for recent performance future prospects capital needs and the risk reward of the investments.
We will focus our efforts in follow on capital on those companies, which have achieved an inflection point in terms of revenues market adoption or where we believe there will be an inflection point in the next 12 months to 24 months.
For those companies that do not fit this criteria, where the upside potential is inconsistent with safeguard schools in terms of timelines returns et cetera, we will look to exit those positions.
To that end, you've seen us exit Sunobe in Q3, 2020, and web Lincoln Quantic mined in early Q1 2021.
The rationale to exit these names were similar.
While each had differentiated technology and some market traction they lack the scale to compete and access capital on a standalone basis in their respective industries.
For those reasons, we chose to exit rather than to continue to support them with capital.
I'll start with wetland web link operating in a highly competitive, albeit high growth e-commerce sector with well funded large competitors and safeguard was the company's only outside capital provider.
Getting tougher for small companies like web length to compete against these larger players. The company were on a sales process and we sold the V textual leverage web links deep e-commerce experience to scale.
We received $3 2 million in cash at close and have an earn out potential over the next 24 months of up to $7 million based on certain milestone set with the buyer.
We will update you on milestone achievements in the ordinary course.
Quantic mind is another company that we exited last month in spite of its interesting search engine marketing platform company had trouble maintaining revenue growth and then ran into the COVID-19 impact given its exposure to hospitality and travel customers.
We and the other investors determined that the capital required to get Quantic mine through the pandemic and build the scale necessary to compete wasn't unattractive proposition.
The company also ran a sales process and was sold for a strategic buyer, but unfortunately, the proceeds did not clear the senior debt, which left no recovery to the equity.
While both of these outcomes for less than ideal we do not believe that they reflect the potential of the broader safeguard portfolio.
The remaining companies are largely well positioned in their sectors and we believe they will drive attractive returns for our shareholders.
Turning to other portfolio exit activities.
On our Q3 2020 call I spoke about one of our companies that was in the midst of an M&A process.
That sale process continues and we are looking forward to sharing additional information on the outcome in the near term.
The second company in the portfolio has selected an investment bank. It was launching a sales process over the next couple of months as we have more to report we will do so.
I'll next turn to liquidity and company highlights.
On the liquidity from our companies continue to access debt and equity capital as needed.
As you saw from last month's press release, Psyops raised $68 million equity round from two leading vcs.
SaaS Psyops operates in a growing and exciting market using data and real world evidence to drive regulatory and clinical decisions for us pharma customers.
With this capital Psyops is focused on accelerating its growth expanding its relationships with leading life Sciences, and health system customers and investing in technology and data assets.
Financing round was a strong validation of the company's market momentum and leadership.
In January Moxie raise capital on a round led by three M. Ventures. This also provide strong validation for the company's technology and value proposition, which enables real time sharing of clinical data across health care ecosystems.
Earlier this month marks he also announced a strategic relationship with free M to expand its go to market capabilities.
Another one of our companies is in the process of completing our senior debt financing to support its accelerating revenue growth. The company will issue a press release post closing and we will include the press release on our on the IR section of our website.
On the performance front as we've done in prior earnings calls I wanted to I wanted to provide some brief updates on each of the companies I'll start with the AD Tech.
On a macro level AD tech has benefited from a multiyear secular trend as AD spending has shifted from traditional to digital.
On the other check market the advertising market overall and AD Tech specifically did experience a downturn during the pandemic, but has since returned to growth.
Another important development is the rapid growth in connected TV driven by the over the top streaming services.
And there's also been increasing regulatory and privacy scrutiny on the large incumbents in the AD space, which has created opportunities for some of the independent players, including our companies.
Our exposure to this sector is through flash stocking and medium out.
You heard from flash talking CEO on our fireside chat last summer.
The company posted record EBITDA in 2020 and added significant new Fortune 500 logos as it gained market share from its competitors.
Laughs shocking has continued to build on this momentum in early 2021.
Media math as our other significant holding any other tech space.
Media math as the number two independent demand side platform.
And over the past year. The company has been focused on streamlining its cost structure to position it for profitable growth in 2021.
Completing a multi year product and technology investment around a new user interface connected television and identity and strengthening its senior management ranks.
These efforts are bearing fruit as the company is seeing improved AD spend coming out of the pandemic, especially internationally.
2021 is an important year for media math as it builds on its efforts over the past year.
The other major sector, which are companies operate in our tech enabled health care, our direct exposure is through autonomy moxie prognosis psyops and Zip nurses.
The pandemic accelerated an even greater focus on all technology and data can revolutionize the health care industry, reducing costs and improving health outcomes.
At <unk> the company is making a big push in omni channel with projects underway with 20 Biopharma companies.
On the channel capabilities are key to allow buyer biopharma companies to engage with their customers through multiple forms of communications and we think that China is an early mover in this area.
At Moxie, we're excited about the recently announced strategic investment and relationship with three M.
The company is experiencing rapid revenue growth as it sits in a unique place in the ecosystem between payers providers handling EMR and other data sources.
On Prognose you heard from prognosis CEO on our fireside chat a couple of weeks ago prognosis is well positioned to be a leader in the health care data and analytics space.
