Q2 2023 Safeguard Scientifics Inc Earnings Call

Ladies and gentlemen, greetings and welcome to the safeguard Scientifics, Inc. Second quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mark, but not general counsel at safeguard Scientifics. Please go ahead.

Okay.

Good afternoon, and thank you for joining us for this presentation safeguard scientifics second quarter 2023 financial results joining me on today's call with Patrick right.

Thank you, Bob Sharp and Mark Hurley, our Chief Financial Officer. Following our prepared remarks, we will open the call to your questions. As always please presentation includes forward looking statements reliance on forward looking statements involve certain risks and uncertainties, including culinary too.

The outcomes of Corpus Christi transaction does concern.

Certainly at the peak performance of our company and our ability to make the decisions about the monetization of our companies.

One of our companies.

All of our companies fluctuations in market prices of any of our companies are publicly traded and the effect of regulatory and government.

Another uncertainty.

Hollywood guests each day.

Any of these factors are beyond our control as a result of these factors are not.

And not be relied on as indication of future performance. During the course of todays call words, such as expect state believe intend will be used our discussion goldcorp and the future management can provide any assurance that future results will be as described in forward looking statements.

Currently reshape first filing with the SEC.

Please describe in detail the risks and uncertainties associated with managing our business nobody does not assume any obligation to update any forward looking statements made today.

I would now like to reduce Eric.

Yeah.

Thanks, Matt.

Thanks for joining us this afternoon for Q2 2023 earnings call.

Today, we will review the following topics.

We will discuss today's announcement regarding our strategic process, our plan to return excess cash to shareholders and our efforts to materially reduce our ongoing operating expenses.

Well review the portfolio and exited activities of our companies.

Next Mark will run us through the financials and then we'll open up the call for questions.

I'll start with the strategic process.

As we announced in our press release safeguard is no longer in discussions with a single counterparty on a potential strategic transaction.

After spending considerable time and effort, we could not reach an agreement on deal terms due in part to valuation tax and structural elements that were critical for us to do the deal.

We also explored alternative structures with this counterparty, but were unable to reach agreement on a deal.

While other strategic transactions could still be considered we are now working diligently on a plan to return excess cash to our shareholders materially reduce our operating costs and exit the assets over the next two years.

First we intend to return excess cash to shareholders in Q4 2023.

We define excess cash as cash on hand, less amounts needed to be retained to support the operations of the company satisfy liabilities and pay onetime costs incurred as a result of pursuing this strategy.

Based on our current estimates, which are being further refined and assuming a substantial reduction in our operating costs, which I will discuss in a couple of minutes.

We estimate that approximately half of our Q4 2023 balance sheet cash could be returned to shareholders in a dividend.

Second to substantially reduce our ongoing operating costs.

Safeguard is exploring delisting from NASDAQ and becoming a non reporting Bulletin Board company.

To do this we would file a proxy and seek a shareholder vote.

Over the past few years, we have worked diligently to reduce our corporate expenses. These have come down from $7 1 million in 2019 to our current $3 million corporate expense run rate. However.

However at this time, we do not believe there is room to cut this much further.

By delisting from NASDAQ and becoming a non reporting company. We expect we can reduce our annual annual cash corporate expenses by up to 50% or one and a half million dollars.

Assuming it takes the next two years to exit the remaining portfolio companies. This would amount to $3 million in total savings, which represents a sizable benefit to safeguard shareholders.

Third we estimate the exit values from the remaining portfolio companies, assuming normal conditions and ordinary course exits would range from 25 million to $45 million over the next two years.

We expect the vast majority of these proceeds to come from companies that we categorize as bucket one concept, we introduced last quarter, and which I will expand upon a little later in my remarks.

We are excited about this path as it reflects our commitment to maximizing value for shareholders and returning cash in a timely manner.

I will next talk about the portfolio.

Last quarter, we divided the portfolio companies into two categories bucket, one and bucket two.

We would like to further refine this categorization and provide greater detail to help you better understand how we are thinking about the companies and their expected exit values.

We defined bucket one companies as those that are well capitalized executing on their business plans, while navigating their share of risks and opportunities, which is typical of VC backed companies at this size and stage.

We believe that the vast majority of exit proceeds from safeguards portfolio positions will come from bucket one companies.

I'll get one companies consist of Maxim equilibrium.

