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Edited Transcript of SFE earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 Safeguard Scientifics Inc Earnings Call

Wayne Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Safeguard Scientifics Inc earnings conference call or presentation Thursday, August 8, 2019 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, IR and Corporate Communications

* Mark A. Herndon

Safeguard Scientifics, Inc. - Senior VP & CFO

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Conference Call Participants

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* Bruce Mitchell Kallins

Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member

* Ephraim Gordon Fields

Echo Lake Capital - Founder

* James Robert MacDonald

First Analysis Securities Corporation, Research Division - MD

* John P. Francis

Francis Capital Management, LLC - President

* Joshua S. Horowitz

Palm Ventures LLC - Investment Manager

* Peter Kirk Lukas

CJS Securities, Inc. - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Safeguard Scientifics' Second Quarter 2019 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to John Shave, Safeguard Investor Relations. Please go ahead.

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

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Good morning, and thank you for joining us for this update on Safeguard Scientifics' Second Quarter 2019 Financial Results. Joining me on today's call and webcast are Brian Sisko, Safeguard's President and CEO; and Mark Herndon, Safeguard's 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. Afterward, 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 the return of the value 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 of any publicly traded partner company holdings, competition, our ability to attract and retain qualified employees, market valuations in sectors, in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our partner companies, including the fact that most of the companies 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 Safeguard partner 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 expect, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot provide any assurance that future results will be as described in our forward-looking statements. We encourage you to read Safeguard's filings with the SEC, including our Form 10-K, which describe in detail the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today.

With that, here is Brian.

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

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Good morning, everybody. Thank you for joining us. We have continued to do, in 2019, what we started to pursue early in 2018. We have returned an aggregate of over $180 million back to our balance sheet since we began pursuing this strategy by being patient and by being opportunistic. We've now reached a significant milestone in the execution of this strategy. We repaid our debt, and currently, we have aggregate cash and marketable securities of nearly $50 million on hand.

The repayment of our debt relieves us from limitations on share repurchases and/or dividends that were previously applicable to us under the terms of that facility. We continue to believe that the current value of our portfolio interests and our cash and equivalents exceed our current share price. In that context, our Board has adopted a capital return policy, whereby whenever we have cash and equivalents on hand, which exceed our requirements for estimated ongoing operating expenses and follow-on support for our partner companies, we will undertake to repurchase shares and/or pay dividends, subject to compliance with the SEC rules and regulations, which are applicable to us.

We will always try to take into account the tax implications of such actions in determining what we do and when we do it. The precise form, timing and manner of such activities will be announced in the near future. We have and are continuing to work with Evercore, our financial adviser, regarding the ongoing execution of our strategy. The process has been very informative regarding what we should do to maximize the overall value of our partner company holdings and return that value in the best possible way to reward our shareholders.

Based upon that work, we currently believe that the continued pursuit of individual partner company exits will provide the best return to our shareholders at this time.

As we continue to proceed down this path, we have been and will continue to consider all alternatives as circumstances dictate, including, among others, the sale of individual partner companies, the sale of certain partner company interests in secondary market transactions or a combination thereof as well as the sale of the entire company.

We will also continue to consider financing transactions, which could expedite the return of value to our shareholders. We remain bullish regarding our portfolio of partner companies. Recently, Syapse entered into a deal with Pfizer to develop a precision medicine solution for oncology. This marks the third major biopharma company to partner with Syapse. The company signed similar agreements with Amgen in May of this year and with Roche in January of 2018. Furthermore, Syapse completed an equity financing at a significantly higher valuation versus the valuation of Safeguard's initial capital deployment. We have deployed $18.6 million into Syapse at this point since '19 -- excuse me, since 2014, and we own 19.4% of that company.

During the quarter, Safeguard partner company MediaMath was recognized for excellence in marketing and media by AdExchanger. MediaMath was declared a winner in the Best Educational Tool or Program and Best Account Support by a technology company. These are just a few examples of good things that are going on within the portfolio that we remain -- that we have remaining on hand.

Additional partner company Prognos has -- additionally, partner company Prognos has achieved important milestones with its announced collaboration with Datavant to harness their comprehensive data ecosystems to deliver expanded analytical solutions to their life sciences and payer customers. Safeguard has deployed $12.6 million in Prognos, and we own 28.7% of that company. We remain committed to supporting the needs of existing partner companies, and we will continue to leverage our capital and relevant expertise to help these partner companies achieve additional market penetration, revenue growth, cash flow improvement and growth and long-term value.

