Safeguard Scientifics, Inc. (SFE) Q3 2022 Earnings Call Transcript

Safeguard Scientifics, Inc. (NASDAQ:SFE) Q3 2022 Earnings Conference Call November 3, 2022 5:00 PM ET

Company Participants

Matt Barnard – General Counsel and Secretary

Eric Salzman – CEO

Mark Herndon – CFO

Conference Call Participants

Matt Burmeister – Private Investor

Operator

Good day, ladies and gentlemen, and welcome to the Safeguard Third Quarter 20222 Financial Results Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Matt Barnard, General Counsel. Sir, the floor is yours.

Matt Barnard

Good afternoon, and thank you for joining us for this presentation of Safeguard Scientifics Third Quarter 2022 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, concern 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 in line to control our companies, fluctuations in the market prices of any of our companies 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, 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 repay for its filings with the SEC, including 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 on our third quarter 2022 earnings call. This afternoon, we’d like to cover the following topics. We’ll provide an overview of the state of the portfolio in the broader market environment, provide an update on M&A activities, capital raising efforts and follow-on deployments in the portfolio, share the latest public market pure multiples that we use among other tools to value the portfolio, provide some recent highlights on each company. And lastly, we will provide an update on the Houlihan Lokey process. After my remarks, I will hand the call over to Mark Herndon, our CFO, and to walk you through the financials for the quarter. We will then open up the call for questions.

I’ll start with the state of the portfolio. As you know, we are focused on maximizing the value of our companies, monetizing our positions and returning value to shareholders, while at the same time, reducing ongoing operating expenses. When I joined Safeguard in Q2 2020, we had 17 portfolio companies. As of Q3 2022, we had 8 companies left and 3 of them are currently pursuing sales processes.

Over the past 2.5 years, we have generated $74 million in proceeds and returned $43 million in capital to Safeguard shareholders. While we recognize the progress we’ve made over the past 2.5 years, we are also cognizant of the volatile economic and capital markets environment in which we operate. These conditions impact how we manage the portfolio and influence our expectations of the value and timing of exits. Many of our comments today will be directed towards how we operate in the current market environment and how this environment affects our company’s and strategy.

Over the past quarter, the economy, the business environment and the capital markets have deteriorated. This impacts our portfolio in several ways. First, for a few of our companies, the sales cycle for their products and services has lengthened, making it more difficult to meet revenue targets and determine future demand and revenue growth. We attribute this meter demand to pressure on corporate budgets, disruptions and delays caused by reductions in headcount occurring at many of our company’s customers and in otherwise more cautious stance towards making financial commitments.

Interestingly, we have yet to see this impact on our companies that sell to health care or pharma customers, which constitutes the majority of our portfolio. But we are seeing some slowdown among Fortune 500 companies in small- and medium-sized businesses. Second, raising equity or debt has become more challenging. Over the past few months, there has been a pullback in the pace of investing and lending by venture capitalists and debt providers. This has no impact on our companies which have recently secured capital, Moxe and Sias, for example, but does impact those companies which are currently raising debt or equity.

Third, the M&A environment has slowed considerably for both strategic as well as financial buyers. While deals are still getting done, for example, the Lumesis sale, the bar for acquiring a company has gone up. The cost of capital has increased and determining asset values has become more difficult. This could negatively impact the 3 Safeguard companies that are currently pursuing sales processes. Regardless of the business and market environment, we are working very closely with our companies pushing management teams and boards to take tough decisions that are necessary for the long-term health of each business.

Fourth, nearly all of our companies have venture debt, which is typical for late-stage tech companies. Leverage introduces risks to each company and can also reduce the degrees of freedom that a company has to operate. Senior loans generally have financial covenants tied to the company’s budgets. In situations where a company is out of compliance with its covenants where the debt is amortizing addressing the needs of the lender becomes 1 of the factors that the company must take into consideration. This could be done through providing additional capital to the company, restructuring or refinancing the loans and are pursuing a more rapid exit. We are working closely with our companies to address situations where this could come into play, and our goal is to maintain as much operating and strategic flexibility as possible.

