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Edited Transcript of SFE.N earnings conference call or presentation 30-Apr-20 1:00pm GMT

Q1 2020 Safeguard Scientifics Inc Earnings Call

Wayne Jun 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Safeguard Scientifics Inc earnings conference call or presentation Thursday, April 30, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric C. Salzman

Safeguard Scientifics, Inc. - Chief Restructuring Officer

* G. Matthew Barnard

Safeguard Scientifics, Inc. - General Counsel & Secretary

* Mark A. Herndon

Safeguard Scientifics, Inc. - Senior VP & CFO

* Robert J. Rosenthal

Safeguard Scientifics, Inc. - Executive Chairman & Principal Executive Officer

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Presentation

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Operator [1]

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Good morning and welcome to Safeguard Scientifics' First 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.

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G. Matthew Barnard, Safeguard Scientifics, Inc. - General Counsel & Secretary [2]

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Good morning, and thank you for joining us for this update on Safeguard Scientifics' first quarter 2020 financial results. Joining me on today's call and webcast are Robert Rosenthal, Safeguard's Executive Chairman of the Board; Eric Salzman, Safeguard's Chief Restructuring Officer; and Mark Herndon, Safeguard's Senior Vice President and Chief Financial Officer. During today's call, Bob and 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 for our shareholders; the ongoing support of our existing ownership interest; the fact that our ownership interest may vary from period to period, challenges to achieving liquidity from our 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 effective economic conditions in the business sectors in which Safeguard's ownership interest operate, including the impact of COVID-19; and other uncertainties described in our filings with the SEC.

Many of the factors are beyond the company's ability to predict or control. As a result of these and other factors, the company's 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.

With that, here's Bob.

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Robert J. Rosenthal, Safeguard Scientifics, Inc. - Executive Chairman & Principal Executive Officer [3]

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Thanks, Matt. Good morning, and thank you for joining us. We have all experienced tremendous change over the recent weeks. The first quarter has been difficult and tumultuous period for our country as a result of the COVID-19 outbreak. Repercussions to the world economy are immeasurable. We are, of course, focused on the safety and well-being of our Safeguard family and the general public.

To date, we have had no cases of COVID-19 at Safeguard and a limited number of cases at companies within our portfolio. I would like to take this opportunity to express our deep appreciation to all the health care workers who are directly guiding and assisting us through this period.

We have had significant changes at Safeguard recently. Earlier this month, we announced the addition of Eric Salzman to the newly created role of Chief Restructuring Officer. Eric will report to me in my new role as Executive Chairman and to the rest of the Board. Eric will be responsible for our value maximization strategy. Eric's prior experience and familiarity with our portfolio make him an excellent choice, especially considering the current situation.

I am encouraged and excited about having Eric lead us through this next phase of our strategy. But I want you to hear that directly from him. So let me hand off the call and again welcome Eric to the Safeguard team.

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Eric C. Salzman, Safeguard Scientifics, Inc. - Chief Restructuring Officer [4]

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Thanks, Bob. Let me start by saying I'm excited to join Safeguard and work with Bob, the rest of the Board and our team. While I joined amidst a challenging environment, I'm optimistic about our portfolio and our prospects, particularly once we emerge from the COVID-19 environment.

Safeguard has ownership interest in companies which are competing at the forefront of their respective industries, be that tech-enabled health care, ad tech, e-commerce and fintech. That said, the impact of the COVID-19 environment has created challenges for our companies as it has for nearly every sector of our economy.

As Bob mentioned, our first order of business has been to work closely with our management teams to ensure the safety of their employees to help them take appropriate actions to weather this storm and to be in a position to take advantage of opportunities as the economy opens up.

As one would expect, COVID-19 has negatively impacted the pace of M&A activity across the economy and by extension, has delayed exit assumptions and time lines we had for some of our companies. We expect this will be temporary. And as the country gets back to work and confidence returns, deal activity will gradually resume albeit the pace of this return remains unclear. While the current economic environment has made this more difficult, the company remains committed to the strategy it outlined in early 2018 to seek to maximize and monetize its holdings and return capital to shareholders.

As part of that goal, we have identified 4 strategic objectives, which we have begun to implement. The first is to review our fair market value and future exit assumptions for our ownership interests in light of the current environment and company performance to allow us to make the best capital allocation decisions for our shareholders.

The second is to actively explore a range of different paths to monetize our holdings. While traditional exit paths for our companies may be complicated by the current economic environment, we will explore a range of alternatives to accomplish this goal as long as it achieves fair value for our holdings.

Selling illiquid assets as we head into a global recession is rarely a value-maximizing strategy. And I saw this firsthand in 2009 when I was working in a similar capacity in the Lehman bankruptcy estate. However, there may be specific opportunities to pursue on a name-by-name basis, and we will evaluate the full gamut of exit options.

