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Edited Transcript of SFE earnings conference call or presentation 25-Oct-18 1:00pm GMT

Q3 2018 Safeguard Scientifics Inc Earnings Call

Wayne Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Safeguard Scientifics Inc earnings conference call or presentation Thursday, October 25, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Sisko

Safeguard Scientifics, Inc. - President & CEO

* John E. Shave

Safeguard Scientifics, Inc. - SVP of IR and Corporate Communications

* Mark A. Herndon

Safeguard Scientifics, Inc. - Senior VP & CFO

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Conference Call Participants

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* James Robert MacDonald

First Analysis Securities Corporation, Research Division - MD

* John P. Francis

Francis Capital Management, LLC - President

* Lee Zimmerman

* Peter Kirk Lukas

CJS Securities, Inc. - Analyst

* Sam Rebotsky

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Presentation

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Operator [1]

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Good morning, and welcome to Safeguard Scientifics' Third Quarter 2018 Financial Results Conference Call. Please note, this event is being recorded.

I would now like to turn the conference over to John Shave, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

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John E. Shave, Safeguard Scientifics, Inc. - SVP of IR and Corporate Communications [2]

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Good morning, and thank you for joining us for this update on the Safeguard Scientifics' third quarter 2018 financial results. Joining me on today's call and webcast are Brian Sisko, Safeguard's President and CEO; and Mark Herndon, Safeguard's new Senior Vice President and CFO.

During today's call, Brian will provide a corporate and strategic update and review recent highlights, including developments at Safeguard and our partner companies, and Mark will discuss our results. Afterwards, we will open it up to your questions.

As always, 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 partner companies for maximum value or at all and distributions to our shareholders; the ongoing support of our existing partner companies; the fact that our partner companies may vary from period-to-period; challenges to achieving liquidity from our partner company holdings; fluctuations in market prices and publicly traded partner company holdings; competition; our ability to attract and retain qualified employees; market valuations in sectors which our partner companies operate; our inability to control our partner companies; our need to manage our assets to avoid registration under the investment act of 1940; and risks associated with our partner companies, including the fact that most of our companies have a limited history and a history of operating losses; face intense competition; may never be profitable; the effect of economic conditions in the business sectors in which Safeguard's companies operate; and other uncertainties described in our filings with the SEC.

Many of these 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 except -- 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. The company does not assume any obligation to update any forward-looking statements made today.

With that, here is Brian.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [3]

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Thanks, John. Good morning, and thank you for joining us today. First, I would like to introduce Mark Herndon, our new Senior Vice President and Chief Financial Officer. We're looking forward to working with Mark as a senior member of the team as we execute against the objective of maximizing the realized value from the portfolio companies we have and returning the net proceeds to our shareholders.

Mark is a former partner in the Philadelphia office for PricewaterhouseCoopers. In that role, he focused on serving clients in the life sciences, technology and healthcare industries during his 27-year tenure. Mark succeeds Dave Kille as our CFO and he's been on the job since late September. If you haven't already spoken with Mark, you will have an opportunity later in today's call, when he summarizes the company's financial results and participates in the Q&A segment. Welcome Mark.

Let's move on. I want to begin by reminding everyone of what we are, what the basic tenants of the strategy are, what we have done and are doing to -- on a day-to-day basis under that new strategy and the value of the portfolio of partner companies as a whole.

We hold significant, but minority interest in growth stage companies that operate within 2 broad categories, Healthcare and Technology. That number doesn't include holdings, what we don't have is much day-to-day involvement.

While we are not pursuing any new partner company deployments, we are continuing to support our existing partner companies with capital and resources. Given the stage of development of the companies in the portfolio, we anticipate that the follow-on capital necessary to foster the ultimate exit of these partner companies will be relatively small as compared to the amount of capital, which we've already deployed into the portfolio and to the portfolio's current and expected value. Our ultimate objective is to maximize the value to us of these companies and to return the net proceeds of those efforts to our shareholders. We anticipate that the majority of the exit activity will occur within the next 3 years.

We also anticipate, that there'll be some further wind-down period during which the remaining holdings will be managed and liquidated. We think that could take up to another 2 years to accomplish, as an estimate. Our specific plans for returning capital to our shareholders have not yet been finalized, but we can say that it is our intention to begin to distribute net proceeds from our monetizations to our shareholders as soon as practicable, once the debt facility has been repaid.

