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Safeguard Scientifics Inc (SFE 0.01%)
Q3Â 2019 Earnings Call
Nov 7, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to Safeguard Scientifics' Third Quarter 2019 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to John Shave Safeguard Investor Relations. Please go ahead.
John E. Shave -- Investor Relations
Good morning and thank you for joining us for this update. 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 development at Safeguard and our partner companies and Mark will discuss our financial 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. These risks and uncertainties that could cause actual results to differ materially include among others our ability to make good decisions about the monetizations of our partner companies for maximum value or at all and the return of 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 the market prices of any publicly traded 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 the 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 and may never be profitable the effect of economic conditions in the business sectors in which Safeguard's partner companies operate and the uncertainties described in our filings. 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.
Brian J. Sisko -- President and Chief Executive Officer
Good morning and 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 $184 million back to our balance sheet since we began pursuing this strategy by being patient and opportunistic. We have now reached a meaningful milestone in the execution of this strategy. We have repaid our debt and currently we have cash of approximately $45.5 million on hand. As a result the Safeguard board of directors has declared a special cash dividend of $1.00 per share payable on December 30 2019 to shareholders of record as of the close of business on December 23 2019. We expect the dividend to be characterized as a return of capital for federal tax purposes. Mark will provide some further information on that determination later in the call.
To reiterate something we have said previously whenever we have cash and cash equivalents on our balance sheet that exceed the amount we believe is then prudent to keep on hand to operate the business and continue to support our partner companies our board of directors will authorize share repurchases and/or dividends. Currently we believe $25 million is the appropriate amount to retain on our balance sheet. In addition to the determination regarding the dividend and to further align interests with shareholders the Safeguard board of directors also decided to reduce the size of our board of directors from 6 to 4 as of the next annual meeting and to pay all board compensation in Safeguard equity. We continue the pursuit of individual partner company exits while considering 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 shareholders. We remain bullish regarding our portfolio of partner companies and continue to believe that the current value of our portfolio interests and our cash and equivalents significantly exceed our current share price.
Let me highlight some recent partner company occurrences. Recently Syapse signed a collaboration agreement with the FDA which will help to solidify their approach to real-world evidence collection as the industry standard. This announcement is anticipated to accelerate discussions with current and future pharma partners. As previously announced Syapse also 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. Most recently the company announced that Fletcher Payne has been appointed as the company's chief financial officer. Mr. Payne joins Syapse as it is experiencing tremendous momentum driven by its new life sciences and health system partnerships and its collaboration with the FDA. Safeguard has deployed $20.6 million into Syapse since 2014 and we own 20.1% of the company. During the quarter Safeguard partner company MediaMath introduced SOURCE by MediaMath to the global marketplace. SOURCE by MediaMath is a new ecosystem that addresses fundamental challenges like fraud single view of the customer and commercial term transparency to name a few. The reception by external audiences has been strong and the company is looking forward to seeing this momentum continue. Furthermore MediaMath was recently named as a leader in the 2019 Gartner Magic Quadrant for AdTech. Notably MediaMath in that quadrant is ranked ahead of Google in its ability to execute.
The company also is ranked ahead of Amazon The Trade Desk and Verizon for market vision. Overall MediaMath attained the highest upper right composite score for market leadership and vision. As the company continues to roll out SOURCE this Gartner Magic Quadrant assessment should provide an extra tailwind as it transforms the digital advertising ecosystem. Safeguard has deployed $15.5 million in MediaMath and we own 13.4% of the company. We have 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 implement our return of capital program. We are pleased with what we have accomplished but much work is left to be done. We continue to work with other partner companies on potential exits and hope to have more news to share in the coming months. On our last quarterly call we indicated that we were highly confident of additional exit activity in 2019. We were recently informed that the exit we were referring to is going to take longer than previously anticipated and the contemplated transaction will likely not occur by the end of the year.
The delay was not due to company performance as the company is performing above plan and we hope to be in a position to provide further information in the near future. As I described above as additional equity from additional exits is returned to our balance sheet we will return the excess to our shareholders as soon as practical in the form of repurchase and/or dividends. We believe that our partner company interests will continue to mature and attract strategic and financial buyer attention as we continue to explore the exit alternatives we referenced above.
Now I'll turn the call over to Mark for a review of the quarter's financial results.