As referenced earlier, we expect to keep a certain minimum amount of cash and equivalents on hand to the extent we deem necessary to pay our expenses and cover anticipated follow-on investments in partner companies. As we continue to monetize the portfolio, we expect that need to keep capital on hand for follow-on funding and our corporate expenses to decrease over time. We've accomplished a lot under our new strategy, including streamlining our internal operations to reduce costs, repaying our debt and moving forward with strategic transactions involving our partner companies that have returned significant capital back to Safeguard, which has also allowed us to retire our debt and will allow us to implement a return of capital program.

We are pleased with what we have accomplished, but much work is left to be done. Our momentum in 2019 has been excellent, and we continue to believe in the value of our portfolio and the way we've been going about realizing that value for our shareholders. The Transactis transaction is the most recent example of our ability to bring the value of our partner companies back onto our balance sheet.

We are currently working with other partner companies on exits and hope to have more news to share in the coming months.

As this additional capital is returned to our balance sheet, we intend to return the excess capital to our shareholders as soon as practicable in the form of repurchases and/or dividends. We believe that our partner company interest will continue to mature and attract strategic and financial buyer attention and as we continue to explore the other alternatives we referenced above.

Now let me turn the call over to Mark for a review of the quarter's financial results.

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

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Thank you, Brian. Our second quarter resulted in net income of $36.1 million or $1.75 per share on a basic and fully diluted basis as compared with a net loss of $24.9 million or $1.21 per share for the same quarter of 2018. Our year-to-date results are a net income of $57.8 million or $2.80 per share on a basic and fully diluted basis as compared with a net loss of $31.1 million or $1.51 per share for the same 6-month period in 2018.

Our second quarter results were driven by the exit of Transactis, which resulted in a $50.4 million gain. Our year-to-date results have now benefited from both this Transactis event as well as the first quarter's $34.9 million gain from the Propeller transaction.

In addition to the accounting gains, the combined effect of these transactions has been a significant improvement to the company's liquidity position. Safeguard's cash, cash equivalents, restricted cash and marketable securities at June 30, 2019, totaled $98.4 million as compared to $46.2 million at 2018's year-end. Safeguard borrowings at June 30, 2019, under our senior credit facility, totaled $44.5 million. As you know, the terms of that debt facility require that qualified cash balances over $50 million be used to repay principal along with associated make-whole interest.

Accordingly, in July, we made a final principal and interest payment of $49.5 million to repay the facility in full, which relieves us of our prior restriction from repurchasing shares or declaring dividends.

Our second quarter's general and administrative expenses were $2.6 million compared to $5.1 million for the same quarter of 2018. This lower level of general and administrative expenses is primarily the result of our reduced cost structure implemented during 2018, which also resulted -- or included a $1.7 million severance charge during the second quarter of 2018 that did not recur this year. Our general and administrative expenses for the 6 months ended June 30, 2019, were $5.7 million as compared to $10.7 million for the comparable period in 2018.

Similarly, the expenses -- the lower expenses were the result of the absence of a $2.8 million severance charge that was incurred in 2018 to reduce the overall level of staffing, and the absence of $1.4 million of professional fees incurred in 2018 associated with activist shareholder matters that did not recur in 2019.

Corporate costs, which exclude interest, depreciation, severance, stock-based compensation and other nonrecurring items, were $1.9 million for the 3 months ended June 30, 2019, and $4 million for the 2019 year-to-date period. These amounts are lower than the $2.4 million and $5.8 million for the 3 and 6 months ended June 30, 2018, due primarily to the significantly lower level of staffing.

We continue to believe that the corporate cost for 2019 will be lower than the $8 million to $9 million target that was announced in 2018. We are pleased about these statements for our shareholders, and we will continue to work towards continuing to decrease these costs where possible.

As we indicated in our first quarter call, we are pleased to have now completed the move of our office space to a new, smaller, less expensive space, which will result in a significant long-term cash savings. The sublease regarding our previous office space, which began in June 2019, will be concurrent with our lease there and will result in $3.7 million of income that will substantially offset the remaining $4.1 million of lease payments we are committed to under the original lease terms.

While we do not expect further dramatic reductions to our cost levels, we will continue to look for further ways to extract efficiencies from our operations, as we continue to pursue our strategy and support our partner companies.

