Q1 2022 Safeguard Scientifics Inc Earnings Call
<unk> results announced this week showed some progress on this front and they have guided towards more market based levels going forward.
We will continue to reevaluate our position their performance and our expectations for their share price as the year progresses.
Media math and April media math completed a recapitalization, where raise new capital from insiders to fund the turnaround of the business.
As part of that transaction safeguards equity stake was reduced to below 1%.
Safeguard had the opportunity to participate in this new financing, but decided not to for several reasons.
The round was not a pay to play round, meaning any new money that we funded in the recap would not help our old money recovery. So this would essentially be a standalone new capital investment with a likely multi year holding period.
Our new capital would be passive in nature and had very little governance rights.
We concluded that wed be better off using the cash to buy back safeguard stock at these levels, which offers a better risk adjusted return.
Recall that last quarter, we indicated that we expected a de minimis return from our medium at stake and that is still the case post this recap.
I'll now provide an update on exits and capital raises.
As I mentioned, we've been spending a lot of time with our management teams and are reviewing business models aligning cost structures and in certain cases, securing capital to fund our companies and what is an increasingly more challenging operating environment.
While we have not seen a pullback in funding sources in response to the recent declines in the public markets or heightened macro concerns.
We have seen a shift in the mindset of investors to focus to a larger degree than previously on path to getting to cash flow breakeven as opposed to focusing solely on revenue growth.
We've also seen a shift in the mindset of some of the potential strategic buyers we've spoken to.
Where in addition to revenue growth technology differentiation product market fit there is an increasing focus on what is needed to get to cash flow breakeven.
We will continue to work with our companies to align to the current environment and adjust accordingly as conditions change.
On the M&A front tour of our companies had been exploring sales to strategic parties over the past two quarters.
Those efforts did not result in sufficiently attractive interest and we together with our co investors and management have decided to continue to operate as standalone companies.
While both companies are emerging leaders in their sectors with differentiated technologies and blue chip customers.
Some of the potential suitors wanted to see more crop more progress on the path to profitability.
We are confident that both companies have clear paths to profitability and sources of capital to fund that path.
Two of our other companies are interviewing bankers to be higher to explore strategic M&A in the second half of 2020 to.
Assuming bankers are hired late in Q2, we would not expect to have material feedback from either effort until late Q3 early Q4, and we will update you as appropriate.
Another one of our companies received inbound interest from a strategic acquirer, which we are currently evaluating this is at an early stage so would not handicap the chances of a deal at this point.
Another one of our companies has been in discussions with a large strategic buyer for this party expressed a need to wait until the end of 2022 before can engage in further due diligence. This is due to its own internal focus on integrating another recently acquired company.
The interest is great validation of our company's attractive product suite and market position and we will look to re engage with them towards the end of the year acknowledging that corporate priorities can change from now to then.
On the capital raise side one of our companies is in discussions with a syndicate of investors for growth equity round, while reasonably far along in diligence there can be no assurance that the deal closes.
Another company, which was gearing up to launch a capital raise process through an investment bank was approached by a private equity investor who wanted to preempt the process based on first half 2022 results.
The board together with ourselves and management decided that we were better off waiting until Q2 results are in before either moving forward preemptively with this party, we're launching a banker led capital raise process.
In short as you can see there is a lot of activity, but no imminent exits that we can point to at this point. While this is incredibly frustrating for investors and for US. We continue to work with these companies to put them in the best position to transact from a position of strength.
I'll talk about public market valuation multiples.
As we do each quarter, we provide enterprise value to revenue multiples and consensus revenue growth rates of our public peers to help investors triangulate around potential valuations. Please.
Please keep in mind that this is only one of several valuation methodologies and should not be relied upon exclusively.
For our tech enabled health care companies.
Easy to 2022 revenue multiples for our publicly traded peers are three eight times with consensus revenue growth for 2022 of 16%.
For our single marketing technology positioned clutch easy to 2022 revenue multiples of the peer group of 334 times.
With consensus revenue growth for 2022 of 19%.
These numbers by the way from close of market yesterday.
We expect our portfolio companies to grow in excess of 15% in 2022, although macro conditions can impact this estimate.
Okay.
The Houlihan lokey process.
As we mentioned last quarter, we retained houlihan lokey to help us explore a range of options to maximize value for safeguard shareholders.