We have significant influence regarding the strategic initiatives of our 22 companies, but we typically share that influence with other capital providers at each of these companies. We work cooperatively with management of these companies and the other involved capital providers. We chart the path forward that will be ultimately and mutually beneficial and which will have the best chance of producing significant profitable exit activity and oversee the execution against those planned paths. I bring this up because it directly addresses the question that we get asked consistently by shareholders, "why aren't you initiating more exit activity?" I can't emphasize enough that we are constantly discussing and pursuing potential exit activity. But that effort is within the context of: number one, a venture growth stage portfolio; number two, syndicate management dynamics at each of the companies; and three, individual company circumstances. Each of those factors contributes to an unpredictable exit timeline for us. Sometimes the exploration of possible exit scenarios involves formal sales processes and sometimes it doesn't, alternate results from inbound increase from potential acquirers to our partner companies to us or to the partner companies' financial advisers.

At any given time, there are multiple partner companies engaged in substantive dialogue concerning potential exits or strategic transactions. As I previously referenced, sometimes that involves a formal process where an investment banker is hired and sometimes it is a direct conversation with potential acquirers. Those conversations may result in a proposed transaction or transactions that would be beneficial for all involved or they may not, based on price, terms and other factors. For obvious reasons, we can't disclose the names or amounts of specific proposed transactions before they are consummated, even if formal offers have been received. But based on present circumstances, we do expect to consummate another profitable exit either later this year or early next year. There is no guarantee that the transaction will ultimately go forward and be consummated. But if the transaction moves ahead, which we do expect it to do, we will disclose the specifics of the transaction when it closes.

So what have we done to date under the new strategy? A lot, in a very short period of time, I might add. First, we repaid approximately $41 million of convertible debentures maturing in May. Second, we revised minimum liquidity and other covenants under our senior debt facility and third, we provided for sufficient working capital to allow us to continue to support our partner companies and to operate this company in the absence of certainty regarding the timing of future exit activity.

Within a few weeks of the announcement of the new strategy, we first structured our senior debt facility to make the financial covenants consistent with the new strategy, to allow us to borrow additional funds to pay off the convertible debt and to provide some additional borrowing capacity to ensure that we had sufficient liquidity during the first stage of operations under the new strategy. These changes allowed us to avoid issuing new, more expensive convertible debt.

Then we negotiated and executed the sale of our interest in AHS to provide us with some cash cushion against our remaining debt covenants. We also negotiated and stole the significant portion of our interest in MediaMath back to the company and in the process returned significant amount of capital to our balance sheet, derisked our holdings and maintained our opportunity for continuing upside in MediaMath.

Fourth, we consummated the sale of Cask to return $11.5 million initially, and up to $2.4 million of additional proceeds in 2019, if certain conditions were met.

In aggregate, year-to-date, we have realized $80 million in cash proceeds, principally from the exit transactions involving AHS, Beyond, Cask and MediaMath. We also consummated the merger of Spongecell and the Flashtalking, a transaction that didn't produce the current cash return for the balance sheet, but did better position us for a shorter-term cash return concerning our initially -- our original deployment.

Most profitable among the transactions we have consummated this year was the MediaMath third quarter repurchase of 39.1% of our equity position. We realized $45 million on this transaction representing a 4.5x cash-on-cash return. You'll also recall that the terms of the transaction grant MediaMath the right to repurchase an additional 10.9% of our stake to $12.5 million. That would represent a 4.5x cash-on-cash return as well. The exercise of that option lies totally in the discretion of MediaMath, and their decision whether to exercise the option will be made in the context of their overall capital allocation strategies as they weigh acquisition and growth opportunities et cetera against the possible exercise of that option.

The foregoing achievements have put us in a position where we've been able to continue to fund and support our partner companies' needs in due course. This continues to be our number 1 priority, as we seek to maximize the potential of the portfolio. We accomplished all of the foregoing while we restructured and reduced our staff from 34 to 13. We're pleased with what we've accomplished here to date, particularly in light of the circumstances under which it has been achieved.

Now let me address the value of the partner companies as a whole. The increasing value of the partner companies in the overall and steady growth and maturation of the portfolio as a whole is evidenced by a couple statistics.

Recently 4 of our new partner -- 4 of our partner companies, excuse me, have undertaken equity-related financing raises that were based on valuations exceeding the respective prior rounds. All 4 round were led by new investors.

In the past 9 months, our portfolio as a whole has raised in excess of $100 million in equity funding, of which Safeguard has had to contribute less than 15%. We have 9 partner companies at present that have trailing 12-month revenue run rates that are in excess of $10 million per annum. I focus on this $10 million milestone because it seems to have become the new standard for judging the normal course potential for a company to be a strategic acquisition target.

9 companies with over 9 -- with over $10 million in annual revenues is certainly a reason for significant optimism. As the portfolio matures and develops, we are constantly making decisions about the care and feeding of the individual companies and the allocation of our financial and professional resources across the portfolio.