Mark A. Herndon -- Chief Financial Officer
Thank you Brian. Our third quarter resulted in a net loss of $2.5 million or $0.12 per share on a basic and fully diluted basis as compared with net income of $32.1 million or $1.56 per share for the same quarter for 2018. Our year-to-date results are net income of $55.3 million or $2.68 per share on a basic and fully diluted basis as compared with net income of $1.0 million or $0.05 per share for the same nine month period in 2018. Our third quarter results were highlighted by continued reductions in general and administrative costs as compared to prior periods the full repayment of our prior credit facility and non-cash gains resulting from certain equity holdings. Our year-to-date results also benefited from the second quarter's $50 million gain from the transaction as well as the first quarter's $34.9 million gain from the Propeller transaction.
Safeguard's cash cash equivalents restricted cash and securities at September 30 2019 totaled $45.6 million compared to $46.2 million at 2018's year end. In July we made a final principal and interest repayment of $49.5 million to repay our debt facility in full which relieves us of our prior restriction from repurchasing shares or declaring dividends. As we indicated the board has now declared a $1.00 per share special dividend for shareholders of record at December 23 2019. In regards to the taxability of this special dividend we have recently completed an analysis of the cumulative and year-to-date earnings and profits. As a result of that analysis we believe that the special dividend will be characterized as a return of capital for federal tax purposes. However I should emphasize that the final determination of this characterization can only be made once the calendar year is complete.
There remains the possibility of additional transactions including possible transactions involving our partner companies that could impact this determination. Our third quarter's general and administrative expenses were $2.3 million compared to $3.5 million for the same quarter of 2018. This lower level of general and administrative expenses is primarily the result of the absence of the $1 million severance charge in the prior third quarter as well as the lower overall level of staffing lower office rent costs and lower professional fees. Our general and administrative expenses for the nine months ended September 30 2019 were $7.9 million as compared to $14.3 million for the comparable 2018 period. Similarly the lower level of year-to-date general and administrative expenses is primarily the result of the absence in 2019 of the $3.8 million severance charge that was taken in 2018 as well as the lower professional fees incurred in 2019. Corporate expenses which exclude interest depreciation severance stock-based compensation and other non-recurring items were $1.9 million for the three months ended September 30 2019 and $6 million for the 2019 year-to-date period.
These amounts are lower than the $2.2 million and $8 million in the three and nine months ended September 30 2018 due primarily to the lower level of staffing and related office costs. We continue to believe that corporate costs for 2019 will be at or below the low end of the previously stated $8 million to $9 million target that was announced in early 2018. We are pleased about the reduced level of spending in 2019 and we will continue to work toward continuing to decrease costs where possible. With respect to our partner company holdings we have 15 partner companies representing an aggregate cost of $206.1 million and having a carrying value of $62.8 million at September 30 2019. During the third quarter we deployed $3.8 million of capital to 4 existing partner companies; the most individually significant being a $2 million deployment to Syapse and a $1.5 million deployment to Aktana. Subsequent to the quarter we also deployed an additional $1.75 million to Moxe.
As a result our year-to-date deployments aggregate to $16.3 million. While we may make a couple of small follow-ons during the remainder of Q4 we do not expect any further material deployments during 2019. Going forward we continue to expect our level of annual follow-on deployments will diminish and we will look to selectively deploy relatively small additional amounts into certain of our partner companies to maintain our position of influence if we continue to believe in their long-term prospects. For the 3 months ended September 30 2019 other income or loss improved $9.9 million as compared to the comparable 2018 quarter. 2019 included $4.1 million of income related to the decrease in the fair value of the credit facility repayment feature liability and an aggregate of $4.3 million gain for the increase in the value of 3 non-partner company equity securities based on observable price changes.
I should also note that each of these other income items were non-cash. Interest expense increased $2.5 million during the quarter primarily due to Maycal interest payments related to the credit facility. As we've previously disclosed the last payment included a $4.1 million Maycal interest and $0.9 million of accrued interest. Additionally for the three months ended September 30 2019 we realized $1.8 million of equity income gains on proceeds received from amounts previously withheld from prior exit transactions. And finally for the three months ended September 30 2019 our share of the losses of our equity method partner companies was $6.3 million as compared to $11.2 million for the comparable prior period in 2018. Our share of the losses from equity method partner companies for the nine month period ended September 30 2019 were $21.9 million as compared to $37.9 million for the comparable prior period.
