Q2 2021 Safeguard Scientifics Inc Earnings Call
Yes.
[music].
[music].
Yeah.
Good afternoon, and thank you for attending the safeguard scientifics second quarter 2021 financial result conference call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to pass the conference over to your host not Barnard with safeguard scientifics.
Thank you you May proceed.
Good afternoon, and thank you for joining us for this presentation of safeguard scientifics second quarter 2021 financial results joining me on today's call and webcast for Eric Salzman Safeguards, Chief Executive Officer, Mark Herndon Safeguards Chief Financial Officer. Following our prepared remarks, we'll open up the call to your questions as always tastes presentation includes forward looking statements reliance on forward.
Looking statements involve certain risks and uncertainties, including but not limited to the uncertainty of future performance of our company's ability to make good decisions about the monetization of our company's ongoing support of our company is our inability to unilaterally controller companies fluctuations in the market prices of any of our companies are publicly traded and the effect of regulatory and economic conditions generally and other uncertainties.
Got it in our filings with the SEC. Many of these factors are beyond.
Our ability to predict or control.
All of these and other factors our past financial performance should not be relied on as an indication of future performance.
During the course of todays call words, such as expects anticipates believes 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 safeguards 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 I would now like to introduce Eric.
Thanks, Matt Thanks for joining us this afternoon for our Q2 earnings call. We will cover the following topics on the call today.
First we'll update you on exits and our thinking around returning value to shareholders.
Second we'll provide you with a Q2 portfolio highlights for each of our positions.
Third we will share the publicly listed comparable trading statistics fourth will provide some commentary on our expected follow on deployments for the balance of the year.
Next Mark will take you through the final review for the quarter and last we'll open it up for Q&A.
I'll start with exits and return of value to shareholders.
As we announced in July Flash talking entered into an agreement to be purchased by media Ocean.
The deal is expected to close in Q3, and safeguard expects to receive approximately $43 million in cash at close were excited about this transaction. It's a good outcome for flash talking management and for flash talking to investors.
Pro forma for this close our cash balance will be substantially above our $18 million target for maximum liquidity cash that we need to operate we have begun we have begun to explore the best ways to return value to shareholders.
This generally falls into two buckets, one is the stock buyback.
Yeah, there is a special cash dividend.
Stock buyback can be done via open market or <unk> five one plan <unk> stock buyback can be executed through a self tender.
Some of the considerations on the star stock buyback include the following how much can we buy in the open market given our average daily trading volume.
Rice's can we buy back stock that would offer a fair price to selling shareholders and also be accretive to the non selling shareholders and what specific disclosure requirements are required at the time of our self tender that could negatively impact any of our companies.
On the special cash dividend front. The primary consideration is whether we will be in an earnings and profit loss position to effectuate a return of capital dividend.
We need to wait until later in the year to determine our earnings and profit position.
The next source of value returned to shareholders is our position in Brighthouse croup, where BHG.
BHG completed its IPO on June 23rd and we own $1.3 million common shares.
Our shares are locked up until the end of December.
It's been a volatile ride for BHG as its IPO and Q2 results were disappointing to the market.
The market seems to be viewing the company as a show me story as it trades in line with traditional managed care providers.
Our view is that management will have to deliver consistent results in the subsequent quarters to rebuild confidence of investors.
From a safeguard perspective, we're closely watching their results and we will have an opportunity to see Q3 earnings before we have any decisions to make post our lockup.
Next I'd like to provide an update on other M&A in the portfolio.
On our Q1 earnings call, we reviewed the strategic or M&A activity among our companies.
On today's call. We wanted to give you an update on those names as well as other M&A activities in the portfolio.
The company, we mentioned in our last call that was in an M&A process and that we were cautiously optimistic about with slash talking as mentioned the deal signed in July and is expected to close in Q3.
On our last call. We also mentioned three other companies that we're exploring strategic options.
One is moving forward they launched a process earlier this month.
The other one interviewed bankers and based on feedback.
Board and the management decided to put off any strategic process until late 'twenty 'twenty two given the company's strong financial performance and robust topline growth.
Third company, we mentioned on last quarter's call had early strategic discussions with a couple of parties and decided it was not ready to go out at this time to maximize value that could be a late next year event.
