Safeguard Scientifics, Inc.

As explained in the proxy, we've concluded that the costs of being public have become too burdensome and the benefits very limited in light of our strategy to monetize our remaining ownership interests and return maximum value to our shareholders. 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 15th. 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 recording 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 described in the proxy. Based on our current estimate, 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 the transition safeguards 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 to three, and we expect to have this in place by January 1st, 2024. Taken together, we believe these steps will substantially reduce the operating costs to manage and monetize 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 annual 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, left the estimated amounts required to be retained to pay the cost of the transaction, support safeguards 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 a cash dividend in late December after the shareholder vote. We would not delist from NASDAQ until after the December 15th shareholder meeting, and assuming we move forward with the Godart 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 10K, which will be our last SEC filing. Post the filing of the 10K, 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. Any 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 and $45 million. The monetization process is expected to take two 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 to come from those companies that we categorize as bucket one companies. Consistent with what we said last quarter, the bucket one companies are Prognos and Equilibrium Clutch, and Moxie. We have also added InfoBionic to bucket one as it recently completed a recap and 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 one. This is what happened with InfoBionic. We continue to have board seats at Prognos, Moxibilibrium, Moxie and Clutch, and are actively engaged with management and co-investors to drive value creation and exit. Post-recap and given our reduced ownership interest, we have retained an observer's seat. Let me provide some further clarifications on the $25 to $45 million in future exit proceeds. First, the $25 to $45 million are estimated future exit values and are not discounted. Second, the inclusion of infobionic in bucket one does not have any impact on this range, nor does it represent the difference between the low and the high. And thirdly, the 25 to 45 million is expected to be generated exclusively from bucket one companies. All other remaining positions are bucket two, and we expect de minimis proceeds from them. On the M&A front, while the market has improved somewhat compared to earlier this year, it continues to be challenging for venture stage companies. For Safeguard, one of our bucket one companies recently hired an investment banker and expects to launch a process in January 2024. There are no immediate plans for the other four companies, but we continue to work closely to position them for exits or recaps that could generate proceeds to Safeguard as expeditiously as possible. We also have had discussions with a couple of secondary buyers for one or more of our positions, but these discussions have not resulted in any transaction. Regarding Q3 performance, our companies have experienced varied results. For example, meeting or exceeding revenue plans, but coming in under bookings, meeting or exceeding EBITDA plans, but missing revenues, and for three of the five companies, Q4 represents an important quarter due to the business's seasonality. The Q3 performance was taken into account when determining the $25 to $45 million of exit values. At this time, I'll hand the call over to our CFO, Mark Herndon. Thanks, Eric.