Now with respect to our partner company holdings, following the impairment of NovaSom, we now have 15 partner companies, representing an aggregate cost of $202.2 million and having a carrying value of $64.1 million at June 30, 2019.

During the second quarter, we deployed $6.7 million of capital to 5 partner companies. The most individually significant being a $3 million funding in the Syapse, which we had also disclosed as a subsequent event in our first quarter call results. We continue to expect aggregate 2019 follow-on funding to approximate levels in 2018, as we opportunistically decided to deploy small additional amounts into certain partner companies if attractive opportunities arise.

And finally, we would like to provide you with some commentary about the health and maturity of our portfolio. We experienced an impairment of $3 million for the 3 and 6 months ended June 30, 2019, with respect to our interest in NovaSom. This was a result of an inability of NovaSom to attract additional equity financing as it eventually became insolvent. For the 3 months ended June 30, 2019, our share of the losses of our equity method partner companies was $8.3 million as compared to $15.6 million for the comparable period. Our share of the losses from the equity method partner companies for the 6 months ended June 30, 2019, were $15.6 million as compared to $26.5 million for the comparable prior period. These reductions are the result of less companies in the portfolio and more companies reducing their burn rate. However, we'll also note, the second quarter was slightly higher sequentially from the first quarter of 2019 by $0.9 million.

And lastly, we continue to project revenue growth in the aggregate, consistent with our prior guidance. Our projected range of the aggregate partner revenue company revenue for 2019 is now between $365 million and $390 million for the 15 remaining partner companies. That would represent a growth rate of between 10% and 18% for the same partner companies in 2018.

I should also remind everyone that Safeguard reports the revenue on its equity and cost method companies on a one-quarter-lag basis.

And 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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So we still have a lot of work to do as we continue to execute our strategy. We'll keep you all apprised of our progress, and we thank you for your continued support.

John, questions.

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John E. Shave, Safeguard Scientifics, Inc. - SVP, IR and Corporate Communications [6]

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Operator, we can open up the platform to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of 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. I guess regarding Evercore in the process go-forward strategy, you mentioned it as informative. I don't know if there are any other details you can give us there. And as far as the distribution strategy plan, you mentioned considering all possibilities and financing transactions. I don't know if you can talk about what you're looking at there? And lastly, on the timing, you mentioned near future. Is there a specific date or presentation you're looking for? Or any sense you can give us on that timing?

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

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It's Sisko, Peter. So Evercore, obviously, we have spent considerable amount of time and effort even before the Evercore engagement, looking at different ways of valuing the portfolio and the companies and current value, future expected value, net present value of future expected value, all those things, but we've done even further analysis with Evercore's assistance to make sure that we're viewing things the right way to confirm our belief in the approach that we're taking to return value to the balance sheet and ultimately to shareholders. So their work has been of considerable help and assistance in kicking the tires on all the different ways that we should be viewing the current value and the potential value of the portfolio.

So they'll continue to provide that assistance. They're -- they've been engaged as our financial adviser generally, not just for any specific endeavors or initiatives, and we'll continue to leverage their capital markets expertise and their -- and all of other investment banking expertise to inform the Board's decisions on what they then turn around and have us here on the management team execute against.

Regarding return of capital issues, I'll restate for the umpteenth time, we are committed, and our Board has not wavered from the commitment of returning capital as soon as practicable. There are no deviation from that intended strategy and nothing will be better to ultimately announce and when we get to that specific point where we can tell you exactly what decisions are made. But what has now transpired is the repayment of our debt. So we -- previously, we were in a position where until we actually did get that repaid, we couldn't execute on anything no matter what our cash position was. So to have that out of the way is a huge accomplishment that was high on our list of things that we needed to get done to allow for the execution against returning capital.

As far as specifics go, our Board is working through -- continues to work through analysis to figure out exactly what amounts of capital they want us to return and when and in what form, okay? That decision obviously is impacted in large part by an analysis of how careful they want to be about how much capital we keep on the balance sheet to make sure we absolutely, unequivocally, will not get into a potential situation where we can't then provide support for the partner companies as we want to, okay? So they're just being -- they're performing the function that you want them to be performing, which is not getting over our skis and just jumping to a conclusion and starting to return capital back, which may not be the best long-term decision for them to make. So that's number one.

