Q4 2021 Safeguard Scientifics Inc Earnings Call
Good afternoon.
Thank you for attending today's safeguard scientifics fourth quarter 2021 financial results conference call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad.
Now I'd like to pass the conference over to our host Matthew Barnard General Counsel.
Got it if I could please.
Please go ahead.
Good afternoon, and thank you for joining us for this presentation of safeguard scientifics fourth quarter and full year 2021 financial results. Joining me on today's call and webcast are Eric Salzman safeguards, Chief Executive Officer, and Mark Herndon Safeguards Chief Financial Officer. Following our prepared remarks, we will open up the call to your questions as always today's presentation includes forward looking statements.
So I end up with what the statements involve certain risks and uncertainties, including but not limited to the uncertainty of the outcomes of corporate strategic transactions, if any uncertainty of the future performance of our company our ability to make good decisions about the monetization of our company's ongoing support of our company is our ability to unilaterally control our company's fluctuations in the marketplaces, if any of our companies.
We trade at and the effect of regulatory and economic conditions generally and other uncertainties described in our filings with the SEC.
These factors are beyond our ability to predict or control as a result of these and other factors our past financial performance should not be relied on as indication of future performance.
During the course of todays call words, such as expect anticipate believe 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 Q4 2021 earnings call.
Today, we will cover the following topics.
We will summarize our strategy and highlight our major achievements for 2021 will provide.
Update on exit activities in the portfolio.
We'll provide an update on capital raises by our portfolio companies.
We'll provide guidance on expected follow on deployments for 2022.
We'll share recent highlights for each company.
We'll share publicly listed comparable company trading statistics and revenue growth.
We will discuss our recent engagement of investment Bank Houlihan Lokey.
I'll, then hand, the call over to Mark Herndon, our CFO to walk you through the financial results in greater detail.
I'll start with achievements for Q4 and full year 2021.
For those investors, who might be new to safeguard let me first briefly summarize our strategy.
Safeguard owns a portfolio of minority equity interests and growth oriented tech and health care companies.
We are not adding new companies to the portfolio and are actively working with management and co investors to drive value creation maximize exit values and recurrent return cash to safeguard shareholders.
The portfolio consists of late stage venture companies, which are at the leading edge in their respective fields. For example, real world data for health care drug development solutions that address workforce wellbeing mobile cardiac telemetry services and customer loyalty software to name a few.
We sit on nearly all of the boards of our portfolio companies and are focused on driving execution and creating a path to successful exits as expeditiously as possible.
We have found that maximizing the value of safeguards ownership interests, usually comes through natural exits, meaning when the company itself is sold and safeguard gets its pro rata portion of the sale proceeds although in certain situations. We have sold our stakes in noncore positions through secondary transactions.
We support our companies with follow on capital, where we can help drive the direction of the company and generate attractive Standalone returns on the new capital deployed.
And while pursuing this strategy we are highly focused on limiting the operating expense burden at the safeguard level.
2021 was a successful year for safeguard.
We generated $61 million in proceeds from the sale of seven positions and returned approximately $41 million to our shareholders through open market purchases and a reverse Dutch self tender.
We repurchased more than 20% of our outstanding shares.
We deployed $2 7 million in the portfolio in 2021.
Versus our original guidance range of $5 million to $7 million.
We substantially reduced our cash operating expenses and ended the year with $24 million of cash no debt.
Next I want to provide an update on exit activities in the portfolio.
During our Q3 call last October we highlighted a number of exit situations and on this call. We want to update you on where they stand and add additional detail as appropriate.
Please note that we are limited in how much detail, we can provide due to confidentiality provisions as well as specific deal dynamics.
On our Q3 call we disclosed that one company had signed an LOI with a strategic buyer and we were cautiously optimistic that the deal would close unfortunately that transaction did not close due to a number of factors, including a post LOI reduction by the buyer to the original purchase price.
The portfolio Companys Board, and we decided that shareholders would be better served if we focused on delivering strong 2022 revenue growth rather than accepting a reduced bid.