Fifth, relates to revenue growth. Each quarter, we report the aggregate revenue growth for the portfolio to provide some insight to our investors on the state of our companies. We do this on an aggregate basis to avoid sharing any one company specific revenue or revenue growth, which could impact its competitive positioning. For Q3, which is reported on a 1-quarter lag basis, the aggregate trailing 12-month revenue growth was 11%. Note that not all of our companies are growing at this average rate, some are growing at substantially higher rates, some lower and a couple are not growing while they implement changes to their business model.

For some of our companies, bookings growth is a better leading indicator of future performance than revenue because what is booked in the current quarter is recognized as revenue in future periods. Where possible, we try to share bookings information in the company-specific highlights. In summary, while we are operating in a difficult economy and facing uncertain capital markets, there’s a lot to be excited about in the portfolio.

One strategy in particular that we’ve begun to explore is to use Safeguard’s resources, its cash and management oversight to take a more aggressive role with 1 or 2 of our companies. In essence, we would play offense with 1 or 2 of our portfolio companies that have sound business models but are victims of the difficult current capital markets. This could come in the form of making more concentrated deployments in 1 or 2 names setting the deal terms in leading key strategic and operational initiatives at the company, all with the goal of generating substantially enhanced returns for Safeguard.

This is still early but we have direct experience and a track record, taking advantage of dislocations in markets to deploy capital and down cycles to generate outsized returns. We’ll update you on progress with this approach on our Q4 call. M&A. As described in our press release last month, Lumesis was acquired by Sol Advisors. Safeguard received $5.3 million in proceeds with additional proceeds to be released from escrows over the next 12-plus months. To connect the dots from our comments on the Q2 call, Lumesis was the company that we said received inbound interest from a strategic buyer and the parties had made significant progress towards the transaction.

As mentioned at the outset of this call, we currently have 3 companies pursuing M&A processes. This includes the 2 that we mentioned on our Q2 call. As you recall, 1 had hired Piper in the other RBC as their bankers and each was preparing to launch its process after Labor Day. Those 2 processes are in flight. A third company hired a banker, also Piper and is kicking off a process this month. While each of these companies offers both financial and strategic value to several potential buyers, this is a tough time to be selling companies. So it is difficult to predict the outcome. And while parties are actively engaged with each opportunity, it’s unclear how the broader slowdown in M&A will impact these situations.

I’ll now provide an update on capital raises. At a macro level, deal activity across all stages of venture capital showing signs of weakness. In fact, there’s been 3 consecutive quarterly declines in the number of completed deals. Fewer potential investors seeking to deploy capital, combined with a shift in investment criteria towards more profitability, a development that we highlighted on our Q2 call can impact the capital raise processes of our companies.

With that said, 4 of our companies are currently seeking to raise capital. Two were mentioned on our Q2 call where we stated that 2 companies were exploring capital raises ahead of launching M&A processes. Also on the Q2 call, we mentioned the third company that was launching a process to raise growth capital. Those 3 companies continue to have conversations with financing parties but no LOIs have been signed.

In addition, a fourth company has had recent conversations with parties about raising capital, but those efforts are at an early stage. In parallel, we are working with each of these companies on alternative plans should capital not be available or not be available on terms that are satisfactory. Against that backdrop, we were pleased with the [indiscernible] announcement in July of their $35 million raise, which came from Novartis Capital with a concurrent investment by existing investors. Safeguard deployed $1.6 million in the inside convertible note as part of that round.

Update on follow-on deployments. While our follow-on deployments in the portfolio have declined over the past 2 years, the current business environment could impact the capital we set aside to support each company going forward. The outcome of the 4 companies are raising money raising money could also impact how much capital we expect to require for the portfolio. Also pursuing a more concentrated strategy that I highlighted earlier in my remarks, could have an impact on the quantum on follow-on capital required.

