Safeguard Scientifics, Inc. (NYSE:SFE) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Greetings and welcome to the Safeguard’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Barnard. Please go ahead.

Matt Barnard: Good afternoon, and thank you for joining us for this presentation of Safeguard Scientifics First Quarter 2023 Financial Results. Joining me on today’s call and webcast are Eric Salzman, Safeguard’s Chief Executive Officer; and Mark Herndon, Safeguard’s Chief Financial Officer. Following our prepared remarks, we will open up the call to your questions. As always, today’s presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties, including, but not limited to, the uncertainty of the outcomes of corporate strategic transactions, if any; the uncertainty of the future performance of our companies; our ability to make good decisions about the monetization of our companies; the ongoing support of our companies; our inability to adequately control our companies; fluctuations in the market prices of any of our companies that are publicly traded; and the effect of regulatory and economic conditions generally; and other uncertainties described in our filings with the SEC.

Many of these factors are beyond our ability to predict or control. As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. During the course of today’s call, words such as expect, anticipate, believe and intend will be 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-Q, which describes 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, I would now like to introduce Eric.

Eric Salzman: Thanks, Matt. Thanks for joining us this afternoon for our Q1 2023 earnings call. The macro challenges we highlighted on our last two earnings calls relating to a more difficult capital raising and M&A environment continue to impact many of our companies. Given that, we thought it would be helpful to categorize the portfolio into two different buckets. Bucket one contains our four companies that are funded, growing and executing on their business plans, albeit in a more difficult environment. Bucket two includes three companies that are facing near-term leverage and liquidity issues, which could adversely impact the values that are recoverable to Safeguard. Additionally, one company sits between these two categories, and while it will require additional funding and operational adjustments, it is not facing the same near-term challenges as the three companies in Bucket two.

Bucket one includes Clutch, Moxe, meQuilibrium and Prognos. We expect these four companies to continue to make progress, and our plan is to exit in the ordinary course over the next two years. Those exits are expected to represent the vast majority of proceeds to Safeguard. The three companies in Bucket two are facing critical challenges stemming from high debt loads, elevated burn rates and/or limited M&A interest. These challenges have become more difficult over the past two quarters as the financing and M&A environment has weakened. While the operating performance of Bucket two companies is mixed, the main factors creating their issues are leverage, liquidity runway and burn rates. As we’ve highlighted on last quarter’s call, this profile of company is extremely difficult to finance or sell in the current environment.

For each of our Bucket two companies, we are actively working with our co-investors and senior lenders to find a path to address leverage and liquidity challenges with the goal of preserving our ownership interests and achieving recovery value. We continue to explore all types of approaches to extract value from these positions. There are no assurances that we will be able to achieve this goal for Bucket two companies, and we have reduced our expectations of exit proceeds, recognizing that the proceeds to Safeguard could be de minimis. Note that we expect the outcome to these situations to be known over the next four months, and we will update investors accordingly. As described in our press release, we deployed $3 million in a financing round for Prognos, which closed in April.

The financing positions the company well to execute on its business model, and we were joined by both new investors as well as existing ones who see the attractive business opportunity to use real-world data to drive better health care outcomes. Prognos platform is used by over 70 life science customers to accelerate the development of new drugs, improve the safety and efficacy of existing drugs and identify new patient populations that may benefit from specific treatments. This capital should fund the company to cash flow breakeven and further details about this financing will be released by Prognos in the near future. Let me now address a question we received from several investors regarding Safeguard’s cash balances and stock buyback plan.

We had nearly $19 million in cash at the end of the first quarter, almost $16 million after the Prognos deployment. We have estimated our follow-on deployments for the remainder of the year at zero to $1.5 million, and our OpEx is stable at its current level. This means we will likely have excess cash beyond what we expect to need to operate and run off the portfolio. As disclosed in our press release, we completed our $3 million stock buyback plan this past quarter. We approved the plan in March 2022 prior to the start of the Houlihan Lokey process because we had an open trading window. Since that time, the trading window for us has been closed due to the Houlihan Lokey discussions, so we have been unable to expand the existing $3 million buyback plan or establish a new buyback plan.

As it relates to the Houlihan Lokey time line, as we indicated on the last earnings call, we expect to announce a decision on the process between June and December of this year. At the conclusion of that process, we will reevaluate ways to return excess cash to our shareholders through buybacks or dividends. In the meantime, we will use our cash resources sparingly and judiciously. I’ll now provide an update on portfolio, M&A and exits. We have two active M&A situations in the portfolio. One of our companies launched the sale process earlier in the year and has received several non-binding initial indications of interest. Those interested parties are currently performing further diligence and have been asked to submit letters of intent in the next few weeks.

While it is still early to handicap the odds of the deal happening, if one were to move forward, it could close in Q3 or Q4. Another M&A process we mentioned on last quarter’s call involved one of our companies that has been in discussions for a stock-for-stock merger. The party is continued to work on this deal, but the timing has extended from the original time line and terms are likely to be modified. We are hopeful we can agree on terms acceptable to both sides, but there is no assurance a final deal can be agreed to. Note that neither of these companies are in Bucket two. There is also ongoing M&A and capital raise activity at some of the Bucket two companies as part of their restructuring efforts. Let me talk about our strategic process.