We did this because we recognized that there might be ways to enhance shareholder value beyond our current monetization strategy. We wanted to fully explore those options we.
We are early in the process currently contacting and interested parties and populating the data room, and we will continue to keep you updated on developments with us with this process when appropriate.
Please remember that these efforts may not result in any transaction.
Yeah.
And finally.
As you may have seen in our recent proxy statement. There are a couple of proposed changes at the board level first.
First our chairman Dr. Robert Rosenthal has decided not to stand for reelection at this year's annual meeting.
Bob has served on the board of safeguard for 15 years, including seven years as the chairman.
I have worked closely with Bob since I joined safeguard in 2019, as Chief restructuring officer and have greatly appreciated his counsel guidance and insights during this time.
Net loss for the quarter ended.
At March 31, 2020 was $6 $7 million or <unk> 40 per share as compared to net income for the 2021 first quarter of $17 6 million or <unk> 84 per share. This.
This quarter's results were primarily impacted by the continued decline in the fair value of Brighthouse stock, resulting in a noncash and unrealized loss on brighthouse stock of $2 million.
The result, the remaining results were fairly typical with respect to the general administrative expenses and equity income or loss net.
During the quarter, we have continued with our open market purchases announced last quarter resulted in the purchase of 148000 shares during the quarter.
$5 27 per share and an additional.
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$4 million worth of shares at an average price of about $4 71 per share.
Subsequent to the quarter end.
Safeguard ended the quarter with $19 $4 million of cash cash equivalents and restricted cash and we continue to have no debt obligations.
Our general and administrative expenses were $1 2 million for the first quarter of 2022, which was 50% lower than the $2 5 million reported in the comparable quarter of 2021.
This decline was principally attributable to the settlements.
Expense charges of $8 million recorded in 2021 that did not recur in 2022.
Of.
Corporate expenses for the quarter.
Which represent general and administrative expenses, excluding stock based compensation severance expenses and nonrecurring and other items.
$1 8 million as compared to $1 $2 million in the comparable quarter of 2021 of 29% decline.
On a sequential basis this quarter corporate expenses were essentially flat with the fourth quarter of 2021 about $20000 higher or 2%.
We continue to expect the quarterly level of corporate expenses are stabilized at the approximate value.
The declines that we have experienced this year with respect to both general and administrative costs and corporate expenses have been the result of reductions in cash based employee compensation cost professional fees office costs and insurance expenses.
Corporate expense measure also continues to benefit from director fee being paid in equity and a significant portion of management's compensation being paid in equity.
With respect to the ownership interest we have an aggregate carrying value at March 31, 22 of $24 1 million as compared to $26 5 million at December 31 2021.
This quarter's activity included increases from the funding of convertible loans that progress a clutch that aggregated $3 4 million, which was offset by decreases due to the application of equity method accounting.
Our share of the losses of our equity method ownership interest for the three months ended March 31 was $3 9 million compared to $4 5 million for the comparable period in 2021.
There were no significant exit events or impairments during the quarter.
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Europe 3 million reported as a gain on sale of an ownership interest represented another installment of.
The web link transaction.
This quarter's decrease in equity method loss is primarily the result of having two less companies in 2022, and a lower level of losses at several companies due to a variety of events.
As well as limiting the recognition of losses and a couple of cases, where when our carrying value is reduced to zero.
I would also like to remind everyone that we report our share of losses from equity method companies on a one quarter lag. So this quarter share losses reflect the fourth quarter of 2021, we have also seen in this quarter annual.
And bill.
Excuse me.
Also with respect to our ownership interest the third party debt in this group of nine companies was approximately $149 million versus $135 million.
2021 year and.
The increase is.
Related to one of our companies raising approximately $10 million of venture debt.
Cash at the same group of nine company has decreased to about $62 million with decrease primarily related to the quarterly burn at two to three companies and some seasonal factors and of course, the increase that was a positive factor to the overall cash level at the portfolio.
In terms of revenue performance, we reported a 16, 2% increase in our group of nine for the trailing 12 months period ended December 31, 2021, due to the one quarter lag.
We continue to see our fastest growth from equilibrium Moxie, who you'll note moved up a category and a revenue table and trace which benefited from the acquisition of <unk> earlier in 2021, but also experience strong sequential growth.