Sinclair reported net income for the quarter ended September 30, 2023 of $0.9 million or $0.06 per share as compared to a net loss for the comparable 2022 third quarter of $3.2 million or $0.19 per share. The year-to-date period ended September 30, 2023 with a net loss of $5.4 million or $0.33 per share as compared to $9.4 million or $0.57 per share for 2022. We ended the quarter with $15.7 million of cash, cash equivalents and restricted cash, and we continue to have no debt obligations. Our general administrative expenses were $1.3 million for the third quarter of 2023 versus $1.4 million for 2022, a decrease of 3.5%. Similarly, our general administrative expenses were $3.7 million for both the year-to-date period, a decrease of 1.5%. Corporate expenses for the quarter, which represent general and administrative expenses excluding stock-based compensation, severance expenses, and non-recurring and other items, were $0.9 million and $0.8 million on a rounded basis for each of the third quarters of 2023 and 22. The year-over-year increase was 9.8%. The corporate expenses for the nine months ended September 30, 2023, were $2.4 million as compared to $2.5 million in the comparable 2022 period, a 3.2% decrease. The increase during the quarter was due primarily to legal and other professional fees. We continue to expect the quarterly level of corporate expenses has generally stabilized to this approximate value before we implement any cost structure changes. However, this quarter's additional expenses have pushed our annual estimate of corporate costs back up to our original range. With respect to our ownership interests, we have an aggregate carrying value at September 30th of $14.8 million as compared to $15.4 million at December 31, 2022. There were no deployments this quarter. However, there was an increase at Infobionic resulting from their recapitalization transaction, which allowed Infobionic to raise cash and convert certain liabilities. Since we did not participate in this transaction, our ownership levels dropped to approximately 5%. This transaction also resulted in recording a $1.7 million non-cash observable price change gain that is recorded in other income. This quarter's activity also included the application of the equity method accounting at our other remaining interest. However, the impact was less than prior periods due to several entities carrying value being previously reduced to zero and year-to-date lower operating losses at the others. Our results under the equity method for the three months ended September 30th, 2023 resulted in a $0.4 million of equity income as compared to a $1 million million equity loss in a comparable period of 2022. This change is predominantly the result of several companies reaching zero carrying value during late 2022 or 23. At that point, we generally cease recording losses from those entities. I'd also like to remind everyone that we report our share of the losses. in the equity method companies on a one-quarter lag. So this quarter's share of losses reflects the second quarter of 2023. Also with respect to our ownership interest, this quarter's third-party debt for the remaining six companies was approximately $88 million versus $135 million last quarter. This decrease is due primarily to the recapitalization transaction at Infobionic. Cash at the same group of six companies was down to approximately $41 million. In terms of revenue performance, we reported a 10.3% increase at this group of six companies from the trailing 12-month period into June 30, 2023, due to the one-quarter lag. This increase was most favorably impacted by clutch, which was largely offset by decreases at progress. Also, we noted in our filing that our share count as of today, the filing date was approximately 16.6 million shares. Looking forward, we expect that share count to increase as we continue to settle director fees using shares. An exact number will depend on the share price when those shares are issued early next year, but we are estimating that the share count will grow to approximately 16.7 to 16.8 million shares by the time we file the final 10K we referred to earlier. Finally, I'd like to reiterate some points made by Eric and answer questions already received from shareholders who have had questions about the preliminary proxy definitive that was filed earlier today about how this will impact them and address the mechanics of what will happen to their shares. The proposed stock splits will not have an impact on any shareholder whose shares equal to or above the stock split number. For example, if the final ratio is based on the highest amount of the proposed range, 100 shares, any shareholder holding 100 shares or more will not be impacted by the share splits. Shareholders who own less than that amount would be cashed out if they hold their shares directly as a registered shareholder. On the other hand, shareholders who hold less than that amount in street name may or may not be cashed out. Street name shareholders should contact their bank or brokerage for more information. We also encourage shareholders to review the Q&A portion of the proxy, which provides further details and examples of the impact you should expect as a result of the proposed stock splits. As we addressed in the proxy document, cash requirements expected to repurchase these fractional shares that may result from these stock splits was estimated to be only about $10,000. As a result, most shareholders will not experience any significant impact of the split and should continue to be able to hold their shares in their brokerage account as we continue to wait for portfolio exits to fund future distributions. Now we will turn to the Q&A segment of the call, so operator.su.gov. And I do see that we've had a couple that have come in on the web, too. We'll address those in a moment as well. I'll let you give those instructions first.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Once again, that's star one to ask a question. One moment while we pose for our first question.

Yeah, and while she's accumulating questions there, Eric, why don't we address the couple that we know already. So the first question was logistically, do we anticipate this to be the last earnings call before the planned delisting? And I would say yes. We will make ourselves available as necessary for questions and comments as we try to do on a regular basis. So this is the last planned conference call before then. We've talked about a timing that the special meeting would occur in the middle of December and a delisting, if that ends up being the case as a result of the votes, would be shortly thereafter. Matt, do you want to add anything to that? I think that's right, Mark.

We can go to the second question, which was related to previously mentioned considering a year-end dividend being roughly half of the year in cash balance. So just to address how we're thinking about sizing the dividend and coming up with what we determine is this excess cash. So the board will estimate the year-end make the decision basically we'll take our September 30th cash less what we'll spend in net outflows this quarter. From that, we would deduct the stock split and transaction costs of $1.2 million, which is on page 10 of the proxy. From the remaining number, we would set aside the estimated cost to operate as a non-reporting company, cost to support the portfolio, cover liabilities, contingencies, and an ultimate wind down. We indicated that's roughly a two-year process, could be longer. And the net of this number would represent the excess cash that the board would consider returning as a dividend. Last quarter, that was our preliminary estimate, what we said, and we're currently half of year in cash, or up to half of year in cash. And we're currently working with the board to arrive at the number that balances returning as much cash as possible. without putting the remaining portfolio or operations at risk. So we're doing that analysis now and we continue to be working with the board. But the goal is to find that balance where we're returning as much cash as possible. We do not want a husband to keep excess cash unnecessarily. But on the other hand, we want to make sure that they're sufficient to cover both the significantly reduced cost of operating as well as any other contingencies.

