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Safeguard Scientifics, Inc. (SFE) CEO Eric Salzman on Q4 2021 Results – Earnings Call Transcript

Safeguard Scientifics, Inc. (NYSE:SFE) This autumn 2021 Earnings Conference Call March 9, 2022 5:00 PM ET

Company Participants

Matt Barnard – General Counsel

Eric Salzman – Chief Executive Officer

Mark Herndon – Chief Financial Officer

Conference Call Participants

Daniel Han – Kansai Capital

Operator

Good afternoon. Thank you for attending right this moment’s Safeguard Scientifics Fourth Quarter 2021 Financial Results Conference Call. [Operator Instructions]

I might now wish to move the convention over to our host, Matt Barnard, General Counsel at Safeguard Scientifics. Please go forward.

Matt Barnard

Good afternoon, and thanks for becoming a member of us for this presentation of Safeguard Scientifics fourth quarter and full 12 months 2021 monetary outcomes. Joining me on right this moment’s name and webcast are Eric Salzman, Safeguard’s Chief Executive Officer; and Mark Herndon, Safeguard’s Chief Financial Officer.

Following our ready remarks, we’ll open up the decision to your questions. As all the time, right this moment’s presentation consists of forward-looking statements. Reliance on forward-looking statements entails sure dangers and uncertainties, together with, however not restricted to, the uncertainty of the outcomes of company strategic transactions, if any, uncertainty of the long run efficiency of our firms, our potential to make good choices in regards to the monetization of our firms, the continued assist of our firms, our lack of ability to unilaterally management our firms, fluctuations out there costs of any of our firms which are publicly traded and the impact of regulatory and financial situations usually and different uncertainties described in our filings with the SEC.

Many of those components are past our potential to foretell or management. As a results of these and different components, our previous monetary efficiency shouldn’t be relied on as a sign of future efficiency.

During the course of right this moment’s name, phrases comparable to anticipate, anticipate, consider and intend shall be utilized in our dialogue of targets or occasions sooner or later. Management can not present any assurance that future outcomes shall be as described in our forward-looking statements.

We encourage you to learn Safeguard’s filings with the SEC, together with our Form 10-Ok, which describe intimately the dangers and uncertainties related to managing our enterprise. The firm doesn’t assume any obligation to replace any forward-looking statements made right this moment.

I might now wish to introduce Eric

Eric Salzman

Thanks, Matt. Thanks for becoming a member of us this afternoon for our This autumn 2021 earnings name. Today, we are going to cowl the next subjects: We’ll summarize our technique and spotlight our main achievements for 2021. We’ll present an replace on exit actions within the portfolio. We’ll present an replace on capital raises by our portfolio firms. We’ll present steering on anticipated follow-on deployments for 2022. We’ll share latest highlights for every firm. We’ll share publicly listed comparable firm buying and selling statistics and income development. We’ll talk about our latest engagement of Investment Bank Houlihan Lokey.

I’ll then hand the decision over to Mark Herndon, our CFO, to stroll you thru the monetary leads to better element. I’ll begin with achievements for This autumn and full 12 months 2021. For these traders who is perhaps new to Safeguard, let me first briefly summarize our technique.

Safeguard owns a portfolio of minority fairness curiosity in growth-oriented tech and well being care firms. We usually are not including new firms to the portfolio and are actively working with administration and co-investors to drive worth creation, maximize exit values and return money to Safeguard shareholders.

The portfolio consists of late-stage enterprise firms that are at the forefront of their respective fields. For instance, real-world information for well being care drug improvement, options that handle workforce well-being, cell cardiac telemetry providers and buyer loyalty software program, to call a number of.

We sit on almost all the boards of our portfolio firms and are targeted on driving execution and making a path to profitable exits as expeditiously as potential. We have discovered that maximizing the worth of Safeguard’s possession curiosity often comes by pure exits, which means when the corporate itself is bought and Safeguard will get its professional rata portion of the sale proceeds.

Although in sure conditions, we have now bought our stakes in noncore positions by secondary transactions. We assist our firms with follow-on capital the place we can assist drive the course of the corporate and generate engaging stand-alone returns on the brand new capital deployed.

And whereas pursuing this technique, we’re extremely targeted on limiting the working expense burden on the Safeguard degree. 2021 was a profitable 12 months for Safeguard. We generated $61 million in proceeds from the sale of seven positions and returned roughly $41 million to our shareholders by open market purchases and a reverse Dutch self-tender. We repurchased greater than 20% of our excellent shares.