Then on top of that, depending upon the decision regarding what is excess capital and when it's not when we have that and when we don't, we're limited by the securities laws. There's -- in particular, buybacks would be -- are impacted by what material nonpublic information we're in possession of. And we all know that this model puts us in a position where -- we always know stuff that's going on in the portfolio that we're not a -- we're not permitted to disclose because it involves potentially specific partner company transactions, et cetera. So our decision making revolves around when we actually can execute against plans. And that's not necessarily easy to do because we do have a partner company portfolio that there's a lot of stuff always going on. So we're always dancing around what's material, what's not, can we do this, can we not do that.

So it -- because we're not announcing some specific action, doesn't necessarily mean that we're not -- there's a bunch of different things that play into findability to deliver better information to -- more direct and granular information to everybody. And -- but we restate yet again, the commitment is to return capital sooner rather than later and to do it with utmost regard for what the tax implications of that to our shareholder population are, not that that will drive behavior completely, but it always will be taken into account. So I think that that is as much as I can say about that topic without beating a dead horse.

And I think you finished up by asking about timing. Overall, where we feel we are in the process? We're still comfortable restating what we've said all along that from the get-go, we view this as a 2- to 4-year process. And I think that it's fair to say, we're so comfortable that that's the time frame within which we're working. And obviously, that may -- that could get expedited in certain circumstances if we have a flurry of activity. But we don't plan on hope, we plan on legitimate drive to tactical plans that tie back to the strategy. So I think we're still working within that time frame. And through that time frame, the cost structure that we are working with will decline as the asset base declines. But for the moment, I think we've done a pretty good job of getting the cost structure to a point where it's stable, and we will be operating under this cost structure for the next couple of years. And then we'll start to whittle away further in some material way at it where we will -- where we can save $10, we'll save $10, but that's not necessarily relevant for these quarterly calls to be talking about where to save pennies, so...

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

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Great. Very helpful. Next one for me, just if you could clarify on the follow-on funding. I think we're $10.6 million year-to-date, and you said it will be less than or approximately levels of 2018. So just remind us of approximate numbers that we'd be looking at there?

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

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Sure, sure. We -- as you said, we continue to believe that our follow-on deployments will approximate 2018 levels, which were $16.4 million because I think we're talking about in that time. So far, in 2019, our year-to-date deployments are $10.6 million. So we believe that we may have additional opportunities throughout the rest of this year to support our existing partner companies, but we haven't specified exact amounts. We intend to participate in those rounds with existing partner companies if there are attractive opportunities for our shareholders.

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

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No, that's perfect. And last one for me. I know it's difficult and almost impossible to predict exit strategies for specific companies. They are all in certain places in their life cycle, but any way you could comment on which companies you're most optimistic about at the moment?

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

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Well, we have 15 companies. So I'd say there's by 14 -- no, as you said, it's difficult. The -- you're always hoping that things will pop opportunistically. But as I said earlier, hope isn't the plan that we operate against. But we -- let me answer your question by saying, we are highly confident that we'll have additional activity in 2019. But I'm not going to get into pointing fingers towards specific companies that we think will be involved in activity.

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Peter Kirk Lukas, CJS Securities, Inc. - Analyst [8]

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Yes. No, understood. Had to ask, but I assumed that would be the answer. But I appreciate it. That's it for me.

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Operator [9]

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Your next question comes from the line of Jim McDonald with First Analyst (sic) [First Analysis].

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [10]

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Just a couple of follow-ups to what -- your detailed answers there. So regarding the Evercore process, have you gotten any indications of what you might get selling the whole portfolio? Have you gotten any -- that Evercore is estimated or any specific offers or anything?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [11]

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Well, as I said, Jim, I'm not going to get into further detail at a granular level because that's not fair to the process that we try to run and the people that we talk to. But I think the proof is in the pudding. Our Board's decision to continue down the path of, for the moment, individual company pursuit of exit is the right way to go. Read into that what you will. If somebody came to us and offered us $500 million for the portfolio, we'd be announcing the transaction. That's not the case. So -- and the way that secondary market works. People are looking to engineer returns. So it willingness to pay X dollars typically doesn't depend on current values, it depends upon trying to engineer 2.5, 3x returns, and that doesn't necessarily lead to actionable events.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [12]

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Okay. And you mentioned tax implications of your distribution strategy. Could you say a few more words about what you're thinking about there?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [13]

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Well, I think, just generally, to put it in the buckets, buybacks are obviously one way that we can go to return capital, and there's -- that provides to people a different tax treatment than if we were to without regard to whether we can characterize the dividend as a return of capital dividend. You're in a situation where people are then faced with holding stock and paying a -- paying tax despite the fact that they still have a considerable amount of capital invested in the stock. So that's -- Mark, do you want to embellish on that a little bit better than I can?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [14]

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Sure. I mean that -- and you're going down on the right path, right? We understand the tax implications of a taxable dividend, and we've heard from a variety of shareholders, so that's generally something that they would like to avoid. There are other dividend circumstances where, if opportunity presented itself, we would evaluate. Outside of that, we believe that repurchases would be a tax-efficient way to get value back to the shareholder base.