As our companies go through capital raises, which are sometimes coupled with discussions regarding potential exit scenarios, we decide on a case-by-case basis whether, and with how much capital, we will participate. We take in all account among other things, other participants, prevailing valuations and terms, and our previously deployed capital. We generally look to continue to participate where initial deployment protects our eventual interest in a projected exit value or otherwise allows us to reach our cash-on-cash return goals.

As noted above, recently our partner companies as a whole have raised a very significant amount of capital to fund their continuing growth, and in most instances, we have participated with our capital in those financing transactions. But it is the nature of venture capital style of finance that we sometimes have to decide to stop funding the company, even if we believe the company has the opportunity to be successful. If the company is behind plan, if the company is unable to source sufficient, additional third-party capital in our view and/or the amount of additional capital required to move the opportunity forward is greater in the amount of capital we have available or wish to allocate to that opportunity given the risk inherent in the opportunity. That sort of decision making process led us to write down the carrying value of our interest in CloudMine this quarter. Since the company has not identified a new third-party source of capitals nor entered into an arrangement to be acquired. But, despite the fact that we took that right down, we continue to work with CloudMine to pursue a strategic transaction.

I'll now ask Mark to review the quarter's financial results.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [4]

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All right. Thank you, Brian. I'm happy to be here at Safeguard, and I'm eager to help this team execute our plan. I look forward to working with you, the rest of the team, the board, as well as all of the other of the company's stakeholders towards our goals.

Over the next few minutes, I will highlight our third quarter results, update partner company holdings and provide a summary of our cash and debt balances. Our third quarter resulted in net income of $32.1 million, or $1.56 per share on a basic and fully diluted basis as compared with a net loss of $18.7 million or $0.91 per share on a basic and fully diluted basis for the same quarter at 2017.

Financial results for the third quarter reflect the previously disclosed $50.5 million of gains from the exit of AdvantEdge HealthCare Solutions and from MediaMath's repurchase of Safeguard's equity ownership stake. The third quarter's results also include an impairment of $4.8 million related to CloudMine, losses we record based on our ownership percentage in our partner companies of $11.2 million and dilution gains of $3.6 million that resulted from our partner companies' new financings.

For the 9-month period, Safeguard's net income was $1 million or $0.05 per share on a basic and fully diluted basis compared with a net loss of $69.8 million of $3.42 per share for the same period of 2017.

Results for the 9 months ended September 30, also included the previously disclosed gains: the $9.5 million gain related to next repayment of a note; a $3.8 million gain on the merger of Spongecell and the Flashtalking, both of which were recognized during the first quarter; the impairment of Apprenda for $6.6 million; and a $4.2 million gain on the sale of our interest in Cask, both of which were recognized during the second quarter. Our total losses we record based on our ownership percentage in partner companies was $37.7 million and unrealized dilution gains, that result from our partner companies' new financings were $6.7 million.

Safeguard's interest expense was $3.3 million for the third quarter as compared to $2.6 million, the same period last year. Interest expense was $9.4 million for the year-to-date period as compared to $6 million for the same period last year.

Stock-based compensation was $243,000 for the third quarter as compared to $560,000 for the same period last year. Stock-based compensation was $853,000 for the year-to-date period as compared to $806,000 for the 2017 year-to-date period.

Staff reductions announced in January and April resulted in an aggregate severance charge of $3.8 million, of which $1.1 million was recognized during the first quarter, $1.7 million was recognized in the second quarter and $1 million was recognized in the third quarter. We expect additional severance charges of $0.2 million to be reflected in the fourth quarter from these previously announced decisions.

For the third quarter, corporate expenses, excluding interest, depreciation, severance and stock-based compensation were $2.2 million, as compared with $3 million in the third quarter of 2017.

For the 9 months ended September 30, 2018, these same expenses were $9.4 million compared with $11.8 million in 2017. We are pleased to have reached our targeted goal of $8 million to $9 million of annualized corporate cost. While we do not expect further dramatic reductions to our cost levels over the next 2 to 3 years, we will continue to look for ways to extract further efficiencies from our operations, as we continue to support our partner companies.

Now with respect to those partner company holdings, at September 30, 2018, we had 22 partner companies representing an aggregate cost of $274 million and having a carrying value of $98 million. Our average capital deployed in those partner companies at September 30 was $12.5 million and the weighted average length of time that Safeguard has been a shareholder in those companies is 5 years.

During the third quarter, we deployed $7 million of capital in 8 existing partner companies, bringing the year-to-date total of follow-on funding through September 30, to $15.2 million.

We expect that we may deploy an additional $2 million in follow-on capital to existing partner companies during the fourth quarter of 2018. And as Brian mentioned, the timing of additional deployments can change with the circumstances of individual companies. Furthermore, we expect that the aggregate 2019 deployments will be lower than 2018.