With one of the largest fully integrated clinical datasets covering over 325 million patients.
ZIP gnosis 'twenty 'twenty was a record year for telemedicine and accompany treated over 2 million patients.
622% increase over 2019.
ZIP nurses continues to see robust demand for technology and virtual care services as health care shifts to a virtual first delivery model.
And the remote cardiac monitoring area info Bionic grew its a R R, which annualized recurring revenue 20% in 2020 in spite of Covid and how it's been rolling out its recently announced deal with mail.
The shift to telehealth has led to a lot of interest by health providers and other device manufacturers and the remote cardiac monitoring space, which drives lower care cost improves outcomes.
At <unk> revenues were up over 50 per cent in 2020, the company enjoyed record bookings and signed its first major health plan customer, which expands its addressable market.
Price posted record sales in Q4 in spite of COVID-19, seeing increasing adoption.
Adoption of its fully disposable endoscopic carpal tunnel system.
<unk> actively exploring targeted acquisitions to build on its product and go to market capabilities.
Outside of that Tech and health care I'll touch on clutch and Loomis.
Oh.
Clutch has.
Had exposure to the retail sector.
And the pandemic to latest revenue ramp for 2020.
We did begin to see some improvements in late Q4, 2020, and there are early indications of bookings and channel partner activity in early 2021, as the retail sector returns to pre pandemic levels.
At Loomis this COVID-19 delayed adoption of its new products from 'twenty to 'twenty and in spite of this the company landed several new clients refinanced its debt and is positioned for improved performance from 2021.
We are excited about the prospects of our companies for 2021, particularly coming out of the pandemic, but of course, we must remind you that our companies are still subject to risks associated with their stage and size.
I'd like to now talk about some additional financial disclosure that we'd like to share on the portfolio.
In an effort to provide some additional insight into the portfolio, we'd like to share information on projected revenue growth at the portfolio publicly traded peer multiples in Q4 2020 getting cash at the portfolio level.
I'll start with revenue growth for.
For calendar year 2021, our portfolio companies are projecting revenue growth on an aggregate basis of over 20%.
Note that there are variations in gross among the companies and that this is an aggregate number.
Also it's early in the year and companies have varying degrees of forward visibility.
I will next talk about public peer multiples so publicly traded peer multiples can be useful for evaluating the safeguard portfolio.
Keeping in mind that the public peer set that we've constructed it is not a direct match to our portfolio.
Companies vary based on product markets profitability size and growth there.
There also maybe a public to private discount for illiquidity that could apply.
With that said recent revenue multiples are as follows.
And the Tech enabled health care area. The median 2021 revenue multiple that we use on our peers. When we look at the peers, who are companies with seven five times and.
In the medium the median 'twenty 'twenty, one revenue growth of that peer set was 20%.
On the AD Tech comps the media in 2020 one revenue multiple was six two times in.
In the media in 2021 revenue growth was 12%.
I'll also mention mentioned marketing technology, or Mark check where the peers trade at three six times 2021 revenues and the expected 2021 revenue growth is 12%.
We lost wanted to provide some information on the debt and cash.
At the portfolio company level.
At year end 2020, total third party debt at our portfolio companies was about $330 million.
This was the portfolio company level debt, we do not have any debt, it's a safeguard level.
And this debt at the portfolio company level is what we would expect to be paid off prior to any returns to the equity holders in these companies.
It also includes safeguard share of this debt.
The amounts of debt is approximate in nature and could vary over time based on the specific terms of the instruments.
I will also mention that this debt is concentrated among a small number of our larger companies as defined by revenues.
For cash at year end 2020 total cash at the portfolio of companies was nearly $100 million.
And note that neither of these debt for cash numbers reflect any 2021 activities for instance that cash does not reflect the recent psyops capital raise.
Lastly, I will touch on operating costs.
We are intensely focused on bringing down our cash cost to operate it gives us greater operating flexibility and reduces the drag on the portfolio as we work towards natural exits.
As you've seen we reduced cash compensation at all levels. We've restructured how we operate from office space for third party vendors no savings is too small for us to consider this shows up on the numbers, which Mark will walk you through on a few minutes.
With that I'll turn the call over to Mark.
Thank you Eric.
For the quarter ended December 31, 2020, safeguards net loss was $7 4 million or <unk> 35 per share.
As compared with a net loss of <unk> 7 million or three cents a share for the same period of 2019.
Safeguard net loss for the year ended December 31, 2020 was $37 6 million for $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 the successful exits of propeller and <unk>.
Our 2020, a year to date results included a variety of impairments totaling $20 million.
Safeguards cash cash equivalents 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 for $9 5 million as compared to $10 million in 2019.
In both periods, our G&A expenses benefited from lower compensation to employees lower office golf.
Lower professional fees.
Lower stock based compensation and lower other miscellaneous costs.
Which were offset by severance costs and higher insurance costs.
Corporate expenses for the fourth quarter, which represent general and administrative expenses, excluding depreciation and stock based compensation severance and retirement costs and other nonrecurring and other items.
For $1 2 million as compared to $1 4 million in 2019, a 13 point, 13% decline.