These reductions are the result of less companies in the portfolio and more companies reducing their burn rate and trending toward cash flow breakeven. In terms of revenue guidance we have lowered our projected range of aggregate partner company revenue for 2019 to between $355 million and $370 million for the 15 remaining partner companies. That would represent a growth rate of between 7% and 12% for the same partner companies in 2018. Excluding our digital media companies the revenue of Safeguard's portfolio of partner companies is growing at more than 50% in aggregate year over year. I should also remind everyone that Safeguard reports the revenue of its equity and cost method partner companies on a 1-quarter lag basis.
Now we're back to Brian.
Brian J. Sisko -- President and Chief Executive Officer
Thank you. Operator why don't we open up the lines for any questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Bob Labick with CJS Securities. Your line is open.
Peter Kirk Lukas -- CJS Securities Inc. -- Analyst
Hi good morning. It's Pete Lukas again for Bob. How are you?
Brian J. Sisko -- President and Chief Executive Officer
Good
Peter Kirk Lukas -- CJS Securities Inc. -- Analyst
Just a question on how you decided on the dividend versus repurchase. Looking at your stock saying that the company value and cash are exceed the share price how you make that decision and how you think about that decision going forward.
Brian J. Sisko -- President and Chief Executive Officer
So Pete I think it's fair to -- it's fairly obvious that whenever we're making these decisions and when we have excess capital it's a combination of a lot of different factors that we take into account. I think what drove the decision here was the opportunity that we had to make this a return of capital dividend to be as straightforward as I can about it.
Peter Kirk Lukas -- CJS Securities Inc. -- Analyst
Got you. And then I guess you pretty much answered everything. The only other one is in your overall timeline on the wind down everything's still as you've talked about in the past there?
Brian J. Sisko -- President and Chief Executive Officer
Yes no changes. We're still within the time frames that we believe will apply and we continue to proceed along that path. So yes I think that's the correct assessment.
Peter Kirk Lukas -- CJS Securities Inc. -- Analyst
And then last one for me. In terms of funding for the partner companies you said you expected that to be down next year. Any sense on the -- or diminished next year. Any sense on the magnitude of that reduction?
Mark A. Herndon -- Chief Financial Officer
Sure. In terms of funding for next year we would expect it to diminish significantly from 2019 and 2018's levels.
Brian J. Sisko -- President and Chief Executive Officer
We'll be hopefully providing a little bit better guidance when we get into the 2020 first quarter assessment and earnings call Pete.
Peter Kirk Lukas -- CJS Securities Inc. -- Analyst
Great. Thank you.
Operator
Your next question comes from the line of Jim MacDonald from First Analysis. Your line is open.
James Robert MacDonald -- First Analysis -- Analyst
On the exit activity you say you expect something in the next couple months but you are not highly confident anymore or maybe a little more color on that?
Brian J. Sisko -- President and Chief Executive Officer
We're still -- we're confident of continuing exit activity obviously but I just wanted to make sure that we clarified the expectation that we had set last quarter because the specific transaction that we were highly confident of occurring in this time frame is pushed off a little bit. But we would certainly expect that transaction to occur. So I'm not concerned about the situation. I'm just cognizant of the fact that we had said in the second -- or in the fourth quarter the year we expected it to occur.
James Robert MacDonald -- First Analysis -- Analyst
And we also have the MediaMath option coming up here so any thoughts on that? And I assume MediaMath's been affected by the softness in the digital marketing area. Any thoughts on how that might affect an exit at MediaMath?
Brian J. Sisko -- President and Chief Executive Officer
Well the MediaMath option expired. They did not exercise it. And I think that what I'd propose is important to remind everyone of regarding MediaMath is now they are one of only two scaled independent demand-side platforms left in the marketplace. dataxu got bought by Roku in a transaction. They were like the third player arguably and were probably considered subscale. They were attractive at some level because of their OTT and video but they were not a complete package like a MediaMath or a Trade Desk. So I think that only means good things for MediaMath. And I know that there has been whisper in the market as to what the multiples were in that dataxu transaction and I have heard 4x to 5x. If that is correct -- and I'm not in possession of any particular information regarding that transaction that anyone else isn't. But if that is the right number that is a number that would not be inappropriate to apply to figure out what MediaMath value is.
James Robert MacDonald -- First Analysis -- Analyst
Okay. And maybe talk a little bit about how you determine $25 million as the cash you need to have on hand. It was a little bit lower than we had expected you would have picked.