Also, we are updating the revenue guidance previously provided with respect to our partner companies. Our new range is $400 million to $415 million for the group, which is a reduction from our previous guidance of $420 million to $440 million. The reduction is principally the result of slow growth across the digital media sector, which has impacted several of our portfolio companies. However, we remain optimistic about each of these companies impacted as they continue to execute on their respective strategies.

Safeguard's cash, cash equivalents, marketable securities and trading securities at September 30, 2018, totaled $70.9 million as compared to $29 million at the end of 2017.

At September 30, 2018, Safeguard borrowings under our credit facility totaled $85 million. As a reminder, proceeds from this credit facility and cash on hand were used to repay in full the $41 million of convertible senior debentures on their maturity date on May 15, 2018.

We continue to retain the $15 million of borrowing capacity of the secured credit facility due 2018 year-end, but we do not expect to borrow any of those amounts.

The terms of our debt facility require that qualified cash over $50 million be used to make an early repayment of debt alongside with associated make-whole interest. Accordingly, on October 15, we paid $16.4 million of principal and $3.2 million of interest to our lender as an early repayment.

I would also note that, as we proceed through the execution of our strategy and prior to the full repayment of our credit facility, we will, on a quarterly basis for accounting purposes, estimate the value of our derivative liability under the credit facility based on our expected quarterly ending cash balances, considering follow-on deployments, expected exit and ongoing corporate expenses.

Additionally, with respect to our lending agreement, the company continues to be in compliance with all of the its debt covenants. As a reminder, under the terms of the credit facility, the company is restricted from repurchasing shares of its common stock and/or issuing dividends until such time as its credit facility has been repaid in full.

Now, here's Brian to share some final thoughts and lead us through the Q&A segment of the call.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [5]

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Thanks, Mark. I'd like to close with the discussion regarding our share price. We continue to be optimistic that realized exits from the portfolio will eventually result in improved share price, and we believe that the value of the group far exceeds Safeguard's current market capitalization. Consider that the total cost of our partner companies is $274 million. Our target aggregate cash-on-cash return is 2x, and if you apply that to the cost basis plus a modest amount of follow-on capital that we believe will be required, that would yield approximately $525 million in gross proceeds to us. If to that total we then add our current cash, subtract our debt obligations and an estimate for operating expenses over the expected return period, let's call it 4 years, okay? We get a net aggregate of approximately $400 million or more. Let's use that as a top end of the range. And for the lower end of range, if we apply our historical cash-on-cash return of something closer to 1.5x instead of 2x, we arrive at a net aggregate of approximately $300 million. If you then divide those net aggregate amounts by the fully diluted number of Safeguard shares outstanding, which was approximately $21 million at quarter-end, you get a per share value of between $14 and $20. You can apply whatever discounts factor you wish to reflect a return period that we envision and obviously, there is a lot of supposition in those calculations. But the disparity between current trading price and the potential value range is fairly obvious.

I hope this information helps to answer some of your valuation questions. John outlined some important disclosers and cautions regarding forward-looking statements earlier in the call and I want to reemphasize here that our assessment of this valuation range -- this potential valuation range is subject to a lot of risks and assumptions, and we certainly can't assure you that things will work out exactly as described, but the numbers speak for themselves.

Operator, let's open the phones for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bob Labick with CJS Securities.

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Peter Kirk Lukas, CJS Securities, Inc. - Analyst [2]

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It's Pete Lukas for Bob. You mentioned that you are in compliance with all your debt covenants. Just wanted to ask, how have the recent exits impacted the covenants? Specifically, the $350 million portfolio valuation covenant? And does that -- how does that work with the sales without triggering punitive covenants on the credit facility?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [3]

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So Pete, the credit facility is built in such a way to take that into account. So there is a -- the provision that you are referring to takes into account cash in excess of our minimum required cash. So it adjusts accordingly. So we're not -- we're not any closer to a default than we were last quarter. We're all -- we're in the same sort of position. We're very well protected. We feel that the -- that covenant doesn't present any challenges whatsoever for us. And we don't anticipate issues with any of the covenants actually, but it's -- but that one in particular, that's an easy answer.

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Peter Kirk Lukas, CJS Securities, Inc. - Analyst [4]

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Helpful. And sticking with the credit facilities, any subject to prepayment penalties that we should be keeping an eye on?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [5]

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Well, the way the facility is structured we don't have any prepayment penalties. It's built in a fashion that recognizes that the lender got into this transaction for reasons different than where we ultimately are going with this portfolio. So the -- what we have under the facility is a required make good on interest. So despite the fact that we're paying-off principal early, as required under the facility, we don't get the benefit of any interest reduction. So there is no penalties for prepaying, in fact, we are required to prepay. We won't go beyond what the required prepayments are to make any additional prepayments unless we're at that point where we are so close that we want to start distributing capital and that will be taken into account at that -- when we get to that point. But there are no prepayment penalties in that sense.