Further our corporate.
Annual our annual corporate expenses were $5 2 million as compared to $7 1 million for the for.
For the comparable 2019 period, that's a 27% decline.
In addition to the G&A reductions mentioned about our corporate expenses in both periods benefited from the reflection of director fees as a stock based compensation items as well as the change previously announced during our second quarter debt 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 shifts at the CEO level.
That also results 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 is a recap of recap one aspect.
We have mentioned multiple times over the last year and that's office costs.
During the fourth quarter, we moved to a small shared office unit and a large multi tenant office building. This.
This is the second time in as many years, we've reduced our monthly spend for our facility by about 75 to 85 per cent.
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 initiation initiating actions that while triggering some short term severance costs will make.
Additional meaningful reductions in our annual corporate expenses.
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 have established an initial target for four to $4 9 million as compared to the $5 2 million.
Reported to you now for 2020.
With respect to our ownership interest at December 31st 2020, we have an aggregate carrying value of $50 4 million.
As we've discussed before carrying value as 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 at the 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 interest declines below our carrying value, we will consider making a downward adjustment to the carrying value by reported an impairment.
We also have a few ownership interest 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 near securities.
In 2020, the carrying value of our ownership interest will have declined.
Our previously disclosed impairments of $20 million.
Sale of Sanofi and protections 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 2020.
Dilution gains of $4 2 million, an observable price changes that resulted in a net gain of $1 2 million. During the year ended December 31, 2020, principally from the one and a half million dollar gain reported in the first quarter related to flash offering.
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 for 2 million for the comparable period in 2019.
And for the year ended December 31, 2020, our share of the 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 interest.
The fourth quarter's equity income loss net also included an impairment of $2 1 million related to quantify.
In this case chronic minds results for impacted by during 2020 by the loss of customers in the travel and hospitality industry. During the time period that the business was being marketed for sale.
Investors decided there was a viable path to continue on a standalone basis for 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 dollar dilution gain related to both moxie <unk> raising equity during the quarter.
I would 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 of losses reflect the calendar third quarter.
Many of our companies saw the initial impact of COVID-19. During the later stages of the first quarter. The results for their their results on the second and third quarters reflected a full quarter of operating in that environment.
Some companies have included.
On the results for benefit from the PPP loan program and this quarter's 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 time, I will turn it over to the Q&A segment of the call. So operator I would ask for you to please open the lines up for your questions and to provide the instructions on how to ask a question.
Ladies and gentlemen, as a reminder, if he would like to ask a question. Please press Star then the number one on your telephone keypad again, if he would like to ask a question. Please press Star then the number one on your telephone keypad.
For just a moment to compile the Q&A foster.
Again participants over the phone if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again to ask a question. Please press Star then the number one on your telephone keypad.
Per centers. Your first question comes from the line of Lee Alper with how much capital. Your line is open.
Good morning.
To say the least liquidation process from there.
The results, we've gotten so for west.
We were hoping for.
Alright.
Going forward I mean, you had talked about getting multiples of your.
Investment.
For your returns are you still looking at those kind of numbers.
I can start with that.
So we you know.
This quarter clearly the quantic modern web link is not debt.
You know it was disappointing to say the least.
And we would've liked to pair news on the Quantic modern web link with positive news timing doesn't always line up that way.
This quarter it didn't line up that way.
We are.
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 was lower than the exit values. So we are looking at.
Returns based on optimizing our reinvestment and maximizing value in some cases that will reside result in a multiple of cost in some cases. It will not result in a multiple of cost.
But on an aggregate basis, you know our mission is to optimize the value of the fixed portfolio that we're a mission that we're managing.
And in some of these markets as we've highlighted or touched on there's opportunities to play for some really large.
Enterprise value creation, particularly in tech enabled health care, which is for instance, why psyops 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 costs, but on the aggregate basis. We believe their turns 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 on effort.
And the areas that are going to drive the most attractive outcomes.
Hope that's helpful on addressing your question, Okay. That's the start and good luck.
Thanks.
Thank you.
All other questions are are coming in and operator. Please continue.
He goes up for us and it did receive a written question that I'll throw out there.
This is a question about the debt at the portfolio level on a vast.
Can you explain how much descartes.
<unk> or the debt is applicable to safeguard I just would like to reiterate that this is debt. That's at the portfolio level for this is debt it's spread across the group.
Within those businesses and it's just something that's layered into their applicable capital structures.
And then I would 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 company.
Portfolio Sir.
Just wanted to clarify that so again, it's at the corporate level of the entities not at safeguard safeguard we have no debt.
Similarly, there is the $100 million of cash we mentioned is also spread out across the portfolio of companies.
Operator can you refresh the instructions to make sure that people are aware.
Ask a lineup for further in the queue.
Once again, ladies and gentlemen, if you would like to ask a question. Please press Star then the number one on New York telephone keypad.
Again, if you would like to ask a question. Please press for the number one on your telephone keypad.
Presenters there are no further questions at this time you may continue.
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 discussions and.
Once 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 your day.
Thank you for your centers and thank you, ladies and gentlemen for joining yesterday.
Today's conference. Thank you all for joining you may now disconnect.
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