Now, we'd like to turn it over to the Q&A segment of the call. So I'll ask the operator to please open the phone lines.
Start queuing up question the mix of their available.
Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time.
Your question has been answered you can remove yourself from the queue by pressing one again, ladies and gentlemen that star one and our first question comes from Jason Jason Stan Mcclinton go ahead, Jason.
Hey, guys.
I found the correct number.
To get on the call.
The prior press release had a little bit of a dyslexic beginning to the call a number to say now.
Point in putting out the press release next time.
Hey, guys.
I didn't see you talk about any possible exits.
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Is there anything on the horizon.
Anybody with LOI is in kind of in a state of the portfolio.
Yes, Jason.
We.
Bided, a fair amount of detail on what the activities are as it relates to exits.
We've talked about companies interviewing bankers.
To launch processes to company. So is that just earlier was that just earlier in the call I was I was trying to call in on the number based on the press release.
And in April and Couldnt get out so I just need to get enough.
But on the transcript for that.
Yes, you can do that or just kind of follow up with us afterwards, and we can get kind of review.
Closed.
Short answer is banker discussions.
Nothing imminent.
Continue to work with our portfolio companies in the current environment and take a look at the transcript we can follow up and answer any questions sorry.
Sorry about that.
And then.
Have you guys given any thought or.
Has the board given any thought to the appropriate and that's on the $18 million.
Cash need maybe maybe your future.
Your future deployments into the portfolio, we're discussing as well and I just missed that but any any context around whether that.
<unk> had.
Given the good work you've done on.
On working on the overhead burden.
Curious.
Yes, it's a good question. So we had last quarter provided.
Kind of a range of $5 million to $9 million follow on in the portfolio for 2022 of which were <unk>.
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Deployed three four to date.
We evaluate that every quarter as we should because as time goes by and passage of time and as we get closer to two and exit our final exit.
You would imagine mathematically that number to go down.
So we did discuss it this quarter, it's something we're going to revisit.
After our Q2, given Max given kind of macro conditions and a few other developments at a few of the companies.
Okay and remind me again when does when does your window open again for for repurchases. After this call and in the disclosure.
A couple of working days after or what.
Assuming you don't have any deals on the table block in India.
What we put in place a <unk> one plan last quarter.
We had a very short window open and we put a plan in place to allow us to buy.
Actually our broker to buy based on a pricing grid and based on the kind of regulatory volume limitations that exist. So we are in the market buying every day.
Just not directed by us because once it's set and then it.
It continues on its own.
Right.
So that's yeah that's operating.
Alright, more for management or or the border.
Yes.
It might be restricted that thinks it's a good value at these levels.
Yeah. So.
Good question, because we had a knock ins and chime in because we pushed them pretty hard on this question, apparently what we learned and Youll learn everything you learn something new every day the volume limitations under our <unk> one.
Purchases by officers and directors get factored into the maximum we can buy on a daily basis. So what that means is that.
If I buy in an open window, assuming theres a window open or the board buys remark for Matt <unk>.
<unk> the amount of shares the company can buy.
Yes.
So we discussed.
From a from a fiduciary standpoint, whether it didn't.
It doesn't make sense for us to crowd the company out and buying.
I think when the window opens.
Don't know what else, we can do about that.
I got that correct right as it relates to the limitations on the tend to be five one.
That is correct and I would just point to our.
Such an <unk> filings to trap officer and director purchases.
Right.
Okay, so that crowds out the volume restriction, so and is it correct that you have no restrictions.
On block trades in terms of volume that someone comes to you with.
With a block of stock you are able to transact that started out as a separate.
So it comes to your broker I guess.
Yes.
No.
There are restrictions, but you are allowed to have larger volumes.
For block trades, when and if they become available. So there are some there are some limitations.
Thanks, Paul.
Okay I'll take a look at the transcript and follow backup thanks, Okay.
Again, ladies and gentlemen to ask a question on the phone at Star one please hold while we poll for questions.
Okay.
Okay.
And it appears we have no further questions at this time I would now like to turn it back to management for any remarks.
Yes, thank you for joining us on the call today.
And as we do every quarter, please feel free to follow up with Mark and the if you want to schedule. Some one time. Thanks, a lot have a good evening.
Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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Yes.