Safeguard Scientifics Inc (SFE) 2020 Q4 法說會逐字稿

Good morning, and welcome to Safeguard Scientifics' Fourth Quarter 2020 Financial Results Conference Call. Please note, this event is being recorded.

I would now like to turn the conference over to Matthew Barnard, Safeguard's General Counsel. Please go ahead.

Good morning, and thank you for joining us for this presentation on Safeguard Scientifics' Fourth Quarter and Full Year 2020 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.

During today's call, Eric will provide some corporate and strategic updates, and Mark will discuss our results. Afterwards, we will open up the call to your questions.

Today's presentation includes forward-looking statements, and those statements are subject to risks and uncertainties. The risks and uncertainties that could cause actual results to differ materially include, among others, our ability to make good decisions about the monetization of our ownership interest for maximum value or at all and the return of value to our shareholders; the ongoing support of our existing ownership interest; the fact that ownership interest may vary from period to period, challenges to achieving liquidity from ownership interest, fluctuations in the market prices of any publicly traded ownership interest; competition; our ability to attract and retain qualified employees; market valuations in sectors in which our ownership interest operate; our inability to control our ownership interest; our need to manage our assets to avoid registration under the Investment Company Act of 1940; and risks associated with our ownership interest, including the fact that most of our ownership interests have a limited history and history of operating losses, face intense competition and may never be profitable; the effect of economic conditions in the business sectors in which our ownership interest operate, including the impact of COVID-19; 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 our filings with the SEC, including our Form 10-K, which describe in detail the risks and uncertainties associated with managing our business. Safeguard does not assume any obligation to update any forward-looking statements made today.

I would now like to introduce Eric.

Good morning. Thanks, Matt, and thank you for joining us this morning. Since our Q3 earnings call, we've continued to make significant progress on our strategic goals of maximizing value, exiting ownership interest and planning to return capital to our shareholders. A lot is happening both at Safeguard and at the portfolio level. We are optimistic that we'll deliver what we define as important wins over the near term.

On today's call, we'll discuss the status of portfolio exits and follow-on deployments, we'll provide an update on liquidity and share some company highlights, we'll provide some greater financial disclosure on the portfolio and we'll share our progress towards continuing to reduce Safeguard's operating costs.

I'll start with exits and follow-on deployments. We are continuously evaluating the fundamentals of each company in which we have an ownership interest. We assess its competitive advantage, recent performance, future prospects, capital needs and the risk/reward of the investment. We will focus our efforts in follow-on capital on those companies, which have achieved an inflection point in terms of revenues, market adoption or where we believe there will be an inflection point in the next 12 to 24 months.

For those companies that do not fit this criteria, where the upside potential is inconsistent with Safeguard's goals in terms of time lines, returns, et cetera, we will look to exit those positions. To that end, you've seen us exit Sonobi in Q3 2020 and WebLinc and QuanticMind in early Q1 2021. The rationale to exit these names were similar. While each had differentiated technology and some market traction, they lacked the scale to compete and access capital on a stand-alone basis in their respective industries. For those reasons, we chose to exit rather than to continue to support them with capital.

I'll start with WebLinc. WebLinc operated in a highly competitive, albeit high-growth e-commerce sector with well-funded large competitors, and Safeguard was the company's only outside capital provider. It was getting tougher for small companies like WebLinc to compete against these larger players. The company ran a sales process and was sold to VTEX, who will leverage WebLinc's deep e-commerce experience to scale. We received $3.2 million in cash at close and have an earn-out potential over the next 24 months of up to $7 million based on certain milestones set with the buyer. We will update you on milestone achievements in the ordinary course.

QuanticMind is another company that we exited last month. In spite of its interesting search engine marketing platform, company had trouble maintaining revenue growth and then ran into the COVID-19 impact given its exposure to hospitality and travel customers. We and the other investors determined that the capital required to get QuanticMind through the pandemic and build the scale necessary to compete was an unattractive proposition. The company also ran its sales process and was sold to a strategic buyer. But unfortunately, the proceeds did not clear the senior debt, which left no recovery to the equity.