Brian J. Sisko -- President and Chief Executive Officer
Well I'm glad we didn't disappoint you in that regard. We're not -- we certainly don't want to keep excess capital when we don't need it. There's no point to that. But we're also trying to be careful and make sure that we don't get ourselves in some sort of cash bind that we don't need to get ourselves into. So it's just some aggregate operating expenses plus some expected follow-on is really how you get there. It's not magic. And we would expect that to go down over time as we continue on through the strategy obviously but at the moment the board is comfortable with that kind of number that kind of range to keep available to us.
James Robert MacDonald -- First Analysis -- Analyst
And just two somewhat technical ones. Do you expect the partner losses to remain? Do you think the $6.3 million for this quarter is approximately where that will remain or hopefully maybe diminish over time as the companies progress? And the second quick one is what's your view on further escrow prospects? Do you see any order of magnitude of how much escrow you might achieve from previous transactions?
Mark A. Herndon -- Chief Financial Officer
Sure I can address those for you. In regards to the equity method losses across 15 different companies you can -- as you might expect there is some level of volatility in seeing their results. But we would expect some level of consistency as we continue to decline as we continue to shrink the size of the portfolio. So again so to the extent that there are less companies in it then that would be a factor. And if we continue to see companies trending closer to a breakeven for their own results as they mature and develop that would also be a factor toward reducing it. It is a difficult number to predict going forward but I do see a favorable trend line in that so far. In regards to escrows there are a variety of companies of prior transactions that have escrows outstanding. And so we may see some relatively small activity coming through the next few quarters related to that but it would not be a dramatic results to our financial statements.
Brian J. Sisko -- President and Chief Executive Officer
The trend in most of these transactions we're doing these days it seems that escrows are going down in the amounts. So the amounts reserved or the amounts held back in transactions that was typically larger back in the day they -- things are being dealt with through rep and warranty insurance and things like that. So those numbers will tend to be small going forward I think.
James Robert MacDonald -- First Analysis -- Analyst
Thanks a lot guys.
Operator
Your next question comes from the line of Joshua Horowitz with Palm Global. Your line is open.
Joshua S. Horowitz -- Palm Global -- Analyst
Couple of questions. Back in August when you announced earnings you said that you continue to believe the current value of the portfolio interest and cash exceed the current share price. At that time the share price was around $11.50. Do you still feel the same way today?
Brian J. Sisko -- President and Chief Executive Officer
Yes I think we said that in the scripted comments but I'll repeat myself that yes no matter how we look at it we believe that's the case.
Joshua S. Horowitz -- Palm Global -- Analyst
Great. Any color on which of the board members might be stepping down and why that's going to happen at the next annual meeting versus end of the year or just any color around that.
Brian J. Sisko -- President and Chief Executive Officer
Well the board will go through the normal formal corporate governance process to name those people. And I'm told I need to be careful because of the proxy solicitation rules that we need to be cognizant of and that mentioning names is jumping the gun insofar as proxy solicitation. So I can't say specifically. But you can probably think through how that will play out. But formal decisions will be made in the normal course of our preparation for that meeting.
Joshua S. Horowitz -- Palm Global -- Analyst
That's fair. On SG&A going forward as we shed assets is there any way to think about additional SG&A cuts? We have 15 companies today. If we have -- I'm making up a number -- 9 by this time next year what is our SG&A?
Mark A. Herndon -- Chief Financial Officer
Right. So it wouldn't necessarily be linear based on the number of companies. But we do expect that cost reductions will continue and in particular as the overall size of the portfolio decreases and exits occur we will continue to reduce costs.
Great. Thank you both. I appreciate your time.
Operator
[Operator Instructions] Your next question comes from the line of Ron Mass with Almitas Capital. Your line is open.
Ron Mass -- Almitas Capital -- Analyst
You talked about the cash distribution versus buying shares back. And I appreciate that the dividend will be a return of capital versus taxable. But can you tell us whether you feel like you could have been buying shares in the open market? Given potential transactions in place would you have been restricted from buying shares back or could you have if you wanted to could you have made the decision to buy back shares in lieu of paying this dividend?
Brian J. Sisko -- President and Chief Executive Officer
I think that the right answer there is we're always at risk of being limited in what we can do because of material non-public information that we have. So read into that what you will. The other part of that answer is probably that open market purchases for us are difficult because we don't have a lot of volume in the stock too. So it's not necessarily the most efficient way to do that. But those things as well as tender offers for stock etc will always be something that we're considering as we have that excess capital bucket to deliver out to you guys.