This was disappointing we continue to believe in the company's prospects for 2022 and beyond especially since demand for their products was negatively affected by COVID-19.
With that mostly in the rearview mirror, we are seeing accelerated revenues at the start of this year, which supports healthy revenue growth for all of 2022.
On our Q3 call, we mentioned that one of our companies with launching a sales process in mid October .
This company has held discussions with several interested parties, but does not currently have an LOI signed we cannot handicap the probability of the deal at this time and should know deal arise. We will continue to support the company as it executes on its business plan.
On our Q3 on our Q3 call. We also mentioned that one of our companies have signed an LOI and was working through diligence.
We highlighted that the deal was complicated and even if it did close the proceeds would not be meaning meaningful the safeguard due to the debt load and capital structure at the company.
While that transaction did not move forward. The company is pursuing a number of other paths and we expect the outcome of those efforts to similarly result, and de Minimis proceeds to safeguard.
Also on our Q3 call we mentioned that one of our companies was an early stage stock for stock merger discussions with another private company. Those discussions did not move forward as the merger partners profile financial profiles to be specific what's unattractive to us and our fellow shareholders, meaning we didn't want to own their <unk>.
Stock.
These were opportunistic discussions and do not affect the Companys, our company's go forward prospects on a standalone basis.
In addition to these four situations. Another one of our companies is pursuing a dual path M&A discussions with small number of strategic parties and a parallel growth capital raise process.
We will evaluate the outcome of those efforts and determined along with our co investors and management, what's the best risk adjusted path will be.
Let's now review other capital raising activities of our companies.
On our October October earnings call. We said there were three companies exploring capital raises to support their 2022 and beyond operations.
Those two chose to delay outreach to vcs until early 2022 and they both are currently in discussions with potential investors.
While there is no certainty we expect these two financings to close sometime in late Q2 or early Q3.
The third company, we mentioned was Prognose, which last month raised an internal financing round from existing investors and which safeguard participated with $2 million.
We had expected this to fund in Q4 of last year, but it pushed into Q1 2022, which is one of the reasons why our 2021 deployments of $2 $7 million was below the $5 million to $7 million, we had guided.
A fourth company is in the process of raising an internal financing round in which safeguard you're expected to deploy approximately $1 5 million.
Before I run through highlights of our portfolio companies.
I wanted to touch on how we see the recent stock market correction the volatile geopolitical.
Your political situation and potential threats to the economic recovery impacting our portfolio.
First none of our companies have operations in Ukraine or Russia.
Second we do not believe that the market volatility will hinder our companies from raising capital. There is an unprecedented amount of uninvested venture capital available that is looking to be deployed and leading technology companies with attractive growth prospects prospects and durable business models.
In fact, what we have been seeing is that venture capital and private equity investors have increased their minimum investment sizes, which creates an opportunity for larger recap financings, where the new investors fund primary capital to the company and simultaneously purchase shares from existing stockholders. This could.
Another path for partial liquidity to safeguard in those situations.
On the M&A front, we see both strategic and private equity backed companies looking to acquire technologies engineering talent and adjacent product lines at a rapid pace.
What has changed over the past few months is that M&A buyers being a strategic private or financial sponsors have been increasingly focused on the financial profile of the company, including seeing a clear path to EBITDA positive or cash flow breakeven.
At each of our companies that are not EBITDA positive. We are working closely with management to develop a path to profitability, while not sacrificing revenue growth or its competitive market position.
Let's now touch on some portfolio highlights.
After exiting seven companies in 2021.
Our portfolio currently consists of 11 positions.
You had seven health care companies.
One AD Tech AD Tech company, one marketing company.
One Fintech company.
One 3 million shares and publicly traded Brighthouse fruit ticker BHG.
The following is a bullet or two in each of our companies.
Please note that this is not a comprehensive assessment of each company and specific risks apply to each name.
I'll start with autonomy.
In 2021 kind of had the highest one year bookings total in the company's history.