We deployed $2.7 million within the portfolio in 2021 versus our unique steering vary of $5 million to $7 million. We considerably lowered our money working bills and ended the 12 months with $24 million of money and no debt.

Next, I wish to present an replace on exit actions within the portfolio. During our Q3 name final October, we highlighted a lot of exit conditions. And on this name, we wish to replace you on the place they stand and add further element as applicable.

Please observe that we’re restricted in how a lot element we are able to present as a consequence of confidentiality provisions in addition to particular deal dynamics. On our Q3 name, we disclosed that one firm had signed an LOI with a strategic purchaser, and we have been cautiously optimistic that the deal would shut.

Unfortunately, that transaction didn’t shut as a consequence of a lot of components, together with a post-LOI discount by the client to the unique buy value. The portfolio firms Board and we determined that shareholders could be higher served if we targeted on delivering robust 2022 income development fairly than accepting the lowered bid.

While this was disappointing, we proceed to consider within the firm’s prospects for 2022 and past, particularly since demand for his or her merchandise was negatively affected by COVID-19. With that principally within the rearview mirror, we’re seeing accelerated revenues at the beginning of this 12 months, which helps wholesome income development for all of 2022.

On our Q3 name, we talked about that one among our firms was launching a gross sales course of in mid-October. This firm has held discussions with a number of events, however doesn’t presently have an LOI signed.

We can not handicap the chance of a deal right now, and will no deal come up, we are going to proceed to assist the corporate because it executes on its marketing strategy. On our Q3 name, we additionally talked about that one among our firms had signed an LOI and was working by diligence.

We highlighted that the deal was difficult and even when it did shut, the proceeds wouldn’t be significant to safeguard as a result of debt load and capital construction on the firm. While that transaction didn’t transfer ahead, the corporate is pursuing a lot of different paths and we anticipate the end result of these efforts to equally end in de minimis proceeds to Safeguard.

Also on our Q3 name, we talked about that one among our firms was in early-stage stock-for-stock merger discussions with one other non-public firm. Those discussions didn’t transfer ahead because the merger accomplice’s profile, monetary profile to be particular, was unattractive to us and our fellow shareholders, which means we did not wish to personal their inventory.

These have been opportunistic discussions and don’t have an effect on the corporate’s — our firm’s go-forward prospects on a stand-alone foundation. In addition to those 4 conditions, one other one among our firms is pursuing a twin path, M&A discussions with a small variety of strategic events and a parallel development capital increase course of.

We will consider the end result of these efforts and decide together with our co-investors and administration what the very best risk-adjusted path shall be. Let’s now evaluate different capital elevating actions of our firms.

On our October earnings name, we mentioned there have been 3 firms exploring capital raises to assist their 2022 and past operations. Of these, 2 selected to delay outreach to VCs till early 2022, and so they each are presently in discussions with potential traders.

While there is no such thing as a certainty, we anticipate these 2 financings to shut a while in late Q2 or early Q3. The third firm we talked about was Prognos, which final month raised an inside financing spherical from current traders wherein Safeguard participated with $2 million.

We had anticipated this to fund in This autumn of final 12 months, however it pushed into Q1 2022, which is among the the explanation why our 2021 deployments of $2.7 million was beneath the $5 million to $7 million we had guided. A fourth firm is within the means of elevating an inside financing spherical and which Safeguard is anticipated to deploy roughly $1.5 million.

Before I run by highlights of our portfolio firms, I needed to the touch on how we see the latest inventory market correction, the risky geopolitical state of affairs and potential threats to the financial restoration impacting our portfolio.

First, none of our firms have operations in Ukraine or Russia. Second, we don’t consider that the market volatility will hinder our firms from elevating capital. There is an unprecedented quantity of uninvested enterprise capital obtainable that’s seeking to be deployed in main know-how firms with engaging development prospects and sturdy enterprise fashions.

In truth, what we have now been seeing is that enterprise capital and personal fairness traders have elevated their minimal funding sizes, which creates a possibility for bigger recap financings, the place the brand new traders fund major capital to the corporate and concurrently buy shares from current stockholders.

This may present one other path for partial liquidity to Safeguard in these conditions. On the M&A entrance, we see each strategic and personal fairness backed firms seeking to purchase applied sciences, engineering expertise and adjoining product strains at a speedy tempo.

What has modified over the previous few months is that M&A consumers, be they strategic non-public or monetary sponsors, have been more and more targeted on the monetary profile of the corporate, together with seeing a transparent path to EBITDA constructive or money stream breakeven.