In addition to those companies that we've talked about on last on the last earnings call. There are two other companies that are exploring strategic options.
One is planning to launch a process in September.
The other is in varying degrees of discussions with strategic partners.
I'd like to make two comments on M&A.
At a high level.
There's lots of risks in M&A processes, and getting deals done even in the current robust M&A process is hard and fraught with uncertainty.
More specifically other than flash talking we do not think that it is highly likely that we will have any other M&A processes closed by the end of this calendar year to be clear, we're not talking about our brighthouse stock, which is coming off lock up where.
Talking about the other in process activities that I mentioned, while it is possible we're not assuming so in our projections for this calendar year.
Let me now provide some portfolio highlights I'll go name by name as we've done in prior quarters.
At <unk>, we're seeing post COVID-19 momentum picking up with pharmaceutical budgets.
The company also had a major multimillion dollar win at a top 10 pharma company for U S. Omnichannel and intelligence. This is where we believe the market is moving in a tiny as a leader in this area.
I Didnt full bionic, they've had accelerated deployments at the Mayo clinic under its multi year agreement.
Q2 EBITDA.
Came in ahead of plan and if you hadn't had the opportunity you might want to watch a replay of my fireside chat with info bionics CEO Stuart long, which can be found on the investors section of our website under past events.
Equilibrium posted record Q2, and first half bookings and they're just one of our fastest growing companies.
At Moxie there year to date June revenues is just shy of full year 2020 revenues and have a full pipeline of connections going live in the second half of 2021.
Prognose continues to add data partners as its healthcare ecosystem evolves and they are on track for their 2021 forecast.
<unk> has experienced increasing market recognition as a leader in the real world data and real world evidence space.
Its core data assets continue to grow substantially with a focus on differentiated cohorts such as bladder ovarian prostate N a M L.
At Trice, we mentioned last quarter that Trice completed an acquisition of 10 X. The integration between the two companies is going well.
The combined company is well positioned for second half 2021 growth.
Clutch had its largest bookings quarter in the company's history in Q2, and the company is seeing accelerated traction through its partnerships with NCR Salesforce accenture among others.
Media math is experiencing strength in Asia Pacific as well as in its retail segment and strong growth in its emerging CTV business.
And lastly, Louis this continues to grow its user base and product platform, which is levered to the municipal market. The company is tracking plan this year.
I'll note that this is not a comprehensive assessment of each company and specific risks apply to each name.
I now want to turn over to portfolio metrics needs of the trading multiples that we've shared with you in prior quarters.
We share these metrics with you on our publicly traded comps.
Because we use them in our internal valuation methodology as well as we follow these companies as part of our industry trends and exits.
You can divide our portfolio into three broad buckets.
Tech enabled healthcare, which is autonomous oxy psyops prognose in probiotic in equilibrium.
AD Tech, which is flash talking in media math.
And marketing tech or Martech, which is clutch.
We look at enterprise value to forward revenue multiples and projected revenue growth.
The stats that I will cite are earlier this week.
The median healthcare enterprise value to revenue multiples on 2021, and 2022 were 6.2 times and five two times respectively.
That's down between one point to one five turns from our May earnings call.
The median AD tech enterprise value to revenue multiples on 2021 and 2022.
Yeah.
Terms.
Oh.
Median martech enterprise value to revenue multiples on 2021 and 2022 were four times and three nine times so selectively.
Sit down <unk> three turns for Meg.
On revenue growth note that the median analysts' consensus revenue growth for these healthcare tech comps.
It's 28% for 'twenty, 'twenty, one and 20% for 2022.
The median analysts' consensus revenue growth for AD Tech comps was 23% for 2021 and 21% for 2022.
And lastly, the median analyst consensus revenue growth for Mar Tech public comps was 19% for 'twenty, one and 13% for 2022.
We provide the revenue growth information for a couple of reasons.
This comp set is experiencing fast revenue growth and the valuation in the public markets is most correlated to revenue growth.
Second when we think about the applicability of these trading multiples to our portfolio.
It is important to make adjustments for revenue growth as well as size profitability and liquidity et cetera.
We continue to protect project revenue growth for our portfolio to be between 15% to 20% up year on year.