Surge in usage of <unk> products and services by its pharma customers underscores growing artificial intelligence adoption across regions and brands.
<unk> announced partnerships with Merck, they health alumina, Pfizer and Infor, including a third phase of collaboration with Pfizer for breast cancer.
Prognose expanded its data sources, adding new Rx data to its novel data marketplace that has 25% coverage of U S pharmacies.
Equilibrium had 2021 revenue growth and bookings growth that were both above 50% year on year. The company is well positioned to address the challenges employers face managing the after effects of COVID-19, the permanent shift to hybrid workforce and a greater focus on employee agility resilience.
C and wellbeing.
For Moxie, It's December 2021 revenue run rate was nearly three times the prior year's the accelerating adoption of <unk> clinical data exchange by payers and providers is creating network effect in the industry.
Info bionics crew, it's billable MCT device space by 40% year on year in 2021.
Mayo Clinic partnership is running ahead of plan.
For <unk> despite omicron.
December was a record high revenue month for both the <unk> and <unk> product lines.
Clutch accelerated its partnership with NCR hospitality, adding over 3700 locations by year end 2021.
Lucas this is steadily growing its top line and developing product enhancements to protect protect and grow its customer base.
And for Brighthouse group, our shares came off lockup in December of 2021.
We're very disappointed with the company's results over the past three quarters.
We're following both the company and this sector closely and are updating our internal price targets based on results.
Yeah.
For medium as a new CEO was appointed in January however, the company's balance sheet and capital structure are such that we expect a de minimis returned to safeguard from our remaining medium out position.
To remind investors, we sold nearly half of our position back to the company in mid 2018 for $45 million and as part of that transaction safeguard gave up its board seat.
The $45 million represented one eight X multiple on our total investment.
Next we'd like to share relevant publicly listed comparable trading stats.
As we've done in prior quarters, we provided certain metrics on publicly traded comparable companies that we track against our portfolio.
This is some of the data we use it as part of our internal valuation methodology together with other qualitative inputs.
When you look at enterprise value to forward revenue multiples and projected revenue growth that's two important metrics.
We provide this information together with the net debt of the portfolio that Mark will share with you in a few minutes.
To help investors assess a range of potential values for the portfolio companies.
Note of course that public comps are not the sole input to determine valuation there are other methodologies. We use and this is not meant to provide guidance on portfolio valuation.
The following statistics are as of March seven.
I'll start with enterprise value to revenue multiples, which you, which you will have seen have come down from the October highs when we reported our Q3 results.
As of earlier this week publicly traded healthcare comps were trading at two seven times 2022 expected revenues down one four turns from October 2021 earnings call.
Publicly traded AD Tech comps were trading at three one times 2022 expected revenues down one three turns from October .
Publicly traded marketing Tech comps were trading at two three times 2022 expected revenues down one three turns from October .
This material reduction in these enterprise value to revenue multiples reflected decline in stock prices, particularly in growth oriented companies.
What is interesting is that analysts consensus for 2022 revenue growth for these public peers have not come down much and in some cases are up so for instance for publicly traded healthcare comps. The analyst consensus for median revenue growth was 28% for 2022 up from 24% and okta.
Over.
For publicly traded AD Tech comps the analysts' consensus for median revenue growth was 26% for 2022 versus 25% October and for publicly traded marketing Tech comps. The analysts' consensus for median revenue growth was 12% for 2022 down from 15% in October .
For comparison purposes, the aggregate revenue growth projected for safeguards portfolio, excluding brighthouse and media math is above 25% for 2022, although not every company is experiencing that growth some higher and some lower and it is still early in the year.
Lastly, I want to talk about our recent announcement to retained houlihan lokey as our investment bank to help explore strategic alternatives.
As I've reiterated since taking over as CEO in December of 2020.
We are singularly focused on value creation for our shareholders and whatever form that takes.
Always recognize there might be ways to enhance shareholder value that goes beyond our current strategy.
After our self tender transaction last fall, we began to explore some of these paths.
We had some early discussions with a few parties who had expressed interest in safeguard.