At every of our firms that aren’t EBITDA constructive, we’re working carefully with administration to develop the trail to profitability whereas not sacrificing income development or its aggressive market place. Let’s now contact on some portfolio highlights.

After exiting 7 firms in 2021, our portfolio presently consists of 11 positions. We have 7 well being care firms, 1 advert tech firm, 1 advertising and marketing tech firm, 1 fintech firm and 1.3 million shares in publicly traded Bright Health Group, ticker BHG.

The following is a bullet or 2 in every of our firms. Please observe that this isn’t a complete evaluation of every firm and particular dangers apply to every title. I’ll begin with Aktana.

In 2021, Aktana had the best 1-year bookings whole within the firm’s historical past. The surge in utilization of Aktana’s services by its pharma clients underscores rising synthetic intelligence adoption throughout areas and types.

Syapse introduced partnerships with Merck, Bay Health, Illumina, Pfizer and Infor, together with a 3rd part of collaboration with Pfizer for breast most cancers. Prognos expanded its information sources, including new Rx information to its novel information market that has 25% protection of U.S. pharmacies.

meQuilibrium had 2021 income development and bookings development that have been each above 50% year-on-year. The firm is properly positioned to handle the challenges employers face managing the after results of COVID-19, the everlasting shift to hybrid workforce and a better deal with worker agility, resiliency and well-being.

For Moxe, its December 2021 income run fee was almost 3 occasions the prior years. The accelerating adoption of Moxe’s medical information trade by payers and suppliers is creating community impact within the trade.

InfoBionic grew its billable MCT gadgets by 40% year-on-year in 2021 and its Mayo Clinic partnership is operating forward of plan. For Trice, regardless of macro December was a report excessive income month for each the 10x and Trice product strains.

Clutch accelerated its partnership with NCR Hospitality, including over 3,700 areas by year-end 2021. Lumesis is steadily rising its high line and growing product enhancements to guard and develop its buyer base.

And for Bright Health Group, our shares got here off lockup in December of 2021. We’re very dissatisfied with the corporate’s outcomes over the previous 3 quarters. We’re following each the corporate and the sector carefully and are updating our inside value targets primarily based on outcomes.

For MediaMath, a brand new CEO was appointed in January. However, the corporate’s steadiness sheet and capital construction are such that we anticipate a de minimis return to Safeguard from our remaining MediaMath place.

To remind traders, we bought almost half of our place again to the corporate in mid-2018 for $45 million. And as a part of that transaction, Safeguard gave up its Board seat. The $45 million represented 1.8 occasions a number of on our whole funding.

Next, we would wish to share related publicly listed comparable buying and selling stats. As we have finished in prior quarters, we offer sure metrics on publicly traded comparable firms that we observe towards our portfolio.

This is a few of the information we use as a part of our inside valuation methodology, along with different qualitative inputs. We have a look at enterprise worth to ahead income multiples and projected income development as 2 necessary metrics.

We present this data along with the web debt of the portfolio, that Mark will share with you in a couple of minutes, to assist traders assess a spread of potential values for the portfolio firms.

Note, in fact, that public comps usually are not the only real enter to find out valuation. There are different methodologies we use, and this isn’t meant to supply steering on portfolio valuation.

The following statistics are as of March 7. I’ll begin with enterprise worth to income multiples, which you’ll have seen have come down from the October highs once we reported our Q3 outcomes. As of earlier this week, publicly traded well being care comps have been buying and selling at 2.7 occasions 2022 anticipated revenues, down 1.4 turns from our October 2021 earnings name.

Publicly traded advert tech comps have been buying and selling at 3.1 occasions 2022 anticipated revenues, down 1.3 turns from October. Publicly traded advertising and marketing tech comps have been buying and selling at 2.3 occasions 2022 anticipated revenues, down 1.3 turns from October.

This materials discount in these enterprise worth to income multiples replicate the decline in inventory costs, notably in growth-oriented firms. What is fascinating is that analyst consensus for 2022 income development for these public friends haven’t come down a lot, and in some circumstances, are up.

So for example, for publicly traded well being care comps, the analyst consensus for median income development is 28% for 2022, up from 24% in October. For publicly traded advert tech comps, the analyst consensus for median income development was 26% for 2022 versus 25% in October. And for publicly traded advertising and marketing tech comps, the analyst consensus for median income development was 12% for 2022, down from 15% in October.

For comparability functions, the mixture income development projected for Safeguard’s portfolio, excluding Bright Health and MediaMath, is above 25% for 2022. Although not each firm is experiencing that development, some greater and a few decrease, and it’s nonetheless early within the 12 months.