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Peter Kirk Lukas, CJS Securities, Inc. - Analyst [6]

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And last one for me. Just to make sure I understood -- understand the exits unpredictable, can't disclose names or amounts. And there -- you'd mentioned -- so if I understand correctly, one, at least in a process that could possibly take place, possibly, of course, by the end of the year or beginning of next year. But just wanted -- and then as far as financing for the current companies for next year will be less than it was in 2018. But any more specifics you can give us on how many companies currently looking for financing at -- in the near term?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [7]

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Let me think, Pete. I think we've got -- well they're truly out looking for financing, I think we have an expectation of 2 of our companies raising capital in, let's call it the next 3 or 4 months. One of which we probably will contribute some component to, consistent with our pro rata. One of which we probably wanted to -- it'll be a larger round that's led by a third-party. But -- to get back to your other point about -- to sort of mix the question about capital raises versus exit activity. You used the term profits when you referred to that -- the comment that we made during the scripted portion of the call. That wasn't even a company that was in a process. It's a good opportunity for me to point that out. The company that we referred to there falls into that category of companies being bought not sold. So it's not a company that was in a process. And we do believe that it will result in a transaction which will be -- I would call a significant transaction. And we do expect it to close before the end of the year or early in -- in the early part of the year -- in the early part of next year, excuse me.

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Operator [8]

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Your next question comes from Jim MacDonald with First Analysis.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [9]

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Just following up on the last question, I guess first, there are sort of 4 companies that you seem to be repetitively investing in quarter-after-quarter, which to me indicates they haven't finalized the funding. Maybe you could talk about a little bit more? You mentioned a little bit about CloudMine, InfoBionic, NovaSom and Sonobi.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [10]

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Give me them again CloudMine, Sonobi...

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [11]

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Yes, InfoBionic and NovaSom, which didn't raise this quarter, but has been raising pretty much in every quarter.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [12]

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So let me start with InfoBionic. InfoBionic made an announcement within the past 2 months, I think we did it in September. They raised a round that -- we've been contributing to a bridge financing for InfoBionic over the course of prior periods, but we brought in a third-party investor and closed a total $50 million financing with InfoBionic. So I would view that company as fully funded and John can refer you to this specific press release that was done by the company announcing that transaction alongside of a very significant commercial transaction that they undertook with the distributor. That sort of lines up perfectly with the fact that they now have a significant pod of growth capital. CloudMine and Sonobi fall into the category of earlier stage company, even though Sonobi is one of those companies that's above $10 million in revenue run rate, we still consider them development stage, early stage. So we have done some bridge funding for them. As you see from the reference to the CloudMine write-down that we took this quarter. That is a company where we have basically been the only capital at the table. And one of the important tenets of how we're going about this -- the pursuit of our strategy now is try not to be in that position where we're the funder of last resort and dribbling capital in with no particular end result obvious to us. So CloudMine has been out looking to raise some capital, also looking to transact when conversations with a number of different companies about strategic paths forward for CloudMine. Sonobi is -- there'll be -- I think there'll be an announcement of some nature, that will be of interest to you, regarding Sonobi's path forward within the next couple of months. We don't anticipate a significant amount of additional capital from us in the context of those discussions. And NovaSom, sort of a different animal. That's a very well scaled company, and we are in the market at present, continuing to fund that company to that next milestone of scale that is important in that sort of non-repetitive -- or excuse me, nonrecurring revenue kind of business. But we do not anticipate having any significant obligation or need to fund NovaSom as we go forward.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [13]

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Okay, that's helpful. I wanted to dive in a little bit to the digital marketing slowdown, you talked about it affecting your partner company revenue. Is that affecting all your digital marketing companies similarly? Or there are some that are more affected? And what does that say to timing of exits for those digital marketing companies?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [14]

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Well, I guess, I'm going to -- I'm looking to Mark to correct me if I'm wrong. But I think it's fair to say that it's a fairly evenly spread level of peanut butter across those companies, in terms of how the slowdown in their growth trajectories has affected our portfolio companies. And for obvious reasons, I'm trying not to point specific fingers, but we -- the companies as a whole are being affected by that slowing rate, I think fairly equally. The -- we haven't necessarily baked into our thinking any change in our ultimate exit time horizons for those companies. Good companies will continue to get sold, especially, if what we're talking about is sort of an industry-wide change. Obviously, if dollars into that category slow that could change our thinking, but at present that's not how we are thinking about it.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [15]

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And then one more for me. So you have a number of companies that are bigger and a number that are smaller. What are your thoughts on some kind of a bulk sale, maybe of the some of the smaller companies in your portfolio?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [16]

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Well, we are constantly willing to, and do talk with potential counterparties. We talk with our financial advisers about the prospects for that and what sort of return dynamics or return profiles that could provide to us. At present, we don't have any specific plan to do that. I would suggest that some of the companies that we have in the portfolio that are "smaller", may end up proving to be, not in the -- not necessarily even in the long term, but in a -- in the shorter timeframe, very profitable transactions that contribute significantly to the overall outcome here. So it's -- I don't view the companies simply as being categorized into large or small in terms of how we view their contribution to the overall outcome here. But we'll get to some point, for sure, down the path here, where it will be more beneficial to everyone involved to look at some sort of bundle sale, but that's not something that, at the moment, is being negotiated or that we're out trying to do.