This interest was not just hey can we buy your assets at a discount to fair market value, which as we've discussed in the past does not in our view represent the best way to maximize shareholder value.
Based on our analysis management and the safeguard board decided to engage a financial adviser to explore the full range of options available to maximize safeguard shareholder value.
After interviewing a number of investment banks, we concluded that houlihan lokey has expertise in asset management transactions complex valuations and deal structuring was the right fit for our needs. Please.
Please note that we are early in the process and these efforts may not result in any transaction.
We will do our best to keep you updated on developments with this process at this time I will hand, the call over to our CFO Mark Herndon.
Thanks, Eric.
Alright.
Net income for the year.
The December 31, 2021 was $27 million.
Or $1 36 per share as compared to a net loss for the year ended.
December 31, 2000, 2037, 6 million or $1 81 per share.
Picard fourth quarter of 2021 resulted in a net loss of $8 6 million or 51 cents per share.
Fair to a net loss of $7 $4 million 35.
Per share for the comparable period 2020.
This quarter's results were positively impacted by the resolution of an earn out contingency related to a 2018 sales of EHS that resulted in an additional $2 million to safeguard.
And the continued to calling and general and administrative costs.
The quarter's results were negatively impacted by the continued decline in the fair value of Brighthouse stock.
Resulting in a noncash and unrealized loss on that stock at $6 3 million.
The fourth quarter also included our Dutch auction self tender offer that resulted in the repurchase of four 3 million shares of common stock.
$39 million.
When combined with our open market purchases earlier in the year.
We repurchased four 5 million shares at an aggregate price of $40 6 million or <unk> 95 per share.
To quickly recap pigments annual results were positively impacted by the exit transactions that flash software.
Local and $44 8 million in cash and Gnosis web link.
On the vascular expert, which returned and the aggregate cash proceeds of $13 $6 million.
Note. This transaction also provided us with preferred equity at bright house, which was converted to $1 3 million common shares and their June initial public offering.
And in the unrealized gain.
Unfortunately, as we've disclosed quarterly decided has declined throughout the year.
<unk> ended the year with that position valued at $4 $5 million.
Safeguard has also ended the year with $28 million of cash cash equivalents restricted cash and.
And we continue to have no debt obligations.
Our general and administrative expenses were $1 1 million for the fourth quarter of 2021, which was 30% lower than the one 6 million reported in the comparable quarter of 2020.
For the full year of 2021, and general administrative expenses were $7 2 million as compared to $9 5 million for the full year of 2020, 24% decline.
Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock based compensation severance expenses and other nonrecurring items and other items.
<unk> dollars 8 million as compared to $1 $2 million in the comparable quarter 2020 or.
33% decline.
For the full year IP that we're putting on these corporate expenses.
$3 9 million as compared to $5 2 million for the full year of 2020 or 25% with growth.
On a sequential basis. This quarter also represents a decline of six 8%.
Well, it's not that much.
Well it also marks the fifth consecutive quarter of declining corporate expenses, we generally expected.
The quarterly level of corporate.
Corporate expenses will stabilize at approximately this level.
As a result, we have established an initial expectation for corporate expenses in 2022 of three $5 million to $4 million.
The decline that we have experienced this year with respect to both general administrative costs and corporate expenses have been the result of reductions in.
Cash based employee compensation of all.
Professional fees office costs and insurance expenses.
Corporate expense measure also continues to benefit from director fees that are being paid in equity and a significant portion of managements compensation is paid in equity.
With respect to our ownership interest we have an aggregate carrying value at December 31, 2021 of $26 5 million as compared to $54 million at December 31, 2020.
This decrease was the result of the application of an equity method of accounting.
The two 5 million impairment in the second quarter.
Other ownership interests as well as the exit the gnosis flash stocking T Rex vascular and labeling that each removed carrying value.
These decreases were partially offset by increases due to our $2 $7 million aggregate deployment.
In the first quarter and have Corona in the third quarter.
The addition of the Brighthouse position and the dilution gains.