Yeah. I'm going to skip to the next question. I'll let you handle the first half of it, but there's a couple of questions in here that would talk about, I'll call it the mechanics of how things will operate in 2024. And so let me broadly cover those for a minute. You know, the company, Safeguard, we will continue to have board seats on our remaining portfolio companies, right, where we have them now. So nothing changes there. What is being worked out right now is exactly who would fit as our representative on those boards. That could be the external service provider. It could be someone else. But we're working through that now. And I will tell you, one of the aspects related to this is just cost. Obviously, as we've talked about, one of the reasons for this transaction is to reduce costs. While we haven't put out a formal number for 2024, we've talked about reducing the cost by one and a half million dollars. If you compare that to your the 3.2-ish where we're at this year, you know, then that's going to be in that ballpark would be an early estimate of expenses for 2024. That said, there's a variety of things that remain to be in play, including that a service provider, while multiple firms have been considered and when we're in discussions with them, We have not settled on a firm or, therefore, a firm price there. So there is a number of estimates involved with continuing to figure out exactly how much the cost will be in 2024, but we expect there will be substantially less when we don't have the full-time management team here working with the company. Eric, you're up.

Yeah, sure. I'll make one more just comment on the cost. So obviously, there are a number of benefits to outsourcing the general administrative activities to a service provider, one of which is as time passes and the needs of the portfolio or the company go down, then there's an ability to scale down the costs of an external service provider in a way that is, frankly, almost impossible or very difficult in our current So when you think about the go-forward costs, it's the savings that Mark indicated and we indicated in the proxy, but if you look beyond that, it would be reasonable to expect that the annual operating costs, 12 months out, 18 months out, et cetera, should come down as there are fewer portfolio companies and fewer activities. Another question we have is on the remaining bucket one portfolio companies, are there any that have not been out in market for a sale process? So we have five of our bucket one companies. Two have not been in a sale process ever since my involvement. A third has not been in the sale process in at least the past 12 plus months. and the other two have. So that answers that question. Board seats we talked about. Can you provide any additional color in the portfolio companies, perhaps the companies most promising for exit values? You know, what I would say is, as we indicated, it was on last quarter, we talked about the definition of what we're using for a bucket one company is well capitalized, um, executing on a business plan while navigating kind of the risks and opportunities. And it does not have an excessive debt level, um, which has, um, you know, impacted negatively a couple of other, other companies, as you know. So I wouldn't call one out over the other. I think, um, there were, were, optimistic and constructive on all of those companies and we'll be working closely with them to maximize the exits over the next two years.

Let me pause there for a second. Operator, have any questions come up in the queue?

Yes, I do have a question from John Powerwood, Redwood Fund. Please proceed.

Thank you, operator. Appreciate your time, gentlemen. And my question was regarding the excess cash, which you covered a couple of minutes ago in your comment. So, no questions.

Thank you. Okay.

Thank you.

Once again, ladies and gentlemen, to ask a question, that's star 1 on your telephone keypad at this time.

We have a question.

on the web that is can you go into more detail as to the 25 million dollar lower bound of proceeds is the 25 million dollar split fairly equally between the five companies so i'll just comment a bit on the methodology of how we came up with that number um so basically we took the low end revenue estimates right so projected revenues for each of those five companies we now in an exit a low end of that We applied kind of low-end revenue multiples, low meaning if you look at the market, either public markets or cross-cycle. And then that would get your enterprise values, track out your net debt, and you would run that remaining value through the waterfall. Each company has its own preferred stack and auction pool, et cetera, to come up with safeguards proceeds. That would be the future value of safeguards proceeds. which is the $25 million at the lower bound. And then, so that's how we came up with it. It's not equally weighted among the five because of the different, the way that the cap structures work in different companies and the preferred payouts fact work. It wouldn't be equal. The revenues aren't equal. Multiples are not dramatically different on the low end across the companies, but revenues would differ and the cap staff would differ. So, you wouldn't get the same resulting value. Another question is how much – I'm sorry, Mark.

I was going to – yeah, let me add. There's a couple questions in here asking about specific debt values and revenue values for different cuts of the portfolio. I'm trying to avoid giving you a specific number on the slide because I want to be accurate. Obviously, it does remain to be debt on the portfolio at our five is substantially less than the number that we quoted for the six companies because that other one is just a high-debt entity. But I was not intending to provide that data at this moment. We can look into putting that out there at a later time perhaps.