Ron Mass -- Almitas Capital -- Analyst
Can you give us a sense for to be able to do tender offers what position you would need to be in in a sales process of a company not to be in kind of a blackout period with material non-public information? Could you have done a tender during this current period or do you feel that that would have been giving you of a sale? We've been talking about this in progress. Would that have impeded your ability to do a tender offer?
Brian J. Sisko -- President and Chief Executive Officer
I really have to be careful here Ron with what I say about what we could have or should have done and how it relates to what material non-public information we have because by saying something I sort of can give away the cat. So I have to punt on that.
Ron Mass -- Almitas Capital -- Analyst
And can you give us a sense of the company that you're in the sales process of can you give us any general sense of the type of size of realization whether this would be a relatively small one or a larger one in the context of the market value of the company?
Brian J. Sisko -- President and Chief Executive Officer
Let me answer more generically that the specific reference that we made did have to do with one company. But at any given time we've got any number of companies that are either quote-unquote in process or having some level of dialogue with potential interested acquirers. This just happened to be a situation that was staring us in the face that circumstances changed a bit. But I'd be remiss if I tried to put this into a bucket of size. So I can't really answer with any level of certainty or granularity for you there.
Ron Mass -- Almitas Capital -- Analyst
Okay. And also can you comment on when you said you'd believe that the current stock price is substantially below your estimate of value can you shed any additional light on how you look at the value or any type of metrics or numbers or any approximation of what where you see the intrinsic value of the company?
Brian J. Sisko -- President and Chief Executive Officer
Well we're not at -- we're not able to put dollars and cents to that to give you an answer. But what I would tell you that the way we look at value is in a number of different ways. We can look at the current value of each of the enterprises as evidenced by their most recent funding round by applying comparables to their performance metrics and coming up with a specific number. And we also look at our expected exit values for these companies and what the discounted value would be at present of those anticipated exit values. And that's what I meant when I said no matter how we look at it we believe that there is a significant delta. I think if you look at the information that was included at the back of the press release you'll also get some further idea of the things you're asking about.
Ron Mass -- Almitas Capital -- Analyst
Okay great. Thank you very much.
Mark A. Herndon -- Chief Financial Officer
Yes I'll just add that the back of that press release that referenced the cost that the company has invested in the partner companies is approximately $206 million and then you add on top of that where we stand today with the cash of the $45 million. So that alone is a substantial value when you look us as the company with zero debt.
Ron Mass -- Almitas Capital -- Analyst
Okay thank you.
Operator
Your next question comes from the line of Jim MacDonald with First Analysis. Your line is open.
James Robert MacDonald -- First Analysis -- Analyst
Yes I thought I'd just follow up with a question about the 3 most recent financings. Could you characterize at all the sort of type of financing for Syapse Aktana and Moxe Health? Are they just support growth or cover losses? What are your thoughts on those?
Brian J. Sisko -- President and Chief Executive Officer
Those are all absolutely growth support transactions full stop.
James Robert MacDonald -- First Analysis -- Analyst
Great. And any update on Prognos? I hear they're progressing well.
Brian J. Sisko -- President and Chief Executive Officer
Prognos is doing very well. Yes their commercial traction and their partnership development continues to be very pleasing to us. Sundeep is doing a -- has been doing and continues to do a fabulous job there. Yes nothing but good things to say about Prognos.
James Robert MacDonald -- First Analysis -- Analyst
Okay. Thanks very much.
Operator
There are no further questions at this time. I'll now turn the call back over to the presenters.
Brian J. Sisko -- President and Chief Executive Officer
Well thank you very much. We have a lot of work ahead of us to bring this strategy to conclusion. We'll keep you all apprised of our progress as best we can on an ongoing basis. In the meantime thank you very much for your continued interest and support and your confidence in us here at Safeguard.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
John E. Shave -- Investor Relations
Brian J. Sisko -- President and Chief Executive Officer
Mark A. Herndon -- Chief Financial Officer
Peter Kirk Lukas -- CJS Securities Inc. -- Analyst
James Robert MacDonald -- First Analysis -- Analyst
Joshua S. Horowitz -- Palm Global -- Analyst
Ron Mass -- Almitas Capital -- Analyst