While both of these outcomes were less than ideal, we do not believe that they reflect the potential of the broader Safeguard portfolio. The remaining companies are largely well positioned in their sectors, and we believe they will drive attractive returns for our shareholders.

Turning to other portfolio exit activities. On our Q3 2020 call, I spoke about one of our companies that was in the midst of an M&A process. That sale process continues, and we are looking forward to sharing additional information on the outcome in the near-term. The second company in the portfolio has selected an investment bank and is launching a sales process over the next couple of months. As we have more to report, we will do so.

I'll next turn to liquidity and company highlights. On the liquidity front, our companies continue to access debt and equity capital as needed. As you saw from last month's press release, Syapse raised a $68 million equity round from 2 leading VCs. Syapse operates in a growing and exciting market using data in real-world evidence to drive regulatory and clinical decisions for its pharma customers. With this capital, Syapse is focused on accelerating its growth, expanding its relationships with leading life sciences and health system customers and investing in technology and data assets. The financing round was a strong validation of the company's market momentum and leadership.

In January, Moxe raised capital in a round led by 3M Ventures. This also provides strong validation for the company's technology and value proposition, which enables real-time sharing of clinical data across health care ecosystems. Earlier this month, Moxe also announced a strategic relationship with 3M to expand its go-to-market capabilities.

Another one of our companies is in the process of completing a senior debt financing to support its accelerating revenue growth. The company will issue a press release post closing, and we will include the press release on the IR section of our website.

On the performance front, as we've done in prior earnings calls, I wanted to provide some brief updates on each of the companies. I'll start with the ad tech. On a macro level, ad tech has benefited from a multiyear secular trend as ad spending has shifted from traditional to digital. The ad tech market -- the advertising market overall and ad tech specifically did experience a downturn during the pandemic, but has since returned to growth. Another important development is the rapid growth in Connected TV, driven by the over-the-top stream services. And there's also been increasing regulatory and privacy scrutiny on the large incumbents in the ad space, which has created opportunities for some of the independent players, including our companies.

Our exposure to the sector is through Flashtalking and MediaMath. You heard from Flashtalking CEO on our fireside chat last summer, the company posted record EBITDA in 2020 and added significant new Fortune 500 logos as it gained market share from its competitors. Flashtalking has continued to build on this momentum in early 2021.

MediaMath is our other significant holding in the ad tech space. MediaMath is the #2 independent demand side platform. And over the past year, the company has been focused on streamlining its cost structure to position it for profitable growth in 2021, completing a multiyear product and technology investment around a new user interface, Connected TV and identity and strengthening its senior management ranks. These efforts are bearing fruit as the company is seeing improved ad spend coming out of the pandemic, especially internationally. 2021 is an important year for MediaMath as it builds on its efforts over the past year.

The other major sector, which our companies operate in are tech-enabled health care. Our direct exposure is through Aktana, Moxe, Prognos, Syapse and Zipnosis. The pandemic accelerated an even greater focus on how technology and data can revolutionize the health care industry, reducing costs and improving health outcomes. At Aktana, the company is making a big push in omnichannel with projects underway with 20 biopharma companies. Omnichannel capabilities are key to allow biopharma companies to engage with their customers through multiple forms of communications, and we think Aktana is an early mover in this area.

At Moxe, we're excited about the recently announced strategic investment and relationship with 3M. The company is experiencing rapid revenue growth as it sits in the unique place in the ecosystem between payers, providers, handling EMR and other data sources.

On Prognos, you heard from Prognos' CEO on our fireside chat a couple of weeks ago, Prognos is well positioned to be a leader in the health care data and analytics space with one of the largest fully integrated clinical data sets covering over 325 million patients.

As Zipnosis, 2020 was a record year for telemedicine, and the company treated over 2 million patients, a 622% increase over 2019. Zipnosis continues to see robust demand for technology and virtual care services as health care shifts to a virtual-first delivery model.