Well, I mean, I'd add to it just if you look at, if you look at the bucket one companies and you adjust it for the cash from the inter bionic transaction that we mentioned earlier, there is slightly more cash than debt. Just if you just summed it up, which, which as Mark said, it's significantly delivered compared to let's call it, you know, in prior quarters. some of that delivering happened because of capitalization and by info bionic where where there was a recap or recast of some debt to equity but if you kind of zoom out overall the bucket one companies today have more cash than debt slightly another question The two companies that have not been out in the sale process is one of them, the one that just hired a banker. Yes. Are share repurchases possible still considering no portfolio companies are under M&A discussions until 2024? Mark, do you want to talk a bit about how we thought about share repurchases versus dividend as well as the goal or map to get to the fewer than 300 shareholders, so we would be non-supported.

Yeah, and there's a variety of things embedded in that question, right? I mean, there's the concept of, and I think what the questioner is getting at is the traditional, I'll call it, window open about material non-public information. And that's something we would address that sort of at the time. that we're trying to make a decision about whether to do a repurchase or not. What we had thought about in terms of repurchases is just to do a large repurchase like we did last time requires generally more cash than we have available at this time. And we also experienced the at-the-market purchases where that had a limited impact because we were just accumulating shares at a slow pace because of the low volume of the traded stock. So part of our evaluation is simply taking those couple considerations in and trying to figure out the most expedient way to get cash and value back to shareholders was to pay dividend to all the shareholders. And that's the path and the direction that we've been talking about here for a couple quarters.

We have another question on, you said revenue multiple at the low end are about the same. About what revenue multiple ranges are you using for the low end proceeds across the five companies? would say that it's low single-digit revenue multiples.

Where else?

So we're reading this in real time as it comes out on the web.

The next question, I'll let Eric think for a second about, again, the dividend amount. And I understand how people are eager to think about exactly how much that value will be. And we're trying to be careful because obviously the board has to make a judgment decision there. And it will be ultimately a matter of judgment. The factors that we are thinking about, yes, are continuing to hold enough funds to operate the more limited scale operations of the company for a period of time to get them to completion, as well as holding back amounts for any kind of contingency that we could think of that would exist, including potentially funding the company, although we don't expect any funding. We've also talked about – I know the metric has been put out there about 50% of year-end cash after a couple adjustments, but we still don't know exactly how much cash we're going to have at the end of the year. We don't think it will be substantially different than where we're at, but we don't know. Those are the parameters that I would provide to you without actually telling you a number or a value of what a dividend could be. We're discussing a range of options with the board on that front.

Yeah, and I'll just add a couple of comments to it. So firstly, one of the design parameters in the reserving the cash, or let's call it the holdback cash, is that it needs to be sufficient to cover the operations portfolio wind down, regardless of when the next exit occurs. So we're not coming up with a cash number that assumes, oh, in June of next year, X million is going to come in to help cover it. So we want to, we're coming up with a quantum of cash that will cover a complete operation support, wind down, contingencies, et cetera. So that's how we're thinking about it from that standpoint.

part of that question and maybe as I read it a little closer now assuming that distributions in the future or rather monetization in the future would flow for the most part down to distribution and the math that we just outlined would say yes but it's always it's hard when you're looking at in the future, some other contingency may arise that the board at that time would need to consider. I don't want to pin them in on that, but if it's designed perfectly, then it should be in that ballpark.

That is the goal. Another question. I think we're at question number 12. Can you speak a bit about the confidence level of the two-year monetization timeframe given there are now four bucket one companies that don't have a real There was another question that related to that around front-end weighted versus back-end weighted proceeds based on our internal, you know, based on our estimates. I think given the fact that we have one company going to market, we have no companies in the market now of our bucket to bucket. One company is the five and we have one going to market in January. And if you look over a, call it a, 27, 28 month period by the time you start, 24 month period in June 1, I think you would just assume that those exits would be occurring in the second half of that period more than the first half where we're sitting today. Now, things do change. As I indicated, we have been having some conversations with some secondary buyers around seeing if there's a bid for any of our positions. We've also been working with one of our companies on potential recapitalization, the proceeds of which could be used to take us out. So we're working from all possible angles to monetize the investments, but from a hiring a banker and going out, I would say it would be the second part of the coming 24 months.