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

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Okay. And in terms of a repurchase plan is -- based on your comments, is that likely to be done under a 501 whatever that -- C3 or whatever that plan is given your...

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

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You mean, 10b5 plan?

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [17]

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10b5 whatever, yes. 10b5 whatever the stupid thing is called, yes.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [18]

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Well, that's certainly one of routes that you take when, that's -- not to play lawyer here, but if we were in the market repurchasing, given the concerns that we always have to deal with about material nonpublic information, if we can get a plan in place during a period where we're not tainted with information, that plan can then operate in the market without regard to what additional material nonpublic information may crop up. In the meantime, you have to get that in place and act against it. So that's clearly one of the tools that we'll consider using. As amounts get larger, you can undertake things that are more programmatic and tender offers that would -- that are a little bit different animal and require a lot of disclosure and work and expense. But obviously, that makes sense at some point. But the 10b5 plan is definitely one of the tools that we've used in the past and would use to help deliver capital back to the shareholder population.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [19]

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And then another aspect, you talked a little bit about the minimum cash. I had sort of estimated that to be somewhere about near where the cash you have now. Can you make any -- $50 million or something? Can you make any comments whether I'm wrong on that estimate or high or low?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [20]

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Well, the -- there's been no specific decision made as to what that amount is, and that's an ongoing dialogue that I would hope to have an answer to sooner rather than later. But we're -- but -- and hopefully, I won't get myself in trouble here by being too specific. But the -- we're not talking about keeping $100 million on the balance sheet, okay? But I don't know if $50 million is exactly the right number or if it's high or low. Our Board will make that decision. And it's interesting. You want a public company Board to be doing things in a manner that protects everybody and the Board is being very careful about making sure that they -- that we don't put ourselves in a situation where we don't have capital that we would like to apply.

It doesn't so much depend upon the operating cash numbers. I think that's much more math. But it's the -- making sure that we're not short on the other front. But until I have an answer from the Board, I don't have an answer from the Board.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [21]

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And a couple more here on the portfolio. So the 3 that you -- that are -- were removed this quarter, so NovaSom, Hoopla, and T-REX, is there any potential recovery for those? You probably had -- I think you were probably investing in bridge debt or something in NovaSom. So, I don't know, is there any recovery you might hope for those 3 companies?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [22]

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No. So for NovaSom, the answer is no, Jim, to be frank with you. And just to put a little bit more color on that, as recently as the first quarter of this year, we had an LOI in place to sell that company. And we also had -- over the course of a period of time when we were going through all the alternatives, we've had LOIs in place to refinance the company, to bring additional equity capital in. And for reasons unrelated to the company, specifically, things that were outside the company's control, none of those transactions happened. We had things like the sales force getting rated by a competitor, things like that. So -- but no. The answer to the question is, we were bridging through to those potential transactions. So that's why you saw us putting small amounts of capital because we were aiming towards transactions that were pending.

When that -- when it became apparent that that was not going to come to fruition and that this was headed to a situation where the senior creditor was going to control the strings, we folded because we weren't going to put in another $10 million or whatever to the company that we had too much capital exposed there to start with. And the company needed some substantial capital to continue to grow to a cash flow breakeven point, and we weren't in a position nor did we view it as worth the risk of putting additional monies in place to do that. So the outcome is that we, in this bankruptcy, will not receive any proceeds, which is why it's written down to $0, okay?

And on Hoopla and T-REX, yes, we have potential recoveries down the line in both of those. This is part of our decision-making process that we -- we're doing this in the context of what our strategy is. So while there's still a lot of promise to these companies, potentially, the time frame within which it will occur and the amount of capital that we would have to put at risk to continue to play lead investor, our decision was, let's take a passive seat and play an observer kind of role. Mark, you want to add to that?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [23]

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Yes, sure. Let me just add that both of those companies had rounds of capital that were infused into the company. So those additional investments, the values at which they were transacted at support and are in excess of the value that we have that we carry those assets at. So those are not gone, so to speak, they are there and they remain valuable they're just a smaller portion of our portfolio now.