In the remote cardiac monitoring area, InfoBionic grew its ARR, with annualized recurring revenue, 20% in 2020 in spite of COVID and has been rolling out its recently announced deal with Mayo. The shift to telehealth has led to a lot of interest by health providers and other device manufacturers in the remote cardiac monitoring space, which drives lower care costs and improves outcomes.

At meQuilibrium, revenues were up over 50% in 2020. The company enjoyed record bookings and signed its first major health plan customer, which expands its addressable market. Trice posted record sales in Q4 in spite of COVID-19, seeing increasing adoption of its fully disposable endoscopic carpal tunnel system. Trice is actively exploring targeted acquisitions to build on its product and go-to-market capabilities.

Outside of ad tech and health care, I'll touch on Clutch and Lumesis. Clutch has -- had exposure to the retail sector, and the pandemic delayed its revenue ramp for 2020. We did begin to see some improvements in late Q4 2020, and there are early indications of bookings and channel partner activity in early 2021 as the retail sector returns to pre-pandemic levels.

At Lumesis, COVID-19 delayed adoption of its new products in 2020. And in spite of this, the company landed several new clients refinance its debt and is positioned for improved performance in 2021. We are excited about the prospects of our companies for 2021, particularly coming out of the pandemic. But of course, we must remind you that our companies are still subject to risks associated with our stage and size.

I'd like to now talk about some additional financial disclosure that we'd like to share on the portfolio. In an effort to provide some additional insight into the portfolio, we'd like to share information on projected revenue growth at the portfolio, publicly traded peer multiples and Q4 2020 debt and cash at the portfolio level. I'll start with revenue growth. For calendar year 2021, our portfolio companies are projecting revenue growth on an aggregate basis of over 20%. Note that there are variations in growth among the companies, and that this is an aggregate number. Also, it's early in the year, and companies have varying degrees of forward visibility.

I'll next talk about public peer multiples. So publicly traded peer multiples can be useful for evaluating the Safeguard portfolio, keeping in mind that the public peer set that we've constructed is not a direct match to our portfolio. Companies vary based on product markets, profitability, size and growth. There also may be a public to private discount for illiquidity that could apply.

With that said, recent revenue multiples are as follows. In the tech-enabled health care area, the median 2021 revenue multiple that we use on our peers when we look at the peers to our companies was 7.5x and the median 2021 revenue growth of that peer set was 20%. On the ad tech comps, the median 2021 revenue multiple was 6.2x and the median 2021 revenue growth was 12%.

I'll also mention marketing technology or MarTech where the peers trade at 3.6x 2021 revenues, and the expected 2021 revenue growth is 12%.

We last wanted to provide some information on the debt and cash at the portfolio company level. At year-end 2020, total third-party debt at our portfolio companies was about $330 million. This is the portfolio company level debt. We do not have any debt at the Safeguard level. And this debt at the portfolio company level is what we would expect to be paid off prior to any returns to the equity holders in these companies. It also includes Safeguard's share of this debt. The amount of debt is approximate in nature and could vary over time based on the specific terms of the instruments. I will also mention that this debt is concentrated among a small number of our larger companies as defined by revenues.

For cash, at year-end 2020, total cash at the portfolio of companies was nearly $100 million. And note that neither of these debt or cash numbers reflect any 2021 activities. For instance, that cash does not reflect the recent Syapse capital raise.

Lastly, I'll touch on operating costs. We are intensely focused on bringing down our cash cost to operate. It gives us greater operating flexibility and reduces the drag on the portfolio as we work towards natural exits. As you've seen, we reduced cash compensation at all levels. We've restructured how we operate from office space to third-party vendors. No savings is too small for us to consider. This shows up in the numbers, which Mark will walk you through in a few minutes.

With that, I'll turn the call over to Mark.

Thank you, Eric. For the quarter ended December 31, 2020, Safeguard's net loss was $7.4 million or $0.35 per share as compared with the net loss of $0.7 million or $0.03 a share for the same period of 2019. Safeguard's net loss for the year ended December 31, 2020, was $37.6 million or $1.81 per share as compared with net income of $54.6 million or $2.64 per share for the comparable period of 2019.