The third objective is to ensure we have sufficient capital to execute our strategy and also work to reduce our cash operating costs. While much progress has been made on the cost side, we will continue to pursue additional reductions as appropriate.

And fourth, we're working to provide additional information to shareholders about our portfolio so that you are better informed. We are excited about our companies and their growth opportunities, and we want you to have the necessary information to form your own opinions, subject, of course, to preserving confidentiality of our companies.

I want to make clear that while I am constructive on the prospects of Safeguard, we are operating in uncharted territory with many unknowns relating to when and how the economic recovery will emerge. Regardless of the state of the economy, we are focused on maximizing value and want to allow ourselves the ability to support our positions when justified.

As such, we may need to deploy more capital in the portfolio than was anticipated pre COVID-19. We remain committed to returning value to our shareholders, either via share repurchases and/or dividends whenever we have cash resources that exceed what we believe is necessary to support our positions and operations.

Before I turn the call over to Mark, I want to provide some additional information on the portfolio. Bob and I have spent the past month speaking to several Safeguard shareholders, and a common request that came back was a desire to hear more about our companies. We are exploring a number of ways to balance this request with limitations relating to our companies regarding confidentiality, competition, et cetera. We would ask for some patience as we explore the best way to accomplish this.

In the meantime, I will highlight a few of our companies and relate them to the current macro environment. Keep in mind that, to state the obvious, with GDP down 5% in Q1 and some analysts predicting it down 35% in Q2, we have not seen anything like this in our lifetimes, and we do not know the level of economic destruction that will be inflicted upon the economy and the pace of any recovery. So on that uplifting note, let me provide some color on some of our portfolio names.

Zipnosis, a virtual care telehealth company, where our cost basis is $10 million and where we own 31% of the company, has outperformed in the current environment. Zipnosis provides a white-label technology platform to allow health systems the ability to offer telehealth to their patient populations. The growth the company was experiencing pre COVID-19 has accelerated even more so in the current environment with patient interactions increasing dramatically from 37,000 in February to 460,000 in March.

Furthermore, 21 of their 51 health system customers are using their COVID-19 virtual screening test. We believe that the telehealth adoption spurred by the COVID-19 pandemic will continue post crisis, and we are working closely with the company to best take advantage of this accelerating secular trend.

Our other tech-enabled health care companies do face exposure to economic headwinds but should be more immune to their impact than other sectors of the economy. One example is Aktana, where our cost basis is $12 million and we own 15% of the company. Aktana provides AI solutions to pharma companies to optimize their go-to-market strategies. The company continues to see strong demand for its products with particular strength coming from expansion opportunities in existing large pharma customers.

Another company uniquely positioned to address the employee challenges of a work-from-home environment is meQuilibrium. meQuilibrium, where our cost basis is $14 million and where we own 25% of the company, sells SaaS solutions to Fortune 500 companies to build employee resiliency and organization agility. meQuilibrium is seeing strong interest in its product offerings.

Other tech-enabled health care companies include Prognos and Syapse, who each use technology and data to help their pharma, payer and health system customers achieve better clinical outcomes. We believe their value proposition should be more resilient to a general economic downturn. Our cost basis and ownership in Prognos is $13 million and 26%, and in Syapse, it is $21 million and 17%.

Our ad tech companies are facing more general economic headwinds. While pre-COVID-19 secular trends supporting digital ad adoption remain intact, ad spending is expected to be down across-the-board in Q2 and even more so in those sectors where business has virtually ground to a halt, such as restaurants, retail and hospitality.

This slowdown has impacted all participants in the ad tech value chain, including MediaMath, Flashtalking, QuanticMind and Sonobi. These companies have all responded aggressively to the pullback in ad spend and are working closely with our customers to tap into pockets of spending strength, which still exists in certain sectors.

We expect these companies to be in a stronger position post COVID-19 as a secular shift of ad dollars to digital should resume and the steps taken during the crisis to align their cost structures will support greater operating leverage when we emerge from the slowdown. I will add that recent commentary from Facebook that indicated that their advertising business has stabilized in April is encouraging but remains to be seen if it is reflective of all market participants.

I'll stop there for now and turn the call over to Mark for a review of the quarter's financial results, and then we can jump into the Q&A.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [5]

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Okay. Thank you, Eric. For the quarter ended March 31, 2020, Safeguard's net loss was $16 million or $0.77 per share compared with net income of $21.7 million or $1.05 per share for the same period of 2019. Our financial results for the quarter were negatively impacted as compared to prior periods by certain impairments to our ownership interest and a severance charge resulting from our executive changes. Safeguard's cash, cash equivalents, restricted cash and securities at March 31, 2020, totaled $21 million and we have no debt obligations.

As we have discussed on prior calls, we believe we have sufficient resources to fund our corporate structure for the remainder of 2020 as well as to fund follow-on deployments to support our existing ownership interest. However, the current environment means that we may have a higher level of expected deployments for 2020, which is causing us to keep a keen eye on cash resources.