Lastly, I wish to discuss our latest announcement to retain Houlihan Lokey as our funding financial institution to assist discover strategic alternate options. As I’ve reiterated since taking up as CEO in December of 2020, we’re singularly targeted on worth creation for our shareholders in no matter type that takes.

We’ve all the time acknowledged there is perhaps methods to boost shareholder worth that goes past our present technique. After our self-tender transaction final fall, we started to discover a few of these paths. We had some early discussions with a number of events who had expressed curiosity in Safeguard. This curiosity isn’t just, “Hey, can we buy your assets at a discount to fair market value”, which as we have mentioned previously, doesn’t, in our view, characterize the easiest way to maximise shareholder worth.

Based on our evaluation, administration and the Safeguard Board determined to have interaction a monetary adviser to discover the total vary of choices obtainable to maximise Safeguard shareholder worth.

After interviewing a lot of funding banks, we concluded that Houlihan Lokey’s experience in asset administration transactions, complicated valuations and deal structuring was the best match for our wants. Please observe that we’re early within the course of and these efforts could not end in any transaction. We will do our greatest to maintain you up to date on developments with this course of.

At this time, I’ll hand the decision over to our CFO, Mark Herndon.

Mark Herndon

All proper. Safeguard’s web revenue for the 12 months ended December 31, 2021, was $27 million or $1.36 per share as in comparison with a web loss for the 12 months ended December 31, 2020, $37.6 million or $1.81 per share.

Safeguard’s fourth quarter of 2021 resulted in a web lack of $8.6 million or $0.51 per share as in comparison with a web lack of $7.4 million or $0.35 per share for the comparable interval of 2020.

This quarter’s outcomes have been positively impacted by the decision of an earn-out contingency associated to a 2018 sale of AHS that resulted in an extra $2 million to Safeguard, and the continued decline on the whole and administrative prices.

The quarter’s outcomes have been negatively impacted by the continued decline within the honest worth of Bright Health inventory was opened in a noncash and unrealized loss on that inventory of $6.3 million. The fourth quarter additionally included our Dutch public sale self-tender provide that resulted within the repurchase of 4.3 million shares of widespread inventory at a price of $39 million.

When mixed with our open market purchases earlier within the 12 months, we repurchased 4.5 million shares at an mixture value of $40.6 million or $8.95 per share.

To shortly recap Safeguard’s annual outcomes, we have been positively impacted by the exit transactions of Flashtalking, leading to $44.8 million in money and Zipnosis, WebLinc, Velano Vascular and T-REX grew, which returned within the mixture money proceeds of $13.6 million.

The Zipnosis transaction additionally offered us with most popular fairness at Bright Health, which was transformed to 1.3 million widespread shares at their June preliminary public providing, ensuing within the unrealized acquire.

Unfortunately, as we disclosed quarterly this worth has declined all year long, and we ended the 12 months with that place valued at $4.5 million. Safeguard has additionally ended the 12 months with $24.8 million of money, money equivalents, restricted money. And we proceed to haven’t any debt obligations.

Our common and administrative bills have been $1.1 million for the fourth quarter of 2021, which was 30% decrease than the $1.6 million reported within the comparable quarter of 2020. For the total 12 months of 2021, our common and administrative bills have been $7.2 million as in comparison with $9.5 million for the total 12 months of 2020, a 24% decline.

Corporate bills for the quarter, which characterize common and administrative bills, excluding stock-based compensation, severance bills and different nonrecurring objects and different objects have been $0.8 million as in comparison with $1.2 million within the comparable quarter 2020, a 33% decline.

For the total 12 months of 2021, these company bills have been $3.9 million as in comparison with $5.2 million for the total 12 months 2020, a 25% decline. On a sequential foundation, this quarter additionally represents a decline of 6.8%.

While this additionally marks the fifth consecutive quarter of decline in company bills, we usually anticipate that the quarterly degree of company bills will stabilize at roughly this degree.

As a outcome, we have now established preliminary expectation for company bills in 2022 of $3.5 million to $4 million. The decline that we have now skilled this 12 months with respect to each common and administrative prices and company bills have been the results of reductions in cash-based worker compensation prices, skilled charges, workplace prices and insurance coverage bills.

The company expense measure additionally continues to profit from director charges which are being paid in fairness and a good portion of administration’s compensation in ache fairness. With respect to our possession curiosity, we had an mixture carry worth at December 31, 2021, of $26.5 million as in comparison with $50.4 million at December 31, 2020.

