Safeguard Scientifics, Inc. (NYSE:SFE) Q3 2023 Earnings Call Transcript

Safeguard Scientifics, Inc. (NYSE:SFE) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Greetings, and welcome to the Safeguard Scientifics Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Matt Barnard, General Counsel. Please proceed, sir.

Matt Barnard: Good afternoon, and thank you for joining us for this presentation of Safeguard Scientifics’ Third Quarter 2023 Financial Results. Joining me on today’s call and webcast are Eric Salzman, our Chief Executive Officer; and Mark Herndon, our 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, uncertainty of the outcomes of corporate strategic transactions, if any, uncertainty of our efforts to execute on and implement reverse and forward splits of our so that we can cease the registration of our common stock under the Securities Exchange Act of 1934 and delist our shares of common stock from trading on NASDAQ.

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 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 other factors, the 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 used in our discussion of goals or events in the future.

Management can’t 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 on our Form 10-Q, 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, I would now like to introduce Eric.

Eric Salzman: Thanks, Matt. Thanks for joining us this afternoon for our Q3 2023 earnings call. Today, we will walk you through the rationale and key [technical difficulty] of our Going Dark Transaction, our thoughts around a potential Q4 2022 dividend, a brief update on our remaining portfolio of companies, and then Mark will run through the financials, and we’ll open up the call to questions. I will start with our Going Dark Transaction. We filed our definitive proxy this afternoon, which details the various elements of our plan to delist from NASDAQ and become a non-reporting company. As explained in the proxy, we’ve concluded that the costs of being public have become too burdensome and the benefits very limited, life of our strategy to monetize our remaining ownership interest and return maximum value to our shareholders.

See also 11 Easiest Instruments to Learn for Adults and Retirees and 10 Best Big Name Stocks to Buy Now.

Q&A Session

The process to become a non-reporting company requires a shareholder vote to approve a series of stock splits, and we set the shareholder meeting date for December 15. The intention of the stock splits is to reduce the number of shareholders of record to fewer than 300. Once we have fewer than 300 shareholders of record, Safeguard is no longer required to be a reporting company for SEC purposes, meaning we will not have to file 10-Ks and 10-Qs, thereby reducing our expenses significantly. The stock splits will create a relatively small number of fractional shares, which we intend to cash out at $1.65 per share. Details of how we arrived at this number is in the proxy. Based on our current estimates, we expect the total cost of cashing out these fractional shares to be approximately $10,000.

As part of our plan to delist from NASDAQ and become a non-reporting company, we also intend to make changes to our management structure to further reduce the cost to operate the business. We expect to transition Safeguard’s general and administrative functions to an external service provider to be selected by the Board. Our remaining officers and employees, the four of us, are expected to provide transition services to Safeguard on an as-needed basis. The Board has narrowed the search process for an external service provider [indiscernible], and we expect to have this in place by January 1, 2024. Taken together, we believe these steps will substantially reduce the operating cost to manage [technical difficulty] the remaining companies in the portfolio.

As disclosed in the proxy, we anticipate annual cost savings of approximately $1.5 million in cash and a reduction in [technical difficulty] base compensation of approximately $1.2 million. Reducing our expected operating costs, frees up more of our balance sheet cash to return to shareholders via a dividend subject to Board approval. We refer to this extra cash as excess cash, and it is defined as cash on hand, less the estimated amounts required to be retained to pay the cost of the transaction, support Safeguard’s operations in the portfolio companies as well as cover liabilities and contingencies. Subject to Board approval, we intend to pay out this excess cash as cash dividend in late December after the shareholder vote. We would not delisted from NASDAQ until after the December 15 shareholder meeting, and assuming we move forward with the Going Dark Transaction, any trading in our common stock after delisting will only occur in privately negotiated sales.

We will be exploring whether Safeguard shares can trade on one of the OTC markets, but there can be no assurances of that. We are required to file a 2023 10-K, which will be our last SEC filing. Post the filing of the 10-K, we expect the size of the Board to drop from the current four members to two with these two coming from our existing Board. From an information perspective, while we are not required to do so, we currently intend to provide quarterly business updates and expect to provide an annual audit to shareholders. Key future distributions after the potential dividend will be dependent on actual cash exits, any changes to the estimates of the cost to operate through a liquidation as well as any other contingencies. We estimate exit proceeds from our remaining positions at between $25 million and $45 million.

The monetization process is expected to take 2 years, but could be longer. We are working with the Board to finalize all operational elements required to consummate this transaction. Now let me turn to the portfolio. As we disclosed last quarter, we expect nearly all of the exit proceeds from the remaining portfolio come from those companies that we categorized as Bucket 1 companies. Consistent with what we said last quarter, the Bucket 1 companies are prognosed meQuilibrium, Clutch and Moxe. We have also added InfoBionic to Bucket 1 as it recently completed a recap in capital raise. As you recall from last quarter’s call, we mentioned that one of our companies was in the midst of a potential recap and capital raise. And if this were to happen, we would expect that it would move to Bucket 1.