Safeguard Scientifics Inc. Q1 2023 Earnings Call

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Greetings and welcome to the safeguard <unk> first quarter 2023 earnings conference call at this time, all participants already in listen only mode.

Brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Matt Barnard. Please go ahead.

Good afternoon, and thank you for joining us for this presentation safeguard scientifics first quarter 2023 financial results joining me on today's call and webcast are Eric Salzman safeguards, Chief Executive Officer, Mark Herndon, Chief Financial Officer. Following our prepared remarks, we will open up the call to your questions.

I always today's presentation includes forward looking statements reliance on forward looking statements involve certain risks and uncertainties, including but not limited to start any of the outcomes with corporate strategic transactions. If any is there any other things you prefer.

That's where our companies are going to make good decisions about the monetization of our companies.

And at the point of our company's inability to leverage controller companies fluctuations in the market prices of any of our companies that are publicly traded and the effect of regulatory and economic conditions generally and other uncertainties filings with the SEC.

Many of these factors are beyond our ability to predict or control as a result of these and other factors our past performance should not be relied on as indication of future performance. During the course of todays call words, such as expect anticipate believe intend movies are discussion Goldberg vents and the future management cannot provide any assurance that future results will be as described in our court.

Statements.

Currently we can safeguards filings with the SEC Form 10-Q, which describe in detail the risks 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.

Okay.

Thanks, Matt Thanks for joining us this afternoon for our Q1 2023 earnings call.

The macro challenges we highlighted on our last two earnings earnings calls relating to a more difficult capital raising and M&A environment continued to impact many of our companies.

Given that we thought it would be helpful to categorize the portfolio into two different buckets.

Bucket one contains our four companies that are funded growing and executing on their business plans, albeit in a more difficult environment.

Bucket two includes three companies that are facing near term leverage and liquidity issues, which could adversely impact the values that are recoverable to safeguard.

Additionally, one company sits between these two categories categories.

While it will require additional funding and operational adjustments it.

It is not facing the same near term challenges as the three companies in bucket two.

Bucket, one includes clutch moxie equilibrium and prognosis.

We expect these four companies to continue to make progress and our plan is to exit in the ordinary course over the next two years.

Those exits are expected to represent the vast majority of proceeds to safeguard.

The three companies in bucket two are facing critical challenges stemming from high debt loads elevated burn rates and more limited M&A interest.

These challenges have become more difficult over the past two quarters as the financing and M&A environment has weakened.

While the operating performance of bucket two companies is mixed the main factors, creating their issues, our leverage liquidity runway and burn rates.

As we've highlighted on last quarter's call. This profile of company is extremely difficult to finance yourself in the current environment.

For each of our bucket two companies we are actively working with our co investors in senior lenders to find a path to address leverage and liquidity challenges.

With the goal of preserving our ownership interests in achieving recovery value.

We continue to explore all types of approaches to extract value from these positions.

There are no assurances that we will be able to achieve this goal for bucket two companies and we have reduced our expectations of exit proceeds.

Igniting the proceeds to safeguard could be de minimis.

Note that we expect the outcome to these situations to be known over the next four months and we will update investors accordingly.

Yeah.

As described in our press release, we deployed $3 million and our financing round for Prognose, which closed in April .

The financing positions the company well to execute on its business model where.

I mean, we were joern joined by both new investors as well as existing ones, who see the attractive business opportunity to use real world data to drive better health care outcomes.

Cognos platform is used by over 70 life science customers.

To accelerate the development of new drugs improve the safety and efficacy of existing drugs and identify new patient populations that may benefit from specific treatments.

This capital should fund the company to cash flow breakeven and further details about this financing will be released by Prognose in the near future.

Let me now address a question we received from several investors regarding safeguards cash balances and stock buyback plan.

We had nearly $19 million in cash at the end of the first quarter almost $16 million after the prognose deployment.

We have estimated our follow on deployments for the remainder of the year at zero to $1 5 million.

And our Opex is stable at its current level.

This means we will likely have excess cash beyond what we expect to need to operate and run off the portfolio.

As disclosed in our press release, we completed our $3 million stock buyback plan this past quarter.