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Operator [17]

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Your next question comes from John Francis with Francis Capital.

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John P. Francis, Francis Capital Management, LLC - President [18]

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How many companies are currently in a formal sale process? And do you have any LOIs in hand?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [19]

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So John, the references that we made earlier in the scripted portion of the call concerning which companies -- or how we look at whether a company -- if what we're trying to ultimately communicate to our shareholder population is the level of activity that's being undertaken concerning these partner companies, I don't want to get caught up in trying to delineate which companies are in a process, as defined by having a banker in place that's out marketing the companies for a sale, come hell or high water. We have as many companies that are in that sort of situation as we do have companies that are having one-on-one dialogues or one-on-two dialogues with and without the involvement of financial advisers concerning a potential exit or sale. So as previously said, in any given time period, we have more than a handful and I would suggest that, that more than a handful, right now, is at least 6 companies that are in some version of those sorts of more granular dialogues and that doesn't include companies who are consistently fielding soft inquiries from potential strategics about whether they are or aren't ready to discuss potential transaction.

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John P. Francis, Francis Capital Management, LLC - President [20]

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Okay, great. And then have -- has management of the board formalized a distribution policy at this time?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [21]

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No. What I was trying to refer to during the call, was that the -- to make sure everyone understood that there is no intention to hold a pot of cash and wait till the end to distribute cash. We will start distributing cash in some way, shape or form as soon as we've dealt with the credit facility, and made sure that we have enough capital on hand just to continue to run the business, which Mark has given us some guidance as to what that cost will be. But what we've -- we just had a board meeting this week and one of the Q4 projects that we have is to put some meat around that plan. So we would hope that, let's call it in the early stages of 2019 be more descriptive to you about what that plan will look like. We've got to take into account the advice of financial advisers, legal advisers, how to go about -- how are we going to go about doing this. So we would hope to have further guidance for you early on in 2019 at the latest.

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John P. Francis, Francis Capital Management, LLC - President [22]

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Okay. And then how achievable is the company's 2x cash return target given the recent track record? I mean, do you think it's still reasonable to expect?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [23]

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We're still comfortable saying that, that our expectations to try to achieve a 2x return with our existing portfolio is still something that we've dialogued about and are still comfortable pursuing. As companies do get sold out of portfolio, there will probably be -- there will be some time, where we have to revisit that, I would guess. Because if there are some big wins that come out of the portfolio soon -- earlier, rather than later, we'll change that. But for the moment, we believe in the aggregate the guidance can remain, that we believe that we're -- our target of 2x is a rational and a target supported by the modeling that we've done around the portfolio.

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John P. Francis, Francis Capital Management, LLC - President [24]

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Okay. And then can you walk through your valuation methodology again for me, please. You know...

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [25]

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Let me be careful not to call it a valuation methodology, so much as it is, just to kind of give you a sense of a broad way to look at the map. So historically, we've produced something around -- and by historically we're talking about, I think since 2006 when the company undertook its first -- undertook to become something other than an operating company. So from 2006 on, the cash-on-cash return metrics for closed transactions has been something in the range of 1.5x. We stand by, as I just said to you, our continuing target to produce a 2x return on our portfolio. So using those as 2 ends or the goalposts, just to give somebody a sense of, if we fall in that range, how that compares to what our current stock price is. I take the current cash deployed into that -- into the existing portfolio and I look at the small amount of additional capital that we view as "reserved" or potential further deployment into that portfolio. I take into account the cash that we have available to us, our debt obligations and our operating costs over that -- the expected period of bringing that capital back to the balance sheet. And then, just do some simple math based on aggregate proceeds that we might expect, dividing that by our fully diluted share number. And if you use that range, you end up with $14 million to $20 million -- excuse me, $14 to $20 per share as a rough goalpost to look at. So I hope that's a little bit more helpful than maybe my scripted dialogue was.