Noticing clutch the same companies, we described last quarter.

Now let me provide a few highlights from Q2 on each of these companies.

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

I'll start with Moxie Moxie posted first half 2023 revenue growth of 20, 20% year on year.

It's signed another contract with a top five electronic medical Health records vendor spanning its network coverage.

And its bidirectional convergence product is gaining traction in the market with two leading health care providers using it.

Equilibrium posted first half 2023 revenue growth of over 20% year on year.

The company exceeded its budgeted revenue and EBITDA targets for the first half and it was operating cash flow positive in Q2.

Clutch posted first half 2022 excuse me first half 2023 revenue growth of 35% year on year.

We closed 10, new logos in the quarter and it began beta testing embedded AI tools with select customers, allowing the customers the ability to generate content and improve their product and engagement recommendations.

Prognose exceeded its revenue and EBITDA plan for the first half of 2023.

The company announced a strategic partnership with gene Dx to help rare disease patients more rapidly gained access to potential treatment options and.

And the company is adding Travis may the founder and former CEO of date event to prognosis sports.

Bucket two companies are those where we expect an outcome that returns a de minimis amount of capital to safeguard.

The expected outcomes for bucket two companies are disappointing and results from any number of the following factors.

An inability to attract additional equity capital due to business model financial profile or risk appetite in the current market.

Too high a debt load and an inability to refinance the debt and the current market.

The company's path to breakeven its too distant to attract capital in the current environment.

We have three companies in bucket two.

Well, we havent directly identify them by name their transaction announced in our earnings release for autonomy and Trice medical would confirm that they are bucket two companies.

For autonomy, we exited our investment in June as part of our senior lender led restructuring and recapitalization that left investors with a de minimis ownership stake in the company as part of that transaction safeguard was cashed out I'll get subordinated promissory note for a cash payment of point $4 million.

We have no further economic interest in the company post this transaction.

So trice medical we exited our position in July as part as part of a similar senior lender led restructuring and recapitalization and the choice case safeguard retained a small subordinated debt position in the recapitalized company, representing the value of our subordinated line of credit that we funded in December .

Number 22 in January 2023.

In addition, we received a small consent fee payable at maturity and retained a sub 2% ownership stake in the recapped the company.

We also have an eighth company, which is in an in between category.

This company is in the process of recapitalizing and raising third party capital.

Should this transaction come to past, we expect the company to move to bucket one.

Should this transaction not be completed and this would move to bucket too.

We expect a resolution of the situation in the next 60 to 90 days.

On an overall portfolio basis I will note that we do not expect to deploy additional capital to any of our remaining companies.

Sale processes.

We have worked closely with our portfolio companies to pursue M&A and over the past 18 months five of our eight companies launched M&A processes with reputable investment banks. Unfortunately, the outcomes of these processes have been disappointing and to date. None of these M&A efforts have resulted in transactions.

On our Q1 call. We said that there were two companies in active M&A processes, one for an outright sale.

And the other for a merger.

Neither deal move forward.

Combination of company business model balance sheet and the market environment have led to these outcomes.

On a macro level the late stage V. C market continues to experience headwinds amid a challenging financing and public exit environment.

This is driven by a weak IPO market reduced risk appetite and V sees higher debt costs and a pullback in investing by non traditional investors having.

Having said that there are signs of stabilization.

Evidenced by the fact that median valuations for most V. C stage companies ticked up in Q2 and anecdotally we are seeing some improvement in the overall M&A market.

I will now hand, the call over to our CFO Mark her and getting to take you through the numbers in more detail.

Thanks, Eric.

Net loss for the quarter ended June 32023 was $2 9 million or <unk> 18 per share.

As compared with net income for the comparable 2022 second quarter, <unk> 5 million or <unk> <unk> a share.

Year to date period ended June 30th 2023, with a net loss of $6 3 million or 39 cents per share that's.

As compared to $6 2 million.

We're 38 cents per share for 2022.

<unk> ended the quarter with $15 1 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 second quarter of 2023 versus $1 1 million for 2022, one around the basis up slightly three 9%.

Similarly, our general administrative expenses were $2 4 million for both of the year to date periods.

The uptick in expenses is primarily the result of certain professional fees associated with our project.

Oh.

Paul.

Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock based compensation severance expenses and nonrecurring and other items were $7 million and point 8 million around the basis for each of the second quarters of 2023 and 'twenty two.

Respectively. The year over year decline was 12, 2%.

Corporate expenses for the six months ended June 30 of 2023 for $1 5 million as compared to the one 7 million for the comparable 2022 period.

The declines in corporate expenses were across a variety of expenses, but included lower employee cost.

Related taxes and professional fees.

The quarterly level of corporate expenses have stabilized at this approximate level before we implement any cost structure changes referred to earlier.

With respect to our ownership interest we have an aggregate carrying value at June 32023, a $13 million.

Compared to $15 4 million at December 31, 2022.

This quarter's activity was limited to the $3 million deployment to progress that increased our carrying value.

And the application of the equity method of accounting, which reduced our carrying value based on our share of the losses of our companies.

We also recorded a.

Zero point $2 million impairment this quarter related to one of our remaining other ownership interests.

Our reported share of the losses of our equity method ownership interests for the three months ended June 30 of 2023 was $2 8 million as compared to $3 9 million for the comparable period in 2022.

Change is largely the result of several companies, reaching zero carrying value during late 2022 or even during 2023.

At that point, we generally ceased recording losses from that entity.

I would also like to remind everyone that we report our share of losses for the equity method companies on a one quarter lag. So this quarter's share of losses reflect the first quarter of 2023.

Also with respect to our ownership interest the third party debt and this group of six.

Six remaining companies was approximately $135 million versus $134 million last quarter essentially unchanged.

And I'll just note that the six companies remaining we're referring to our info, Brian Runich equilibrium, Mcafee prognose sign ups and clutch.

This group excludes Oksana and Trice, who.

We're in this disclosure last year, where we hit we no longer have an ownership interest.

Cash at the same group of six companies was unchanged at $51 million. However, you may recall that progress raised equity during the quarter.

After considering directly we raise.

They need to be a decrease in the group's cash primarily related to the quarterly burn three companies.

In terms of revenue performance, we reported an 11, 7% increase at this group of six companies for the trailing 12 months period ended March 31, 2023 during the one quarter lag.

We continue to see consistent strong growth for moxie and equilibrium in this quarter. Both clutching sign ups also showed improved revenue growth for this trailing 12 month period.

Now it's.

Turning first to turn to the Q&A segment of the call. So I'll ask our operator to open the phone lines for questions.

Thank you.

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Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Yeah.

Our first question comes from the line of Jason Stankowski with Clayton. Please go ahead.

Hey, guys.

Can you hear me.

Yes, yes, yes, we can okay.

Do you know.

Yes.

If the return of capital at least the first the first one.

You know potentially in Q4, if at all does that way will be will be a return of capital.

Similar to.

Similar to our dividend a few years ago Yep Yep.

And just for those that are on the phone that's a quick recap in December 2019.

And you pay the dollar dividend per share and that was a return of capital so effectively a non taxable distribution to shareholders at that time.

That is based on taxable analysis for the year and that was a circumstance in 2019, we are similarly in a similar situation. This year, we expect that we'll be in that position.

I'll caveat it that everything can change if we have a transaction that.

Slips us to a oh, it's even a tax technical term, but accumulated profit position.

How big of a problem to have right that yeah that would be that would be okay, well address that if it occurs but our expectation is that where you would be in a similar circumstance.

And then.

You know I I don't know when the decision was made or how far along but can you give us you know assuming we can continue to go down.

The cost reduction path.

And prepare a proxy.

Do you have.

Now what that timeline would look would look like.

Is that a week process or like a three month process or are you kind of ready to go.

Well I would I would say we indicated at Q4.

Hmm.

Churn of capital and that would correspond with the.

The listing process also so that's the part of it because they're paying for it.

They're not.

And Extricable linked right you could you could do a dividend if you want but I guess, you're saying they kind of are because.

You need that reduction in overhead sort of beat the plan how much cash you actually want to keep so you've got approval.

Figure that out.

Exactly one does not require the other but input from one we'll determine what amount of money needs to be retained.

Yeah, Jason you got it.

Okay.

I think that's I think that's all I had thanks.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, a reminder.

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Yeah.

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Okay.

Well, thank you for joining us on the call today and as always please contact or contact us. If you have any follow up questions. Thanks and have a good evening.

Thank you the conference of safeguard Scientifics, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.

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