And while Eric's looking at another question there, one of the The next question, we've had another question come in about revenue rates, about which companies are growing the fastest. And I'll add more to what we said earlier. Similar to what we've seen last quarter or the last few quarters, Moxie and Equilibrium as well as Clutch, all three of them on a trailing 12-month basis have experienced growth and good growth. But that period ended June 30th. And then I think I would refer to Eric's comments. We've had sort of varied results since then. Some of the September numbers are still kind of shaken out. But each of those three have had over 20% growth.

Question 14, given we're not functional shareholders in any of these portfolio companies, can we drive monetization timelines? That has been a... It's a great question. It's one that we've been working with for the last three years. And what I can say is that in each of our companies, we have very good alignment in terms of among ourselves and management and the other investors in terms of how long we want to be in the investment, right? So other co-investors are similarly, these are, you know, The whole periods have been long, relatively long. So there's alignment to exit. The decision to exit is really less of a, are people, are the management and the stakeholders aligned to exit? It's really more of the opportunity, availability, valuation, and is the company putting up the types of metrics needed to attract buyers in a reasonable way. So that's less of an issue about how to drive monetization timelines because there's alignment.

Eric, we have another question coming in about the range of proceeds, particularly the low end of the proceeds with respect to Infobionic moving into bucket one. So, and I will tell you, we made that the full range estimate last quarter when things were in flux with the one company and we've updated it again this quarter from a bottoms up analysis and as you might expect there's not a perfect on any of these and things vary within the portfolio even from the estimates and we still have come up with the same range it just has not Moving Infobionic in there, yes, I would say they give you more confidence at one end of the range, but it's not something in and of itself that's going to move you from, you know, move the range significantly or move within the range significantly.

Yeah, and I'll add to that. Yeah, and I'll add to that. You know, last, when we did this analysis last quarter, we had some probability weighting. of Infobionic achieving a recap and a set of outcomes. So it wasn't necessarily in at zero last quarter and a big number this quarter. There was a number that reflected the probability of the recap getting done. And the second thing I would say is with a 5% ownership stake, which is what we have, It moves the needle given where our stock price is and what we're trying to do, but it doesn't swing as much as some of the other companies where we have larger ownership stakes.

We'll pause there for a second. Operator, were there any other questions on the line?

We have a question from Sherry Rubenstein, a private investor. Please proceed.

Hello, am I on?

Yes, you are. Hi. How are you?

Oh, hi. I'm really new to this. I don't quite understand. I only have 83 shares, so I'll be cashed out. What does that mean exactly?

If you end up being cashed out, then your brokerage account would simply receive a check, cash, and the price outlined in the proxy is $1.65 per share. $1.65 per share. Well, because right now it's only $0.98.

Correct.

Yes, the cash-out price is at a premium to today's traded price.

So am I best to wait then until you cash me out?

Well, I need to avoid giving individual investment advice.

So I should have to ask my broker that. So right now, if I sold it, I would be getting $0.98. If I wait, when are you cashing out?

Well, if this transaction is approved by shareholders, we would expect it to occur around December 15th.

December 15th. Okay. So possibly then I could get $1.65 a share if I just wait until then. Is that correct?

That is correct. That is correct.

Okay. And they receive the check because it's a brokerage. I have E-Trade. Is that the way it works?

Yes. That would all be handled through your brokerage account.

Okay. All right. Then I will give them a call. Thank you for all the information. It's just confusing to me. I'm sorry. You're welcome.

Yep. I understand.

There are no audio questions left in queue. I will turn it back to management for closing comments.

Yeah, we have one more. Question number 18. At what point would you expect to have clarity on whether SuperCard will continue to trade OTC or not? So as we said, we're starting to work with OTC. Depending on, there are different levels within OTC. You need a market maker and so forth. So we have every incentive to try to make that happen or make that work. So we'll do everything we can to see if we can get market makers to see if it can trade on one of these levels. There's no assurance that it will. Obviously, keep in mind that if we're a non-reporting company, so we're not defiling the equivalent of 10 Ks or 10 Qs, then it's going to trade differently than a proper NASDAQ-listed company with Ks and Qs, although our current recent trade has been quite limited or episodic, if you will. So we'll do everything we can to try to achieve that. At this point, we can commit to trying. We can't commit to having it done, subject to things that we're working on.

Okay, it looks like that was the last question.

um so um just to wrap up i want to thank you for joining us on our call today please contact us if you have any questions we'll uh we'll either answer the questions directly we'll put you in touch with uh computer chair or whoever else to try to help you understand the transaction and um and address any any questions or concerns you have thanks a lot have a good evening

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.