That's 'twenty 'twenty to 2021 on an aggregate basis, but note that not every company is experiencing that growth some are higher and some are lower.
The last topic I'd like to comment on is our follow on deployments for the balance of the year.
As you read in our press release, we've deployed a $1 billion year to date in our portfolio income.
<unk>, new to maintain $5 million to $7 million guidance for 2021.
This obviously means we expect to deploy $46 million of capital the balance of the year.
This is explained primarily by two companies with which we are in discussions about deploying capital.
I'd like to remind our investors that our policy is to commit follow on capital to situations, where one the new capital has attractive risk adjusted returns and to the capital is either necessary to protect our existing position <unk> better control the path to exit.
These two situations meet those criteria and we will update you further next quarter on the developments with them.
At this time I'll turn the call over to our CFO Mark Herndon to walk you through our financial results.
Mark where we having technical problems.
Okay.
Eric.
Yep.
In a moment there.
Okay.
I will start again.
Okay now for the quote.
Okay. Good.
For the quarter ended June 30th 2021, safeguards net loss was <unk> 3 million or <unk> <unk> per share as compared with a net loss of $9.9 million or <unk> 48 per share for the same period of 2020.
This quarter's results were positively impacted by noncash gains.
So are noncash and unrealized gain on Brighthouse stock of $7.4 million.
And at $1.8 million realized gain resulting from the <unk> acquisition.
These events were offset by the noncash impairment of $2.5 million and other ownership interests.
As you May recall 2000, Twenty's net loss was also included a variety of impairments totaling $5.7 million related to Sanofi and several other ownership interests.
Safeguards cash cash equivalents and restricted cash at June 30 of 2021 totaled $21.3 million and we have no debt obligations.
Our cash flows for the quarter were primarily the result of the $3.4 million received from Atlanta, Bachelor transaction less the share repurchases of $1.6 million.
Our general and.
Administrative expenses were $2 million for the three months ended June 32021, which was slightly lower but consistent with the $2 million reported in the comparable second quarter of 2020.
Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock based compensation severance expenses and nonrecurring and other items were $1 million as compared with $1.2 million in the comparable quarter of 2020.
23% decline.
On a sequential basis, our quarterly corporate expenses were also down 20% from $1.2 million last quarter.
We expect this approximate level of corporate expenses for the remainder of 2021, resulting in our outlook to be below the previously disclosed target of four four to $4.9 million.
With respect to both general administrative costs and the corporate expense amounts. We have continued to reduce the cash based employee compensation costs professional fees and office costs.
Really offset by higher insurance expenses.
The corporate expense measure continues to be to benefit from director fees being paid in equity and a significant portion of management's compensation being paid in equity.
Last year's and last quarter's severance actions are significant factors for our current <unk> level of corporate expenses.
I would also like to note that the corporate expense measure excludes <unk>.
An accrual that is set aside from the transaction bonus plan commonly.
Commonly referred to as the L tip.
Which is included as a component of general and administrative expenses.
This quarter included the first payments on the Delta since we began the LTI plan in 2018, which was zero point $4 million.
We expect that the proceeds from flash stocking transaction will result in additional layers to be met and will ultimately result in a $2.1 million dollar worth of payments during the back half of this year.
We continue to view the LTI payments as fully funded by the proceeds of exit transactions.
Since this plan was enacted safeguarding has collected approximately $208 million of gross proceeds from asset sales, which resulted in the zero point $4 million payment last quarter.
With respect to our ownership interest at June 32020, we have an aggregate carrying value of $61 million as compared to $50.4 million at December 30 <unk>.
2020 last year.
The increase for the year to date period as a result of the additional brighthouse position valued at $22.7 million at June 30, as well as our previously disclosed quarter first quarter $7.3 million of dilution gain recorded in <unk> and the $1 million.
It's deployed to trice.
These increases were offset by typical decreases that we've discussed before resulting from the application of the equity method of accounting.
Two and a half million dollar impairment this quarter as well as the exits.
ZIP Gnosis T Rex Valletta, vascular and web link and each for me its carrying value.
Yeah.
As a reminder, our carrying value of the ownership interest where we apply the equity method of accounting is the GAAP term, which we typically reduce the carrying value for our share of the losses of the underlay.