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John P. Francis, Francis Capital Management, LLC - President [26]

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No, that's helpful. And then finally, last question. What impact are the new board members having? And where do you see them adding value?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [27]

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Well, the -- Ira -- both Ira and Russell are extremely well credentialed people. I've known Ira for an extremely long period of time. I don't know Russell as well, but both of them have sort of fit right into the board. I've gotten some questions where people thought -- it's -- they sit on one side of the table and everybody else sits on the other which is totally not the way it plays out for anyone that's sat on a public company board. And maybe it's different, if you're sitting on Time Warner and there is dissident that's pounding the table. But we're a very small team, both management-wise and now a board of 5. So it's pretty incumbent upon us to all work together, which is basically how it's been working to date. There's been no acrimony. It's 2 more smart people around the table contributing to a dialogue. I can tell you that every decision that's been made since we -- since they got on the board has been unanimous. There's been no, sort of, division between the old and the new. So it's worked pretty darn well actually, nothing that I would complain about at all.

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Operator [28]

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Your next question comes from Lee Zimmerman with Baird.

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Lee Zimmerman, [29]

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It was nice to see so many companies go up in your chart from low traction to high traction. From developing and some of them went up 2 slats in one quarter, I've never seen that. Seeing that it looks like you've got 1 company that you're pretty confident will sell, which is good. Do you think in 2019 you have a number of sales and possibly be returning capital to us long-waiting shareholders?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [30]

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Well, Lee, I certainly -- if we're not producing some exit activity in 2019, I'll be extremely surprised. So -- and we're not talking about $2 million here, $3 million there. We're talking about transactions that produce significant dollars back to the balance sheet that we will be turning around and returning to shareholders. That being said, obviously, I can't predict, but if we're in a position that mid-year 2019 we've done a couple of transactions that allowed us to pay off the debt facility, we certainly will be talking about returning capital quickly thereafter. The big if is, if that's where we are in mid-year, but we certainly don't anticipate a fallow period. We should be hitting a stride here, where -- because of where these companies are and unless the economy goes completely in the tank and M&A activity goes out the window, we certainly anticipate that there will be, sort of, a groundswell that starts to become obvious with these companies and we'll be planning accordingly. So I hope -- that's as direct as I can be with you that -- about what our intentions are. Timing is a different issue.

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Lee Zimmerman, [31]

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When you first changed the policy to liquidate the company, we were told that would about a 3-year process. And were you just being conservative today, when you said it's a 3-year process from here? Do you hope to do it significantly quicker than that?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [32]

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Well, I absolutely would love to do this as quickly as possible. I'm just trying to set rational expectations about what it will probably look like. I would love nothing more. I remember an old mentor of mine saying, "underpromise and overdeliver." So I would much rather.

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John P. Francis, Francis Capital Management, LLC - President [33]

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There would be a first...

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [34]

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Be straightforward with you and say that this could take -- because it really could. I'm not sandbagging here. It's a lot of companies to take through a lot of transactions and they -- and that just sometimes takes time. But I certainly, would rather surprise you on the high side and get a lot of this done sooner and beyond to everyone's next project. And if I -- so if I could get this done, we can get this done all within that 3-year timeframe, I'd be a happy camper.

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Lee Zimmerman, [35]

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Have you hired any investment bankers to sell the whole company?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [36]

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No, we haven't hired anybody. The board dialogues about that, whether that's rational and I've been asked to continue to provide data points to them to understand what that could possibly look like. And that's something that we've done over the course of time, too. There's nothing that's different from previous periods. But given where our stock price is, et cetera, where we're -- I'm always being asked by the board, this new board as well as the old board, to provide that kind of data for purposes of a discussion about whether or not that is a path that they -- that we all should look to go down. But no, as of now, there's been no decision nor has anybody been hired to undertake that for us.

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Lee Zimmerman, [37]

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Is it board giving you any incentives to make this happen quicker? Are you under any incentives? Have they thought about that?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [38]

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Well, I can guarantee you Lee, as I spill coffee all over myself, that I'll get paid -- and that wasn't in response to your question. We will be, we the management team, if we were able to produce, let's say, a reduced, excuse me, produce a result of X dollars in 2 years versus 3 years, I guarantee you, we'll all make more money. If we do it in 2 years, we'll be rewarded for doing that because of the time value money and the fact that we won't have to expend as much in the way of operating costs over the return period as would otherwise be the case. So yes. I'm incented to do this faster.

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Operator [39]

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Your next question comes from [Susanne Meline] with [Catalysis Partners].

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [40]

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Susanne, I don't think we have spoken before.