As you may recall, 2019's income was the result of the successful exit of Propeller and Transactis, and our 2020 year-to-date results included a variety of impairments totaling $20 million.

Safeguard's cash, cash equivalents, restricted cash and securities at December 31, 2020, totaled $15.6 million, and we have no debt obligations.

Our general and administrative expenses were $1.6 million for the 3 months ended December 31, 2020, which is lower than the $2.1 million reported in the fourth quarter of 2019. Similarly, general and administrative expenses for the 2020 year were $9.5 million as compared to $10 million in 2019. In both periods, our G&A expenses benefited from lower compensation to employees, lower office costs, lower professional fees, lower stock-based compensation and lower other miscellaneous costs, which were offset by severance costs and higher insurance costs.

Corporate expenses for the fourth quarter, which represent general and administrative expenses excluding depreciation, stock-based compensation, severance and retirement costs and other nonrecurring and other items, were $1.2 million as compared to $1.4 million in 2019, a 13% decline. Further, our corporate annual -- our annual corporate expenses were $5.2 million as compared to $7.1 million for the comparable 2019 period. That's a 27% decline.

In addition to the G&A reductions mentioned above, our corporate expenses in both periods benefited from a reflection of Director fees as a stock-based compensation item as well as the change previously announced during our second quarter that has resulted in a portion of management's incentive bonus compensation to be paid in invested equity instead of cash. That change as well as a similar structural shift at the CEO level that also results in a compensation -- in that compensation program being effectively funded with equity for over half of total compensation have made meaningful reductions in our annual corporate expenses as well as cash outflows in density.

I also wanted to highlight here a recap -- or recap one aspect that we had mentioned multiple times over the last year, and that's office costs. During the fourth quarter, we move to a small shared office unit in a large multi-tenant office building. This is the second time in as many years that we've reduced our monthly spend for our facilities by about 75% to 85%. Said another way, our monthly spend for office space today is about 95% less than it was during 2018. Unfortunately, we believe we will be able to continue to be effective, working predominantly on a remote basis in the coming year.

We've also taken additional actions in the first quarter of 2021 to structurally reduce our personnel costs by initiating actions that while triggering some short-term severance costs will make additional meaningful reductions in our annual corporate expenses during 2021. And we will continue to target other aspects of our cost structure where appropriate to make further improvements.

As we look at our 2021 corporate expenses, we expect that they will continue to decline and have established an initial target of $4.4 million to $4.9 million as compared to the $5.2 million we are reporting to you now for 2020.

With respect to our ownership interest at December 31, 2020, we have an aggregate carrying value of $50.4 million. As we've discussed before, carrying value is a GAAP term that's a result of the application of the equity method of accounting that typically reduces the carrying value of our -- for our share of the losses of the underlying companies and generally does not represent the fair value or expected exit value of those same ownership interest. If the fair value of any of our ownership interest declines below our carrying value, we will consider making a downward adjustment to the carrying value by reporting impairment. We also have a few ownership interests that are accounted for under the other method, which can have upward or downward adjustments resulting from observable price changes, if there are transactions in their securities.

In 2020, the carrying value of our ownership interest have declined by our previously disclosed impairments of $20 million, the sale of Sonobi and reductions for the application of the equity asset of accounting. These declines were partially offset by the $9.2 million that we deployed into the portfolio during 2020, dilution gains of $4.2 million and observable price changes that resulted in a net gain of $1.2 million during the year ended December 31, 2020, principally from the $1.5 million gain recorded in the first quarter related to Flashtalking. These observable price changes, gains or losses are included in the other income loss line item.

Our share of the losses of our equity method ownership interest for the 3 months ended December 31, 2020, was $4.1 million as compared to $4.2 million for the comparable period in 2019. And for the year ended December 31, 2020, our share of the losses declined to $13.8 million as compared to $26.1 million from 2019. The decreases are the result of lower net losses generated by our companies under the equity method ownership interest, the fourth quarter's equity income loss net also including the impairment of $2.1 million related to QuanticMind. In this case, QuanticMind's results were impacted by -- during 2020 by the loss of customers in the travel and hospitality industry during the time period that the business was being marketed for sale. Investors decided there was no viable path to continue on a stand-alone basis. So the company entered into a transaction, which closed in February 2021. It did not result in proceeds available for investors. The fourth quarter's equity loss also included a $1.1 million dilution gain related to both Moxe and Syapse raising equity during the quarter.