We approved the plan in March 2022 prior to the start of the Houlihan Lokey process, because we had an open trading window.

Since that time, the trading window for US has been closed due to the houlihan lokey discussions. So we have been unable to expand the existing $3 million buyback plan or established a new buyback plan.

As it relates to the Houlihan lokey timeline.

As we indicated on the last earnings call, we expect to announce a decision on the process between June and December of this year.

At the conclusion of that process, we'll reevaluate ways to return excess excess cash to our shareholders through buybacks or dividends.

In the meantime, we will use our cash resources sparingly and judiciously.

I'll now provide an update on portfolio M&A and exits.

We have two active M&A situations in the portfolio.

One of our companies launched the sale process early in the earlier in the year and has received several nonbinding initial indications of interest.

Those interested parties are currently performing further diligence and have been asked to submit letters of intent in the next few weeks.

While it is still early to handicap the odds of a deal happening if one were to move forward. It could close in Q3 or Q4.

Another M&A process, we mentioned on last quarter's call involved one of our companies that has been in discussions for a stock for stock merger.

The parties continue to work on this deal, but the timing has extended from the original timeline in terms are likely to be modified.

We are hopeful we can agree on terms acceptable to both sides, but there's no assurance of final deal can be agreed to.

Note that neither of these companies are in bucket two.

There is also ongoing ongoing M&A and capital raise activity.

Some of the buckets you companies as part of their restructuring efforts.

Okay.

Let me talk about our strategic process.

On our strategic process.

We are in exclusive discussions with one counterparty.

While we cannot go into too much detail at this time the goal of the transaction is to enable the vast majority of exit proceeds from the portfolio to flow to our current shareholders.

To reduce our operating expenses and to gain scale.

We are in their structuring and diligence phase. So there can be no assurance that a deal will be reached.

This traction this transaction should it move forward would be subject to safeguard shareholder approval.

I will now provide some company highlights.

The Q1 highlights.

That we discussed today relate to our bucket one companies.

Note that these are not exhaustive and do not reflect all the risks inherent in these venture stage companies.

Moxie increased the number of live connections to its health care providers by 49% in Q1 2023.

It's Q1 revenues per healthcare provider site is up 142% year on year and the company was issued its first patent.

Equilibrium exceeded plan revenues and EBITDA targets for Q1.

Its Q1 2023 revenues were up 28% year on year.

It's EBITDA loss was reduced by 70% year on year and operating cash flow improved by 51%.

For prognosis. The biggest highlight is the funding round that we mentioned earlier.

On the business side, 100% of the business has pivoted to the marketplace model.

The company is executing to plan and is on track to nearly triple its bookings for 2023.

Clutches Q1, total revenues were up 54% year on year, and reoccurring revenues were up 30% year on year.

In Q1 2023, the company added nine new customers and on boarded five new customers.

Now, let me comment on public comps in trading multiples.

We regularly track the revenue multiples and revenue growth of our publicly traded peer companies to help investors triangulate on what some of our companies could be worth using these same metrics.

Given the buckets of the portfolio that we described at the outset, we believe that these trading data points are relevant for the five companies, which are not in bucket two.

So the bucket two companies given their situations traditional valuation metrics do not apply.

As of April 25th our Tech enabled health care peers, we're trading at three six times 2023 consensus revenue.

And three five times 2024 consensus revenue.

2023 consensus revenue growth for these tech enabled health care peers was 11%.

With 12% consensus revenue growth for 2024.

As of April 25th the marketing technology peers, which is relevant for clutch. We're trading at two eight times 2023 consensus revenues and $2 six times 2024 consensus revenues.

2023 consensus revenue growth for these marketing technology tiers was 10% and 13% consensus revenue growth for 2024.

Note that this data has not changed much much from our Q4 2022 Paul.

At this time I will hand, it over to our CFO Mark Herndon.

Thanks, Eric.

<unk> net loss for the quarter and the March 31, 2023 was $3 5 million or 22 cents per share as compared to the net loss for 2020 to first quarter of $6 7 million or <unk> 40 per share.

