Safeguard Scientifics Inc (SFE) 2021 Q4 法說會逐字稿

Good afternoon. Thank you for attending today's Safeguard Scientifics Fourth Quarter 2021 Financial Results Conference Call.

(Operator Instructions)

I would now like to pass the conference over to our host, Matt Barnard, General Counsel at Safeguard Scientifics. 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, Safeguard's Chief Executive Officer; and Mark Herndon, Safeguard's Chief Financial Officer. Following our prepared remarks, we'll open up the call to your questions.

As always, today's presentation includes forward-looking statements. Reliance on forward-looking statements involves 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 companies, our ability to make good decisions about the monetization of our companies, the ongoing support of our companies, our inability to unilaterally control our 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 described in our 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 financial performance should not be relied on as an indication of future performance.

During the course of today's call, words such as expect, anticipate, believe and 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 Safeguard's 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'll summarize our strategy and highlight our major achievements for 2021. We'll provide an 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'll 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 interest in 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 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 well-being, 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 in creating a path to successful exits as expeditiously as possible. We have found that maximizing the value of Safeguard's ownership interest 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 stand-alone 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 7 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 and 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 company's Board and we decided that shareholders would be better served if we focused on delivering strong 2022 revenue growth rather than accepting the reduced bid.

While 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 was 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 a deal at this time, and should no deal arise, we will continue to support the company as it executes on its business plan.

On our Q3 call, we also mentioned that one of our companies had 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 meaningful to 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 in de minimis proceeds to Safeguard.

Also on our Q3 call, we mentioned that one of our companies was in early-stage stock-for-stock merger discussions with another private company. Those discussions did not move forward as the merger partner's profile, financial profile to be specific, was unattractive to us and our fellow shareholders, meaning we didn't want to own their stock. These were opportunistic discussions and do not affect the company's -- our company's go-forward prospects on a stand-alone basis.

In addition to these 4 situations, another one of our companies is pursuing a dual path M&A discussions with a small number of strategic parties and a parallel growth capital raise process. We will evaluate the outcome of those efforts and determine along with our co-investors and management what the best risk-adjusted path will be.

Let's now review other capital raising activities of our companies. On our October earnings call, we said there were three companies exploring capital raises to support their 2022 and beyond operations. Of 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 Prognos, which last month raised an internal financing round from existing investors in 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 is 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 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 in leading technology companies with attractive growth 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 provide 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, be they 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 the path to profitability while not sacrificing revenue growth or it's competitive market position.

Let's now touch on some portfolio highlights. After exiting 7 companies in 2021, our portfolio currently consists of 11 positions. We have 7 health care companies, one ad tech company, one marketing tech company, one fintech company and 1.3 million shares in publicly traded Bright Health Group, 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 Aktana. In 2021, Aktana had the highest 1-year bookings total in the company's history. The surge in usage of Aktana's products and services by its pharma customers underscores growing artificial intelligence adoption across regions and brands.

Syapse announced partnerships with Merck, Bayhealth, Illumina, Pfizer and Infor, including a third phase of collaboration with Pfizer for breast cancer. Prognos expanded its data sources, adding new Rx data to its novel data marketplace that has 25% coverage of U.S. pharmacies. meQuilibrium 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 aftereffects of COVID-19, the permanent shift to hybrid workforce and a greater focus on employee agility, resiliency and well-being.

For Moxe, it's December 2021 revenue run rate was nearly 3x the prior years. The accelerating adoption of Moxe's clinical data exchange by payers and providers is creating network effect in the industry. InfoBionic grew its billable MCT device base by 40% year-on-year in 2021, and its Mayo Clinic partnership is running ahead of plan. For Trice, despite Omicron, December was a record high revenue month for both the Tenex and Trice product lines. Clutch accelerated its partnership with NCR Hospitality, adding over 3,700 locations by year-end 2021. Lumesis is steadily growing its top line and developing product enhancements to project -- protect and grow its customer base.

And for Bright Health Group, our shares came off lock-up in December of 2021. We're very disappointed with the company's results over the past 3 quarters. We're following both the company and the sector closely and are updating our internal price targets based on results. For MediaMath, a new CEO was appointed in January. However, the company's balance sheet and capital structure are such that we expect a de minimis return to Safeguard from our remaining MediaMath 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 1.8x 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 provide certain metrics on publicly traded comparable companies that we track against our portfolio. This is some of the data we use as part of our internal valuation methodology, together with other qualitative inputs. We look at enterprise value to forward revenue multiples and projected revenue growth as 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 7. I'll start with enterprise value to revenue multiples, 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 health care comps were trading at 2.7x 2022 expected revenues, down 1.4 turns from our October 2021 earnings call. Publicly traded ad tech comps were trading at 3.1x 2022 expected revenues, down 1.3 turns from October. Publicly traded marketing tech comps were trading at 2.3x 2022 expected revenues, down 1.3 turns from October. This material reduction in these enterprise value to revenue multiples reflect the decline in stock prices, particularly in growth-oriented companies.

What is interesting is that analyst 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 health care comps, the analyst consensus for median revenue growth is 28% for 2022, up from 24% in October. For publicly traded ad tech comps, the analyst consensus for median revenue growth was 26% for 2022 versus 25% in October. And for publicly traded marketing tech comps, the analyst consensus for median revenue growth was 12% for 2022, down from 15% in October for comparison purposes, the aggregate revenue growth projected for Safeguard's portfolio, excluding Bright Health and MediaMath, 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 retain 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 in whatever form that takes. We've always recognized 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's expertise in asset management transactions, complex valuations and deal structuring was the right fit for our needs. 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. All right. Safeguard's net income for the year ended December 31, 2021, was $27 million or $1.36 per share as compared to a net loss for the year ended December 31, 2020, $37.6 million or $1.81 per share. Safeguard's fourth quarter of 2021 resulted in a net loss of $8.6 million or $0.51 per share as compared to a net loss of $7.4 million or $0.35 per share for the comparable period of 2020.