On our strategic process, we are in exclusive discussions with one counterparty. While we cannot go into too much detail at this time, the goal of the transaction is to enable the vast majority of exit proceeds from the portfolio, the flow to our current shareholders, to reduce our operating expenses and to gain scale. We are in restructuring and diligence phase, so there can be no assurance that a deal will be reached. This transaction should it move forward, would be subject to Safeguard shareholder approval. I’ll now provide some company highlights. The Q1 highlights that we discuss today relate to our Bucket one companies. Note that these are not exhaustive and do not reflect all the risks inherent in these venture-stage companies. Moxe increased the number of live connections to its health care providers by 49% in Q1 2023.

Its Q1 revenues per health care provider site is up 142% year-on-year, and the company was issued its first patent. meQuilibrium exceeded planned revenues and EBITDA targets for Q1, its Q1 2023 revenues were up 28% year-on-year, its EBITDA loss was reduced by 70% year-on-year and operating cash flow improved by 51%. For Prognos, the biggest highlight is the funding round that we mentioned earlier. On the business side, 100% of the business has pivoted to the marketplace model – the company is executing to plan and is on track to nearly triple its bookings for 2023. Clutch’s Q1 total revenues were up 54% year-on-year and recurring revenues were up 30% year-on-year. In Q1 2023, the company added nine new customers and onboarded five new customers.

Now let me comment on public comps and trading multiples. We regularly track the revenue multiples and revenue growth of our publicly traded peer companies to help investors triangulate on what some of our companies could be worth using these same metrics. Given the bucketing of the portfolio that we described at the outset, we believe that these trading data points are relevant for the five companies, which are not in Bucket two. For the Bucket two companies, given their situations, traditional valuation metrics do not apply. As of April 25, our tech-enabled health care peers were trading at 3.6x 2023 consensus revenue and 3.5x 2024 consensus revenue. 2023 consensus revenue growth for these tech-enabled health care peers was 11% with 12% consensus revenue growth for 2024.

As of April 25, the marketing technology peers, which is relevant for Clutch, we’re trading at 2.8x 2023 consensus revenues and 2.6x 2024 consensus revenues. 2023 consensus revenue growth for these marketing technology peers was 10% and 13% consensus revenue growth for 2024. Note that this data has not changed much from our Q4 2022 call. At this time, I will hand it over to our CFO, Mark Herndon.

Mark Herndon: Thanks, Eric. Safeguard’s net loss for the quarter ended March 31, 2023, was $3.5 million or $0.22 per share as compared to the net loss for 2022’s first quarter of $6.7 million or $0.40 per share. As we disclosed last quarter, we completed the remaining purchases under the $3 million 2022 share repurchase plan during the quarter by acquiring about 25,000 shares earlier in January. In total, the 2022 repurchase program repurchased 736,577 shares at an average price of $4.09 [ph] per share. Safeguard ended the quarter with $18.8 million of cash, cash equivalents, restricted cash and marketable securities. We continue to have no debt obligations. Our general and administrative expenses were $1.2 million for the first quarter of 2023 and 2022 on a rounded basis.

Year-over-year decrease was 4%. Similarly, corporate expenses for the quarter, which represent general and administrative expenses, excluding stock-based compensation, severance expenses and nonrecurring and other items were $0.8 million on a rounded basis for each – of the first quarters of 2023 and 2022. The year-over-year decline was 6.4% there. We continue to expect that quarterly level of corporate expenses have stabilized at this approximate quarter. With respect to our ownership interest, we have an aggregate carrying value at March 31, 2023, of $12 million as compared to $15.4 million at December 31, 2022. This quarter’s activity is limited to the application of equity method accounting, which generally reduces our carrying value based on our share of the losses of our companies.

Our reported share of the losses of our equity method of interest for the three months ended March 31, 2023, was $2.6 million as compared to $3.9 million for the comparable period in 2022. This decrease is largely the result of several companies reaching fewer carrying value. At that point, we generate fees for recording losses from that entity. I would also like to remind everyone that we report our share of the losses from the equity method companies on a one quarter lag. So this quarter’s share of the losses reflect the fourth quarter of 2022. Also, with respect to our ownership interest, the third-party debt of this group of eight companies was approximately $226 million versus $209 million in 2022 year-end. This increase is primarily related to one of our companies accessing line of credit that had previously been established at Silicon Valley Bank.

Cash at the same group of eight companies has decreased to about $59 million from $71 million last quarter. This decrease primarily related to the quarterly burn at a couple companies.. In terms of revenue performance, we reported an 8.9% increase in this group of eight companies for the trailing 12-month period ended December 31, 2022, due to the one quarter lag. We continue to see our fastest growth from Moxe and meQuilibrium. Now it’s time first to turn it over to the Q&A segment of the call. So I’ll ask the operator to open up the lines for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] First question comes from Matt Burmeister with Private Investor. Please go ahead. Matt, your line is live.

Operator: Thank you. There are no further questions at this time. I would like to turn the floor over to Eric Salzman for closing remarks.

Operator: Okay. We do have a follow-up question from Matt Burmeister. Matt, your line is live.

Operator: Thank you. I’d like to turn the floor over to Eric for closing remarks.

Eric Salzman: Okay. So I’ll just thank you all for joining us on the call today. Please contact us if you have any follow-up questions. Thanks very much. Have a nice evening.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.