As we disclosed last quarter, we committed we completed the remaining purchases under the $3 million 2022 share repurchase plan during the quarter by acquiring about 25000 shares earlier in January .

In total the 2022 repurchase program.

We repurchased 736577 shares.

An average price of 490 per share.

Picard ended the quarter with $18 8 million of cash cash equivalents restricted cash and marketable securities.

We continue to have no debt obligations.

Our general and administrative expenses were $1 2 million for the first quarter of 2023, and 2022, but rounded basis.

Year over year decrease was 4%.

Similarly, corporate expenses for the quarter, which represent general and administrative expenses, excluding stock based compensation severance expenses and non recurring and other items.

$8 million on a relative basis for each of the first quarter 2023 and 2022.

The year over year decline was six 4% there.

We continue to expect the quarterly level of corporate expenses have.

Stabilized at approximately.

With respect to our.

Ownership interests, we have an aggregate fair value at March 31, 2023, a $12 million as compared to $15 4 million at December 31.

This quarter's activity was limited to the application of equity method accounting.

It's generally reduces our carrying value based on our share of the losses of our companies.

Our reported share of losses of our equity interest in the three months ended March 31, 2023 was $2 6 million as compared to $3 9 million for the comparable period in 2022.

This decrease is largely the result of several companies, reaching zero carrying value.

At that point, we generally vies recording losses for that entity.

I would also like to remind everyone that we report our share of the losses from the equity method companies on a one quarter lag.

This quarter's share losses reflect the fourth quarter of 2022.

Also with respect to our ownership interest the third party that this group of eight companies.

It was approximately $246 million versus $209 million in 2022 year end.

This increase is primarily related to one of our company's accessing your line of credit that had previously been established at Silicon Valley Bank.

Cash at the same group of eight companies has decreased to $59 million from $71 million.

Last quarter.

This decrease primarily related to the quarterly burn a couple of areas.

In terms of revenue performance, we reported an eight 9% increase of this group of companies for the trailing 12 months period ended December 31 2022.

Due to the one quarter lag.

We continue to see our fastest birth for Murphy in equilibrium.

Now, let's turn first to turn it over to the Q&A segment of the call. So I'll ask the operator to open up the lines for questions.

Thank you we will now be conducting a question and answer session.

I'd like to ask a question.

So our one on your telephone keypad.

Formation tone will indicate your line is another question too.

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One moment, please while we poll for questions.

Okay.

Once again, if you would like to ask a question. Please press star one on your telephone keypad.

First question comes from Matt Burmeister with.

Private Investor. Please go ahead.

Your line is fine.

Yes.

Yes.

Hi, the June to December .

Asian.

Timeline, what was that in regards to again.

The June to December .

Timeline.

An announcement on the Houlihan lokey strategic process, but we've been working on.

Okay.

Okay.

Is that is that separate from this.

Recent update about the.

A single counterparty.

Vince discussions is that separate from houlihan lokey process or are they.

One and the same.

They are one and the same the houlihan lokey process.

Has resulted in us as well.

Scribed entering into.

So the evenings, where we're having discussions with one counterparty.

And the outcome of those discussions in the overall process with Houlihan Lokey.

It will be announced between sometime between June and December of this year.

Thank you there are no further questions at this time I would like to turn the floor over to Eric Hoffman for closing remarks.

Yeah.

I do believe we did on a web question, Matt you want to go ahead and ask it.

Sure. The question from the web is core and strategic process, you mentioned gaining scale as a possible beneficial outcome of the current transaction being discussed can you explain why that would be a goal for the company.

Sure.

Gaining scale could be a goal or an advantage for the company and its shareholders for a couple of reasons.

First of all.

Greater scale.

<unk> generate greater.

Trading.

Volume for the stock.

Our trading volume has declined dramatically over the past year. So that's one benefit that could be gained through scale.

The second is that scale would help.

Amortize the operating expenses over a bigger base because as.

As we've spoken about in the past year is a fixed amount of operating expenses to manage the portfolio and to operate as a public company to a larger scale would help them share those costs across a.

A larger operation of our base of assets.

Okay.

Okay. Alright next question from the web there was a recent announcement that media math has put itself put itself up for sale can we reasonably expect to receive anything or should we expect not to get anything.