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [24]

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Okay. And so that sort of leads to my next question. What percent of the -- or how many of the remaining 15 companies would you say are well-funded or recently funded or that kind of thing?

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

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So that's tough to answer the way you phrased the question, Jim. But like the company like Syapse, who is just -- this is -- I hope this is -- I've got our General Counsel sitting across from me, so hopefully, he won't kick me, but Syapse is killing it, okay? They're doing great. They have capital needs and will continue to have capital needs as they grow, okay? So that's one category of companies. And I throw into that the companies like Aktana and potentially Prognos. Companies like that need capital for one reason. There are other companies that are still in their more development stage that need capital based upon what the plan has been all along and will continue to have some capital need, some portion of which you hope to be able to satisfy always with layering on debt.

So if I look across our portfolio of what we're talking about as partner companies, I think there's probably half the companies that still have the need for capital as they build and prove their value to the potential strategic buyers out there. And then there's the couple more on top of that, that are going down the hardcore growth path with potentials for raising very large rounds. No -- so there's capital need across, but the way we look at this is we are no longer the primary capital provider for anyone near a majority of this portfolio. There's other people around the table. These are attractive companies for new third-party to come in with a different investment thesis than we do because they're later-stage investors.

So capital need on us is consistent with what we've said before. We expect our required capital needs for these companies to decline over time. To tie this back to the question I was asked before regarding excess capital, we're just trying to be extra careful that to the extent that dynamic might change a little bit. We are not unable to support companies that we would otherwise want to be supporting. The economy generally has a hiccup. We don't want to get caught short and put these companies in a situation where they're all of a sudden lacking in the support they need despite the fact that they continue to accomplish what they are intending to accomplish. Does that answer your question well enough?

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James Robert MacDonald, First Analysis Securities Corporation, Research Division - MD [26]

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Yes. That's very helpful.

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Operator [27]

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And your next question comes from the line of Bruce Kallins with Yakira Capital.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [28]

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A lot of my questions were answered by the previous question. You did a good job. Look, you mentioned something about a new financing and we were not a fan of the old financing. And we wonder why -- with $50 million of excess cash and then exits to come in the future, why you would -- what you'd consider for financing? Is your letter of credit -- the line of credit still open is another sort of side question. And we're also wondering about these 3 write-offs now. I guess that we -- it was kind of answered before, but it seems like it's a lot, 3 out of 18 is a lot to come at one time. And we're just wondering -- like he said, if they're really total zeros, and -- we thought T-REX was doing pretty well, actually. So we're surprised about it. If you can elaborate on that?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [29]

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Yes, sure. So on the financing front, Bruce, don't -- please don't read anything more into that than should be. The only reason that was -- that there was a mention made in the prepared materials was to us to make the point that we're always considering all alternatives. So there are things that are available out there that would provide capital, potentially, if we wanted to finance some portion of the portfolio and deliver that capital back to shareholders. So the Board's thinking about that. But I wouldn't put any -- there's no current transaction that we're pursuing. So don't worry about us doing that without proper thought. And it might -- that -- in the future, that may very well be something that makes a little bit of sense, some nonrecourse financing that would allow us to deliver capital back to shareholders, but otherwise might be tied up in remnant assets or something. But it wasn't intended to lead to some further disclosure next quarter. So hopefully, that gives you comfort on that side.

On the write-off front, NovaSom is what I said it was. So yes, it was -- it certainly wasn't the outcome that we wanted. The -- and you specifically asked about T-REX. T-REX is a great -- T-REX has all kinds of good promise. But it -- as I described before, we're -- we -- based upon what we're trying to accomplish and the time frame within which that company will -- we believe, will ultimately come to fruition, it was our decision not to put additional capital. We are -- we don't have that much...

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [30]

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And again, yes, just to reiterate, those are not write-offs. Those have value and that value is in excess of our carrying value as evidenced by these rounds that came in.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [31]

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Yes. Hoopla and T-REX, they just are no longer partner companies because how we figured out, it's how much control we have, how much ownership interest we have. We've just defined partner companies in the past, and this is going to get kind of tortured as we go forward because these are still companies we care about. They just don't fit that category that we always used to use as kind of a line of demarcation for what was material to discuss with everybody. T-REX, in particular, has a lot of promise to it.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [32]

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Okay. So how much do we still own of T-REX? And I mean I don't know what the line of demarcation is, but you're saying, so T-REX is not 0, what you're saying at this point. It's still worth something. So we...