<unk> companies and it generally does not represent the fair value or an expected exit value of those same ownership interests.
If the fair value of any of our ownership interest declines below our carrying value, we would consider making a downward adjustment.
Carrying value by recording an impairment.
We also have a few ownership interests that are not accounted for under the equity method and do not have a readily determinable fair value.
There was interest can have.
A readily determinable fair. It excuse me is that this can have an upward or downward adjustment, resulting.
Resulting from observable price changes.
If there are transactions in their securities.
<unk> price changes are recorded as gains or losses.
Other income loss net section of our statement of operations.
The second quarters. Other income included a $7.4 million unrealized gain resulting from Brighthouse IPO and the subsequent trading activity through June 30th.
Subsequent to the quarter, we have seen breakout stock declined substantially.
As a reminder, the terms of the Ikea requires to hold our $1.3 million shares at least through December.
Through late December 2021.
This quarter also included a realized gain of $1.8 million, resulting from the sale of blunted vascular as I mentioned earlier.
Our share of the losses of our equity method ownership interests for the three months ended June 32021 was $5.4 million as compared to $3.1 million for the comparable period in 2020.
This quarter's increase in loss is primarily the result of a benefit in the prior year related to the accounting change at one of our companies.
For the remainder of the equity method entities our share of the results were relatively consistent.
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. So this quarter's share of losses reflect the calendar first quarter.
Many of our companies saw the initial impact of COVID-19. During the later stages of the first quarter of 2020 their results for the remainder of the year reflected full quarters of operating in that environment.
We've also seen and expect to see again in later quarters, some benefits to our company's resulting from PPP loan programs.
Also with respect ownership interest we can update you to the total third target third party debt at our 11 companies, which excludes Brian.
That level of debt has increased to about $385 million.
This was principally the result of additional debt raised at several companies to fund operations and growth.
For cash the mountain held by those companies decreased slightly to about $135 million.
In terms of revenue performance, we reported a 10% decrease in our trailing 12 month of disclosure, which again relates to the trailing 12 month period ended March 31, 2021, due to the one quarter lag.
That decline was attributable to a few different aspects, including COVID-19 headwinds throughout the later portion of 2020 for companies with retail are elective medical customers or other company specific issues.
In one case.
Specific revenue increase in the fourth quarter of 2019 that did not recur in the fourth quarter of 2020.
Which come into Kim's into play due to the one quarter lag in the reporting data.
As a result, you may continue to see this that weakness in the trailing 12 month disclosure in upcoming quarters. However, we continue to expect that the calendar 2021 results for those group of companies will result in a 15% to 20% revenue growth.
However, much of this occurs in the back half of the year.
So now.
This is time to turn to the Q&A portion of the call there Hannah.
I'll ask you is there.
And we are.
We have only a handful of folks participants right now, but can you check to see if we can get it.
<unk>.
We will now begin the question and answer session if you'd like to ask a question. Please press star followed by one on your Touchtone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one if <unk> streaming today's call. Please dial in and then two star one.
As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question a little pause here briefly to allow questions to generate in Q.
So well he knows pause as well.
Notes one aspect so we've talked about it before we're looking for ways to additional ways that we can provide shareholders with information and interact with you to support your evaluation of our investment opportunity here.
So one thing I'll call your attention to as.
An example, we have added a disclosure in our press release table to the fully diluted ownership percentage.
For each company in addition to the primary interest.
Voting.
So.
Take a look at that and I'm sure. If you have questions about it we'll be happy to talk about it.
There are no questions waiting in queue at this time.
This is Eric Salzman.
Want to first apologize we had a few technical issues on this I will tell you that I had a lightning strike that I lost power in a tree fell about 15 feet for me, while I was going through my prepared remarks, so if theres any clarifications. Please feel free to reach out to us in any event and we will make sure that there's a clean transcript.
Of the call available for for our investors.
And as always please feel free to reach out to us at any time.
Mark or me and we can answer any questions and want to thank you for joining us This evening take care.
That concludes today's conference call. Thank you for your participation and enjoy the rest of you again.
Yeah.
Okay.
Yeah.
Yeah.
Yes, Sir.
Can we start Lauren for a minute.
Yes, Sir.
Private land.
One moment.