This quarter's results were positively impacted by the resolution of an earn-out contingency related to a 2018 sale of AHS that resulted in an additional $2 million to Safeguard and the continued decline in general and administrative costs. The quarter's results were negatively impacted by the continued decline in the fair value of Bright Health's stock, resulting in a noncash and unrealized loss on that stock of $6.3 million.

The fourth quarter also included our Dutch auction self-tender offer that resulted in the repurchase of 4.3 million shares of common stock at a cost of $39 million. When combined with our open market purchases earlier in the year, we repurchased 4.5 million shares at an aggregate price of $40.6 million or $8.95 per share.

To quickly recap Safeguard's annual results, we were positively impacted by the exit transactions of the Flashtalking, resulting in $44.8 million in cash and the Zipnosis, WebLinc, Velano Vascular and T-REX Group, which returned in the aggregate cash proceeds of $13.6 million. The Zipnosis transaction also provided us with preferred equity at Bright Health, which was converted to 1.3 million common shares at their June initial public offering, resulting in the unrealized gain. Unfortunately, as we disclosed quarterly this value has declined throughout the year, and we ended the year with that position valued at $4.5 million.

Safeguard has also ended the year with $24.8 million of cash, cash equivalents, restricted cash, 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 $1.6 million reported in the comparable quarter of 2020. For the full year of 2021, our general and administrative expenses were $7.2 million as compared to $9.5 million for the full year of 2020, a 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, were $0.8 million as compared to $1.2 million in the comparable quarter 2020, a 33% decline. For the full year of 2021, these corporate expenses were $3.9 million as compared to $5.2 million for the full year of 2020, a 25% decline.

On a sequential basis, this quarter also represents a decline of 6.8%. While this also marks the fifth consecutive quarter of decline in corporate expenses, we generally expect that the quarterly level of corporate expenses will stabilize at approximately this level. As a result, we have established initial expectation for corporate expenses in 2022 of $3.5 million to $4 million. The decline 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 costs, professional fees, office costs and insurance expenses. The corporate expense measure also continues to benefit from Director fees that are being paid in equity and a significant portion of management's compensation in paying equity.

With respect to our ownership interest, we have an aggregate carry value at December 31, 2021, of $26.5 million as compared to $50.4 million at December 31, 2020. This decrease was the result of the application in equity method of accounting, the $2.5 million impairment in the second quarter at another partnership interest as well as the exit of the Zipnosis, Flashtalking, T-REX, Velano Vascular and WebLinc, that each removed carrying value. These decreases were partially offset by increases due to our $2.7 million aggregate deployments at Trice in the first quarter and Aktana in the third quarter. The addition of the Bright Health position and the dilution gains aggregating to $9.3 million from Syapse in the first quarter and Trice in the third quarter. These dilution gains are reported as a component of equity income or loss line items.

And as a reminder, our carrying value of ownership interest where we apply the equity method is in a GAAP term, where we typically reduce the carrying value for our share of the losses of the underlying companies, and it generally does not represent the fair value or an expected exit value of those same ownership interests. The fair value of any of our ownership interest declines below our carrying value, we would consider making a downward adjustment for the carrying value by recording an impairment. We've also had a few ownership interests that are not accounted for any of the equity methods and do not have a readily determinable fair value. These interests can have an upward or downward adjustment from time to time resulting from observable price changes if there are transactions in their securities. These observable price changes are recorded as gains or losses in other income or loss net.

Our share of the losses of our equity method ownership interest for the 3 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 2 less companies in 2021 and a lower level of losses at several companies due to a variety of events, including some nonoperating onetime gains in the underlying companies; and limiting the recognition of losses when our carrying value is reduced to 0.

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's share of losses reflect the third quarter of 2021. We have also seen, in this quarter and annual period, the income statement benefits to our companies resulting from PPP loaning programs, when those loans are officially forgiven.

Also, with respect to our ownership interest, we can update you to the total third-party debt and cash of our companies. As a reminder, with Flashtalking's exit in the third quarter, we are now also excluding MediaMath in this disclosure. Also, as another ownership interest, these disclosures will continue to exclude Bright Health Group. With those notes in mind, the third-party debt of this group of 9 companies was approximately $135 million. That is up about 10% since last quarter. Cash at that same group of 9 companies has decreased to about $73 million. Within this group, the most notable changes relate to additional bank debt at a couple of companies and a decrease in cash resulting from quarterly burn rates.

In terms of revenue performance, we reported a 7.1% decrease at our group of 10 ownership interest for the trailing 12-month period ending December 30, 2021, due to the one quarter lag. In addition to the revenue decline at MediaMath, the decline was primary attributable to what we have previously disclosed about a single customer event that resulted in a nonrecurring revenue increase in the fourth quarter of 2019. As Eric mentioned earlier, we're seeing the fastest growth from a few companies like meQuilibrium, Moxe and Trice, which -- Trice has also benefited from the acquisition of Tenex earlier in 2020.

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, and we'll start lining those up.

(Operator Instructions)

First question comes from the line of Daniel Han with (inaudible) Capital.

Just had a quick housekeeping one. I think historically, you guys have provided LTM revenue broken out between digital media and health care. Can you provide that for 2021?

Yes, we've essentially stopped doing that now because it was limited to just the one company. So that's -- yes, that's why we did not provide that earlier.

Daniel, the point being, if we disclosed it, then you would know the revenue of a private company, which doesn't disclose its revenues publicly.

(Operator Instructions)

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 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, and 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.