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [33]

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Yes. Let's make the distinction. So just to give you a quick reminder. We started defining "Partner companies" as companies where we had a significant level of control and economic interest. And it kind of tied back to, but not specifically into what is considered a good asset for the '40 Act purposes, okay? Just not to muddy up this conversation with that. But we just -- for ease of reporting back when we were still putting more money into new companies, et cetera, that partner company distinction was a relevant line for us to follow and how we reported. It also roughly ties to cost versus equity method accounting. But by us saying that a company is no longer a "Partner company," unless we say there's a write-off that you shouldn't equate the 2 things.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [34]

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We evaluate all -- the carrying value of our companies on a quarterly basis. But Hoopla and T-REX both in addition to the other companies are included in the cost method, which are included in the tables following the press release.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [35]

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Okay. So I understand that. You are saying you got a little below stakes and -- a certain percentage, now you're taking it off a little bit, doesn't really count as a partner company, but it's still an investment?

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

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Yes.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [37]

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Correct.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [38]

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And we expect to get some recovery. We're hopeful to get some recovery on it?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [39]

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Absolutely.

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

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Absolutely.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [41]

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Do we still have a Board seat on that?

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

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We have an observer seat. We have an observer seat on T-REX, but I think we gave a -- yes, we -- that's (inaudible) said that we gave up our Board involvement with Hoopla.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [43]

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And Hoopla, how much do we have in Hoopla?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [44]

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Well, our carrying value coming into this call was about $300,000. So...

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [45]

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Yes.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [46]

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Okay. Then with regards -- we used to have a line of credit. Do we still have that line of credit?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [47]

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No.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [48]

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We do not.

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Bruce Mitchell Kallins, Yakira Capital Management, Inc. - Chief Compliance Officer, President, CIO & Managing member [49]

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We do not.

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

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We have no institutional debt whatsoever.

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [51]

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That's correct. Which is a good -- well, it has been a lot of time since the company has been in that position, but we're happy to be here as debt free.

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Operator [52]

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And your next question comes from the line of John Francis with Francis Capital.

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John P. Francis, Francis Capital Management, LLC - President [53]

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Can you give us an update on MediaMath, please?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [54]

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I guess what I would say to you, John, is that MediaMath, it continues to be one of the most significant demand-side platforms in the market, continues to grow. I'm trying to think what else I'm at liberty to disclose. They haven't done any new financings recently. They're -- I believe they'd be considered one of the leaders in this whole privacy and identity debate that's going on in the media technology space. Joe Zawadzki continues to be recognized as one of the industry savants. They're -- they have made a fair amount of supplements to their management team over the past year. I'm an observer on that Board now and continue to have a significant level of informational involvement and face-to-face access to the management team. But there's nothing else that I -- that I can really -- they continue to be in the range of revenue generation and we -- where, we all know, they are, although we never specifically assigned a number to it. They are included in our revenue guidance, so you can -- and as you would imagine, they -- that their number is large. So it has a fairly significant impact on our revenue guidance. So as long as we're meeting what our guidance is, you can read into that what you want about MediaMath meeting their revenue guidance.

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Operator [55]

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And your next question comes from the line of Joshua Horowitz with Palm Global Funds.

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Joshua S. Horowitz, Palm Ventures LLC - Investment Manager [56]

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A couple of questions for you. Just trying to get the calculus right here. If we roughly estimate, I don't know, call it 2 years of expenses at $14 million, $15 million, we add on the follow-on commitments that we've made, it should be fairly easy to get some ballpark number then for what we think is "Excess capital." How do we think about that? We just take the headline cash number and then subtract 3 years of expenses, plus follow-on. What does that equate to?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [57]

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You're doing the math right. I mean, it...

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [58]

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That's the right -- yes, that's the right model to think about it as how much would we spend in a year on corporate cost on a cash flow basis? And how long of a period of time do you want to have as a cushion? And how much do you expect to be deploying to partner companies, right? And you'll add those 2 up and subtract from $50 million, and that would be sort of the excess capital. Generally speaking, that would be the right mindset to have. And I think the period of time -- our expense run rate has been improving and is fairly well defined. The discussion we would have is how long a period of time do you want to have available to us.