I agree I think the $9 $3 million from sign ups in the first quarter and <unk> in the third quarter.
The leasing gains are reported as a component of equity income or loss.
One item.
And as a reminder, our carrying value of ownership interest where we apply the equity method.
Is the GAAP term.
Where we typically reduce the carrying value for our share of the losses of the underlying companies generally does not represent the fair value or it looks like an exit value under the same ownership interests.
The fair value of any of our ownership interest to clients below our carrying value, we would consider making a downward adjustment to the carrying value that recording an impairment.
We've also had a few ownership interests that are not accounted for under the equity method and do not have a readily determinable fair value there.
These interests can have an upward or downward adjustments from time to time, resulting from observable price changes if there are transactions in their securities.
He is observable price changes are recorded as gains or losses, and other income or loss.
Our share of the losses of our equity method ownership interest for the three months ended December 31, 2021 was $3 $6 million.
As compared to $4 1 million for the comparable period in 2020.
The quarter's decrease in loss is primarily the result of having two less companies in 2021.
And a lower level of losses at several companies due to a variety of events, including some nonoperating onetime gain and the underlying company and limiting the recognition of losses, when our carrying value is reduced to zero.
I'd 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 share of losses reflect the third quarter of 2021.
We have also seen in this quarter and annual period, the income statement benefit to our company, resulting from PPP loan program when those loans are officially forgiven.
Also with respect to our ownership interests, we can update you too.
The total third party debt and cash.
As a reminder, with flash market exit during the third quarter. We are now also excluding medium Atlas disclosure.
Also as in other ownership interests. These disclosures will continue to exclude bright health care.
With those notes in line with the third party that this group of nine companies was approximately $135 million and is up about 10% since last quarter.
Cash at that same group of nine companies has decreased to about $73 million.
Within this group the most notable changes relate to additional bank debt in a couple of companies and a decrease in cash resulting from our quarterly burn rate.
In terms of revenue performance, we reported a $7 one decrease a decrease at our group of pet ownership interest for the trailing 12 month period, ending September 32010 awards due to the one quarter lag.
In addition to the revenue decline at meeting that the decline was primarily attributable to what we have previously disclosed about a single customer event that resulted in a non recurring revenue increase in the fourth quarter of 2019.
As Eric mentioned earlier, we are seeing the fastest growth from a few companies like <unk> and trice, which.
Also benefited from the acquisition of connects earlier in 2004.
Now it is time for us to turn to the Q&A segment of the call. So I will ask our operator to open the phones up for a few questions.
Sure.
Good morning.
Alright.
Just a question. Please press star followed by one on your telephone keypad.
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The nice thing that question. Please press star followed by team again to ask a question. Please press star one.
Minder, if you're using a speaker phone. Please remember to pick up your handset before asking your question.
Ill briefly to allow questions to generate in Q.
Again to ask a question. Please press star followed by one on your telephone keypad.
First question.
Comes from the line of Daniel Kang with Constraining capital. Please go ahead.
Hi, guys. Thanks for taking the question just had a.
Quick housekeeping, one I think historically you guys have provided LTM revenue broken out between digital media and healthcare can you provide that for 2021.
Yes.
Yes.
Essentially stopped doing that now because it's limited to just the one company.
So.
Okay.
Yes, that's why we did not provide that.
Danielle the point being if we disclosed. It then you would know the revenue of a private company, which doesn't disclose its revenues publicly.
Understood. Thanks for thanks for that clarification.
Yes.
Thank you Mr. Huang.
Again to ask a question. Please press star followed by one.
Currently there are no questions waiting at this time I would like to pass it back to the management team for any closing remarks.
Thank you for joining us on the call today we.
We appreciate your continued interest in safeguard and we'll be following up as we do each quarter to set up one on one calls.
With the management team. Thanks have a good evening take care.
That concludes the safeguard scientifics fourth quarter 2021 financial results Conference call I Hope you all enjoy the rest of your day you may now disconnect your lines.
Okay.
Yeah.