So we're really not at Liberty to comment on on their specific M&A process.

I think for the purposes of our internal purposes, we're not describing much value to media math. It is possible that a successful M&A outcome. If it were to happen could result in something but we're not factoring it in.

Internally.

Is there anything.

More than de Minimis.

Our next question from the web what are the four companies in bucket one again.

Sure. So those companies are equilibrium.

Mark here.

Parag knows.

Yes.

Hi, Josh.

Yes.

Clutch.

Much.

Yes.

That was our last question from the web.

Okay. We do have a follow up question from Matt Matt.

Matt Your line is open.

Yes.

The single counterparty.

They are in advanced discussions.

It seems like it's a little farther along based on that.

How come.

Time window from June to December that seems like a pretty long window.

Yes.

So.

The discussions.

Are underway.

And working as expeditiously as possible get two a 's action. If there is one that has that is doable and that we think would be.

Superior for our shareholders than just run off plan.

The transaction would also as I mentioned require safeguard shareholder approval.

Approval.

So there are a number of things involved in both.

On the diligence side with the counterparty on the structuring side addressing tax issues and then determining what the implications are for us to go in.

Shareholder approval. So that's the reason for that.

Timeframe.

From which you may know.

So from June to December is kind of.

Between one months, one month and call it six months.

I'm a little confused.

They're talking about we're going to achieve scale from this transaction.

Following what that plan looks like.

Yes, well, we haven't we haven't given too much detail as you can understand given that we are under an exclusivity agreement and are doing work. We just wanted to highlight some of the goals and objectives that we would be looking to achieve from a transaction.

If we get to a point, where the deal has been signed we of course, we will share with the investors and our shareholders.

All the benefits and advantages of that transaction as well as any risks that are associated with that transaction.

Alright best of luck.

Okay.

Thank you I'd like to turn the floor over to Eric for closing remarks.

Eric we have one more question from the web asks can you. Please elaborate about the company that is not in either bucket.

Yes.

The company that is not in either bucket, so I think.

Yes.

A lot of these companies are obviously quite fluid as you've seen over the last two or three quarters. The one company that is neither.

In bucket one bucket two.

We're working to get it into two buckets, one, let's just put it that way.

But that is a process that's underway the company as I mentioned <unk>.

Need additional capital it will also need some operational changes and some cost cuts so that is a.

A project that we're working on together with the other investors the management team.

And the lender to try to achieve an outcome for that company, who can move it into bucket one.

Our next question from the web.

Could you talk through how you were evaluating in place help from the end of 2021, when the lockup ended until the time that you sold it.

Yes.

I can make some comments and mark mey.

They have something also to add onto it.

When the lockup ended.

The stock of bright health was $3 and change.

Okay.

Obviously.

Down from the $18 IPO price.

This.

With a.

Top tier Investor Group management team and our.

Interesting business model that would use technology to help lower the cost and improve the efficiency in the insurance market both for.

Medicare advantage Obama care, another HCA and other.

So the company had.

Significant opportunity.

And we followed the company each quarter.

We had a as we may have called out at some point the company had a cafe.

The address that capital need.

We were looking at that other catalysts for the stock to go higher we evaluated the performance each quarter.

<unk>.

Like anything from the investing standpoint, you can't look in the rearview mirror at a point in time that we decided to sell our position we had concluded that.

The company and the management team, we're not going to deliver on them.

Any of the requirements or the objectives that we.

We're looking forward to achieve our target exit price.

So at that time, we look to them to exit the position in the market I don't know markets, there's anything more you'd like to add to that.

Yes, I was just going to reiterate.

The vast majority.

As you already I think the percentage was something like 85% of the decline happened during the restricted phase.

And then the other aspect of this is we didn't have immediate cash needs throughout the year right. So we werent.

We had sufficient cash resources.

Throughout the year, so we were able to to make.

To make the investment decision.

Eric laid out throughout the year.

Okay and that was our last question from the web.

Okay.

I'll just.

Thank you all for joining us on the call today. Please contact us if you have any follow up questions. Thanks, very much have a nice evening.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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