I would also like to remind everyone that we report our share of the losses and equity method companies on a 1 quarter lag. So this quarter's share of losses reflect the calendar third quarter. Many of our companies saw the initial impact of COVID-19 during the later stages of the first quarter. The result of their -- their results of the second and third quarters reflected a full quarter of operating in that environment. Some companies have included in their results that benefit from the PPP loan programs in this quarter's results. We expect to continue to see some of this impact in their fourth quarter results when we receive them, which will be reflected in our first quarter 2021 reporting cycle.

At this point in time, it's -- we'll turn it over to the Q&A segment of the call. So operator, I would ask you to please open the lines up for a few questions and to provide the instruction on how to ask a question.

(Operator Instructions) Your first question comes from the line of [Lee Alper] with Hammock Capital.

To say the least, the liquidation process and the results you've gotten so far are less than we were hoping for. But going forward, I mean, you had talked about getting multiples of your investment for your returns. Are you still looking at those kind of numbers?

I can start with that. So [Lee], this quarter, clearly, the QuanticMind and WebLinc is not that -- is disappointing to say at least. And we would have liked to pair news on QuanticMind and WebLinc with positive news. Timing doesn't always line up that way. This quarter, it didn't line up that way. We are optimistic and confident that we will have, let's call it, more satisfying exit news to share with you in the near term.

As it relates to the actual relationship, our exit value versus our cost, what we've said, since I've been in this position and since this management team has been working together since the middle of last year, is that the stock price is lower than fair market value, fair market value is lower than the exit value. So we're looking at returns based on optimizing every investment and maximizing value. In some cases, that will result in a multiple of cost. In some cases, it will not result in a multiple of cost. But on an aggregate basis, our mission is to optimize the value of the fixed portfolio that we're managing. And some of these markets, as we've highlighted or touched on, there's opportunities to play for some really large enterprise value creation, particularly in tech-enabled health care, which is, for instance, why Syapse raised the amount of money that it raised.

So we can't say that on a line-by-line basis, every company is going to make a multiple of cost. But on the aggregate basis, we believe the returns will be attractive to our shareholders. And that's what we get up every morning working to do, working with the companies and balancing where we want to put our capital and effort in the areas that are going to drive the most attractive outcomes.

I hope that's helpful in addressing your question.

While other questions are coming in, and, operator, just please continue to queue those up for us. But I did receive a written-in question that I'll turn out there. And this is a question about the debt at the portfolio level and I was asked, can you explain how much Safeguard owns or the debt is applicable to Safeguard?

I just would like to reiterate that this is debt that's at the portfolio level. So this is debt that's spread across the group. It's within those businesses, and it's just something that's layered into their applicable capital structures. And then I'd also like to add that it was -- as we mentioned, Eric mentioned in his prepared remarks, it's concentrated in a few of the higher revenue companies at the portfolio. So just wanted to clarify that. So again, it's at the corporate level of the entities, not at Safeguard. Safeguard, we have no debt. And there's -- similarly, there's the $100 million of cash we mentioned is also spread out across the portfolio of companies.

(Operator Instructions) Presenters, there are no further questions at this time. You may continue.

Thanks. Thank you for joining us today. If you have any follow-up questions, we are -- please feel free to reach out. As I mentioned, we are working to optimize the value of the creation of the portfolio and return capital. We'll provide investors with transparency and communication and accessibility. And look forward to following up discussions in the balance of the quarter, and we look forward to providing some additional news as it develops on the portfolio in the near term. Thank you very much. Have a great rest of the day.

Thank you, presenters, and thank you, ladies and gentlemen, for joining us today. That concludes today's conference. Thank you all for joining. You may now disconnect.