This lower was the results of the appliance in fairness technique of accounting, the $2.5 million impairment within the second quarter at different partnership curiosity in addition to the exit of the Zipnosis, Flashtalking, T-REX, Velano Vascular and WebLinc, that every eliminated carrying worth.

These decreases have been partially offset by will increase as a consequence of our $2.7 million mixture deployments at Trice within the first quarter and Aktana within the third quarter, the addition of the Bright Health place and the dilution positive aspects aggregating to $9.3 million from Syapse within the first quarter and Trice within the third quarter.

These dilution positive aspects are reported as a element of fairness revenue or loss line merchandise. And as a reminder, our carrying worth of possession curiosity the place we apply the fairness technique is a GAAP time period the place we usually scale back the carrying worth for our share of the losses of the underlying firms and it usually doesn’t characterize the honest worth or an anticipated exit worth of those self same possession pursuits.

If the honest worth of any of our possession curiosity declines beneath our carrying worth, we’d think about making a downward adjustment for the carrying worth by recording an impairment. We’ve additionally had a number of possession pursuits that aren’t accounted for of the fairness technique and do not need a readily determinable honest worth these curiosity can have an upward or downward adjustment sometimes ensuing from observable value modifications if there are transactions of their securities.

These impairment value modifications are recorded as positive aspects or losses in different revenue or loss web. Our share of the losses of our fairness technique possession curiosity for the three months ended December 31, 2021, was $3.6 million as in comparison with $4.1 million for the comparable interval in 2020.

The quarter’s lower in loss is primarily the results of having 2 much less firms in 2021 and a decrease degree of losses at a number of firms as a consequence of quite a lot of occasions, together with some nonoperating onetime positive aspects within the underlying firms, and limiting the popularity of losses and when our carrying worth is lowered to 0.

I’d additionally wish to remind everybody that we report our share of the losses from the fairness technique firms on a 1-quarter lag. So this quarter’s share of losses replicate the third quarter of 2021.

We have additionally seen on this quarter an annual interval, the revenue assertion profit to our firm ensuing from PPP milling applications, when these loans are formally forgiven.

Also, with respect to our possession ventures, we are able to replace you to the overall third-party debt and money in our firms. As a reminder, with Flashtalking exiting the third quarter, we are actually additionally excluding MediaMath on this disclosure.

Also, as an different possession curiosity, these disclosures will proceed to exclude Bright Health too. With these notes in thoughts, the third-party debt at this group of 9 firms was roughly $135 million. That is up about 10% since final quarter.

Cash at that very same group of 9 firms has decreased to about $73 million. Within this group, probably the most notable modifications associated to further financial institution debt at a few firms and a lower in money ensuing from quarterly derates.

In phrases of income efficiency, we reported a 7.1% lower at our group of 10 possession curiosity for the trailing 12-month interval ending December 30, 2021, as a result of 1 quarter lag. In addition to the income decline at MediaMath, the decline was major attributable to what we have now beforehand disclosed a couple of single buyer occasion that resulted in a nonrecurring income enhance within the fourth quarter of 2019.

As Eric talked about earlier, we’re seeing the quickest development from a number of firms like meQuilibrium, Moxe and Trice, which — Trice additionally benefited from the acquisition of Tenex earlier in 2020. Now it’s time for us to show to the Q&A phase of the decision.

So I’ll ask our operator to open the telephones up for a number of questions, and we’ll begin lining these up.

Question-and-Answer Session

Operator

[Operator Instructions]

First query comes from the road of Daniel Han with Kansai Capital. Please go forward.

Daniel Han

Just had a fast housekeeping one. I feel traditionally, you guys have offered LTM income damaged out between digital media and well being care. Can you present that for 2021?

Mark Herndon

Yes, we have primarily stopped doing that now as a result of it was restricted to only the one firm. So..

Daniel Han

I see. Okay.

Mark Herndon

So — sure, that is why we didn’t present that earlier.

Eric Salzman

Daniel, the purpose being, if we disclosed it, then you definitely would know the income of a non-public firm, which does not disclose its revenues publicly. So…

Operator

Currently, there aren’t any questions leaning right now. I want to move it again to the administration staff for any closing remarks.

Eric Salzman

Thank you for becoming a member of us on the decision right this moment. We respect your continued curiosity in Safeguard and we’ll be following up as we do every quarter to arrange one-on-one calls with the administration staff. Thanks, and have a superb night. Take care.

Operator

That concludes the Safeguard Scientifics Fourth Quarter 2021 and monetary outcomes convention name. I hope you all take pleasure in the remainder of your day. You could now disconnect your strains.

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