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Unidentified Analyst, [41]

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Since we were just talking about overhead expenses, can you talk a little bit more about that going forward?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [42]

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Yes, let me hand that off to Mark, if I could.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [43]

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Sure. I think the punchline related to that would be, our expectations for forward looking operating cost haven't changed at this time from our previously stated goal of $8 million to $9 million of annualized corporate cost. It's something that we've continued to monitor at that level and certainly refine as new information becomes available. But we are at a pretty steady state of operations here now, and we're just -- we're looking to play out the interest cost are relatively fixed, not entirely, but relatively fixed and again, our corporate costs are stable.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [44]

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Susan, I would add to that. As the portfolio gets smaller, if there is a significant reduction in the portfolio, that will be our next opportunity to determine whether there is some amount of reduction in cost that might end up being material. But as of right now, I would suggest that, other than for us subletting the space that we're in, in a fashion that saves us the -- maybe $1.5 million over the course of the facility, I wouldn't be baking in any model, any significant reductions. We still are a public company and until we get out from under that, we're going to have that cost. And our headcount is down, as I said earlier, from 34 to 13 over the course of the past year. It will fall a little bit more by the end of the year in a planned exercise. But other than that, we've got a portfolio of 22 companies that we're trying to manage with a fairly small team and that in itself is a limiting factor for how we can cut those costs further until the portfolio gets smaller.

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Unidentified Analyst, [45]

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And so when you're talking about the portfolio getting smaller, presumably, you are speaking about numerosity of companies rather than by value, correct?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [46]

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Yes, it -- because it really is. It's when you talk about, how much time we do spend and should spend with each of these companies, it's not just showing up for a quarterly board meeting, it's a significant level of activity beyond that. And we would be shortsighted if we viewed this as a passive portfolio as opposed to what we know it to be, which the results tend to be better, when we are actively involved in those companies, which takes hands and time cycles, et cetera.

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Unidentified Analyst, [47]

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And can you remind me again, out of the 22 companies, do you hold board seats in all 22?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [48]

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Yes. Well, let me take that back. In MediaMath, because the -- part of the transaction we did with them, I took an observer seat and I -- we filled -- we agreed to fill our board seat with an industry executive, who they haven't yet announced, but they will -- I think they will be making a public announcement of that person. But other than that case, we don't -- where we don't have a formal board seat and a vote, every other case we have at least one board seat.

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Unidentified Analyst, [49]

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Right. So you are an observer, so you're still showing up for the meetings, participating. Correct?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [50]

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I'm sorry, say that again?

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Unidentified Analyst, [51]

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You said you retain...

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [52]

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Yes, I'm on every call and we have full information rights, et cetera, et cetera, yes.

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Operator [53]

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(Operator Instructions) Your next question comes from Sam Rebotsky with SER Asset Management.

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Sam Rebotsky, [54]

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Could you help me out with the amount that you're carrying -- you're carrying the MediaMath at 0. It should be worth $70 million even though you've got $45 million. And the accounting rules don't permit you to list the valuation and you talk about the $525 million. Could you sort of indicate, how many companies you have like the MediaMath? And how they break down to the $525 million?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [55]

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Well. You're correct in that the accounting rules would not allow us to write up the values in any of the companies to their expected values. So everything that you've seen there is characterized at their cost less adjustments for the application of equity method accounting. So the valuation relative to the portfolio is a different process entirely.

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Sam Rebotsky, [56]

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But this -- is $70 million conservative for MediaMath in the $525 million or..?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [57]

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Yes. That would be conservative within the concept of the overall portfolio. And I think that price is consistent with what was the transaction that just happened in the repurchase.

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Sam Rebotsky, [58]

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Okay. And as far as the cash as of now, you haven't paid off any of the debt subsequent to now?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [59]

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One correction there. As of October 15, which is just about a week ago, 10 days ago, we repaid $16.4 million of principal. So as we sit here today, the $85 million of principal is now -- has been reduced to roughly $68 million.

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Sam Rebotsky, [60]

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And based on your carrying cost, would you reduce the debt so that your cost expenses are lowered because you really don't expect to be investing significant amounts of money?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [61]

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So we'll -- our plan would be to repay the debt as resources become available. And in particular, when our cash balances exceed the $50 million threshold specified in the agreement.

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Sam Rebotsky, [62]

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Okay. But one further and last question. You have a significant tax flow as carryforward. As you expect to pay off the shareholders, you will not utilize that fully. What do you expect to do with the balance of the NOL? Or is there any thoughts there?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [63]

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Yes. I mean that's something to be evaluated. I think that the first step for us -- and just for context as of the end of last year, it's roughly $250 million of NOLs. They are right now, those are there for us to use to offset future taxable income as we monetize our portfolio, and we'll evaluate any other options we can take on those when the time comes, based on the number of gains that we have and the gains that we have in the portfolio in the future.

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Operator [64]

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There are no further questions at this time. I will turn the call back over to Brian Sisko for closing remarks.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [65]

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Thanks, everybody, for joining us. I look forward to -- as this is my second call, Mark's first, look forward to a couple more at least, where we continue to provide you with some good information about the portfolio and the results that we start to see going forward.

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Operator [66]

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