Quarter's results included partial impairments aggregating to $11.3 million related to several companies, including WebLink, QuanticMind, T-REX and other smaller holdings. These impairments are a noncash adjustment, which reflect a reduction to an estimated fair value for those specific ownership interest below our carrying value, which was deemed other than temporary.

The declines in fair value in our outlook were impacted by our outlook for the near-term exit expectations for each of these companies, which, as mentioned, has been significantly negatively impacted by the current M&A environment. In addition, our quarterly results also included a $1.5 million noncash other income gain related to an observable price change at Flashtalking.

I recognize that the financial reporting in this area can sometimes be complex, so let's take a moment here to provide you with a brief plain English overview of the accounting model followed with respect to our ownership interest. The majority of our ownership interest where we have significant influence through our ownership followed the historical cost model of equity accounting. This results in our balance sheet carrying value reflecting our original costs, which is then adjusted each period for our share of the loss or earnings of the underlying company.

To the extent that the fair value of these ownership interest increases as a result of their performance, that unrealized depreciation is generally not recognized in our financial statements. We do recognize unrealized dilution gain from time to time when an investment round occurs at a higher price and our participation is less than our existing ownership share.

We also have other ownership interests that follow the other accounting method because we do not have significant influence over the management of those companies. Under this method, we begin with our historical costs, and then make adjustments historically that those have been upward for observable price changes when there is an equity transaction at the underlying company in a substantially similar security.

Both of these accounting methods also require us to evaluate quarterly if the fair value of our interest is below the carrying value. If that circumstance exists and we believe that decline is other than temporary, we would be required to reduce our carrying value to that fair value. The measurement of fair value is inherently a subjective process with respect to securities of privately held companies and can result in volatile movements based on broad market conditions.

We have experienced some of that impact this quarter, resulting in the impairments recorded. Future estimates of fair value could be higher or lower, but the accounting model does not record upward adjustments for that estimate. It only requires us to record downward adjustments that are judged to be other than temporary. So thank you for allowing me that diversion. We can clarify these comments more specifically for you in the Q&A portion of the call.

Our general and administrative expenses were $3.5 million for the 3 months ended March 31, 2020, as compared to $3.1 million for the first quarter of 2019. This increase was the result of the $1.7 million severance charge recorded during the quarter. Excluding that charge, our G&A expenses were 41% lower than the first quarter of 2019 due to our scaled-down level of staffing and the impact of the office move to lower-cost facilities.

Corporate expenses for the quarter, which represent general administrative expenses, excluding depreciation, stock-based compensation, severance, retirement costs and other nonrecurring other items, were $1.5 million compared to $2.1 million in 2019, a 32% reduction. In addition to the G&A reductions mentioned, we had a quarter-over-quarter reduction in compensation costs, professional fees and the reflection of director fees as a stock-based compensation item. We still have more to do on the cost side, and we will continue to look for ways to continue cost reductions

With respect to our ownership interest at March 31, 2020, we have an aggregate carrying value of $66.8 million. During the first quarter, we limited deployments to $2.2 million to 5 existing companies. We expect that we will make additional deployments into 2020 at the high end or higher than our previously established range so that we can continue to support our ownership interest. In the aggregate, we now expect 2020 deployments to be between $8 million and $12 million.

Our share of the losses of our equity method ownership interest for the 3 months ended March 31, 2020, was $2.8 million as compared to $7.3 million for the comparable period in 2019. The decrease is the result of fewer companies being accounted for under the equity method due to exits, changes in basis of accounting as 2 companies move from the equity method to the other method as well as lower losses on a net basis from our equity method ownership interest.

I would also like to remind everyone here that we report our share of the losses from the equity method companies on a one quarter lag. So this quarter's share of the losses reflected the calendar fourth quarter for those companies, and we consider the impact of -- and as we consider the impact of COVID-19, some of the impact to the operations of our companies has occurred in the calendar Q1, which we will report in our second quarter.

There can be larger impacts in calendar Q2, a period where many companies are dealing with this economic shutdown, which we will report in our Q3. We will try to make this as clear as possible for you, but I wanted to make sure that, that is understood, that the impact of these recent events is likely to impact our reported results throughout this calendar year.

But now I'd like to return the call back over to Bob.

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Robert J. Rosenthal, Safeguard Scientifics, Inc. - Executive Chairman & Principal Executive Officer [6]

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Thank you, Mark, and I believe it would be appropriate for us to move to the Q&A.

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Operator [7]

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(Operator Instructions) There are no questions at this time. I'll turn the call back over to the presenters.

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G. Matthew Barnard, Safeguard Scientifics, Inc. - General Counsel & Secretary [8]

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Okay. Well, I want to thank all of you for dialing today and listening, and thank you for joining us. Thank you for your continued interest and support of Safeguard, and please reach out to us if you have any questions or follow-up. Thank you very much.

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Operator [9]

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This concludes today's conference call. You may now disconnect.