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Joshua S. Horowitz, Palm Ventures LLC - Investment Manager [59]

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So if we do that calculation, I mean, what do we -- do we get the $30 million of extra cash? Is it $40 million? Is it $50 million?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [60]

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Well, as I tried to answer, I think, it was Jim's question before when he said, is it $50 million? I wish I could give you a specific answer. But given that it's not my decision, it's -- the Board is working through that calculus. I don't want to -- I can give you a very broad parameter and saying, it's nothing less than $20 million or $25 million, and it's certainly nothing more than $75 million, but within that range, where the Board is going to come out, I don't want to try to put words in their mouth because I've never been a crystal ball reader. But I -- you're thinking about it the right way, and therefore, the added layer, which is the unknown for me, at least in terms of what I can report here today, is how much buffer? How much buffer do you want to keep to make sure that you don't get yourself in a pickle?

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Joshua S. Horowitz, Palm Ventures LLC - Investment Manager [61]

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Mark, is there some sophisticated tax analysis that you're designing or analyzing that will be part of a year-end's financial analysis or audits that will determine the best tax treatment for return of capital to shareholders? What is the timing on -- I guess, it sounds like from the comments that you're working on a fairly complex tax analysis. And I guess what are the components of that analysis? If you're able to share at this stage?

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Mark A. Herndon, Safeguard Scientifics, Inc. - Senior VP & CFO [62]

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Sure. So yes. Just as background for others on the call. I mean, the company reported roughly $300 million of NOLs and carry-forwards in its 2018 10-K. And we continue to believe that the gains from portfolios -- or transactions this year, those gains will be offset by those NOLs, right? So we'll have no tax impact per se this year because we've had a full valuation allowance on all those deferred tax assets, historically. Part of their -- our regular ongoing process as annual tax returns are completed, and we project for the current year tax returns as we would evaluate the level of taxable income as well as earnings and profits. And that's something that generally happens towards the end of a year. So that's an ongoing process.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [63]

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That answers your question?

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Joshua S. Horowitz, Palm Ventures LLC - Investment Manager [64]

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And just 2 more quick ones on portfolio names. You had some great info on Syapse. Are you able to share what valuation they last raised capital at?

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

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I don't have that in front of me, and I don't think -- is that -- have they disclosed that, Mark? Yes, it -- Josh -- as you know, we defer to the companies in what they do and don't disclose on things like that. I can tell you that it was a significant up round financing from previous round and a very significant up round from what we had -- where we originally deployed capital, but they have not disclosed. So we will not disclose any specifics regarding the valuations that were used for that financing round.

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Joshua S. Horowitz, Palm Ventures LLC - Investment Manager [66]

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And lastly, I've noticed some -- we saw the write-down, the bankruptcy. Did we just put more money into that company recently?

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [67]

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As I said in my response earlier, we had pending transactions over the course of the last 6 months for sale of the company, a debt financing that would have increased the company's available debt. And as you know, with all these -- what you're often doing with these debt financings is you reach the end of an interest-only period and you look to refinance for a further interest-only period that provides cash burden relief. We had LOIs in place to do that. We've also had LOIs in place to do new equity financings that were going to be led in whole by new third parties. Those transactions, as they were pending and under LOI, we did contribute some additional capital to bridge the company in anticipation of those transactions getting done. So we bridge small amounts of capital alongside the other active institutional investor to try to get to those transactions. Now you're basically betting that the transactions are getting done, and we were betting that they were going to get done. But we've ultimately reached the point where we were no longer willing to -- that transaction was going to be get done. So yes, we did, but it was small amounts and it was in anticipation of transactions that would have had much better outcomes than where we ended up.

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Operator [68]

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And we have time for our final question from the line of Ephraim Fields with Echo Lake Capital.

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Ephraim Gordon Fields, Echo Lake Capital - Founder [69]

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My question has been answered, so thank you. No questions.

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Brian J. Sisko, Safeguard Scientifics, Inc. - President & CEO [70]

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Thank you. Appreciate it. Well, thank you, everybody. Hopefully, we've answered your -- the majority of your questions. And as you know, we're always available for follow-ons individually as you see fit. We'll continue to keep plugging away here and provide you with as much additional clarity on the topics you've asked about today as we possibly can.

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Operator [71]

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And this concludes today's conference call. You may now disconnect.