In every case, we have set a high bar for deploying more capital in the portfolio. So the returns and rationale need to be extremely compelling, and we discussed these criteria on our Q2 call. With that in mind, we have decided to maintain the maximum cash threshold at $18 million. To remind investors, this is the amount above which we would look to return cash to shareholders.

In addition to the $1.6 million we deployed in [indiscernible] subsequent to the quarter, Safeguard had funded $500,000 to equilibrium as part of an inside convertible note round together with other equilibrium investors. And we also made a $375,000 subordinated debt commitment to Trice alongside other Trice investors. Public market peer multiples. As we do each quarter, we provide the EV, enterprise value, to revenue multiples and consensus revenue growth rates of our public peers to help investors triangulate around potential valuations.

Please keep in mind that this is only 1 of several valuation methodologies used and should not be relied upon exclusively. Differences in company size, growth rates, margins, net debt, capital structures and liquidity discounts all come into play. Note that the following data is as of October 26. For our tech-enabled health care companies, the EV to 2022 revenue multiples for our publicly traded peers were 3.4x, down from 3.8x on our Q2 earnings call. Consensus revenue growth for 2022 for tech-enabled health care companies is 10%. Given we’re in the last quarter of 2022, it is appropriate that we also consider 2023 EV to revenue multiples and expected revenue growth rates.

Our tech-enabled health care multiples were 3.2x 2023 consensus revenue estimates with 12% expected revenue growth for 2023. For Clutch, our single marketing technology position EV to 2022 revenue multiples for the peer group were 2.7x, down from 3.3x in our last call. Consensus revenue growth for 2022 was 16%. 2023 EV multiples and revenue growth for the Martec peers were 2.4x 2023 consensus with 2023 revenue growth pegged at 14%. Please remember that from the implied enterprise values that are calculated using revenue multiples, we subtract out net debt for each of our portfolio companies and then run the remaining proceeds through a waterfall for each company that reflects its specific capital stack, options, management carve-outs, if any, deal fees, et cetera, to arrive at what Safeguard’s stake could be worth.

Companies with more net debt will, by definition, have less available proceeds for the equity holders and companies with more complicated preferred capital structures can also impact Safeguard’s proceeds depending on where we sit in the capital stack. From an equity perspective, while the month of October posted gains, since our Q2 call, markets have sold off with the S&P, down 8%; the Russell 2000, down 6%; our healthcare peers, down 14%; and our martech peers; down 35%. The year-to-date, S&P and Russell 2000 are both down around 20%, health care peers are down 25% and Mark tech peers are down 62%.

I will now go through the name by name highlights for the portfolio. Note that these are selected highlights for the quarter and do not reflect the risks inherent in each company. Aktana Medit product bookings through Q3 of this year, the company added new logos, including Novo Nordisk and Nestle. It reduced roughly $10 million in annual operating expenses and expect to achieve operating cash flow in 2023.

For [indiscernible], we mentioned their $35 million financing led by Novartis capital earlier. Also of note, our key collaboration and partnership announcements with Science 37 Genesis and Merck. Prognos completed its business transition to a marketplace model. This should position the company for rapid growth with both data providers and customers. The company signed 3 new marketplace data partner contracts in Q3, bringing the year-to-date total to 10 new agreements.

Prognos also sold its noncore underwriting business to Gradient AI. Trice experienced Q3 year-on-year revenue growth of over 30%. The company was EBITDA positive in August for the first time and expects to be consistently EBITDA positive later next year. Its new my Eye 25-degree camera release led to over 50% growth in disposable carpal tunnel systems.

InfoBionic posted continued year-on-year growth in ARR, annualized recurring revenue, with a 70% increase year-on-year in deployed devices. Its sales pipeline continues to build momentum, especially with large health systems, and the Mayo relationship remains strong with recent IDTF deals in addition to Mayo Clinic deployments. From equilibrium, its contracted ARR was up 18% year-on-year in Q3 and its revenues were up 20% year-on-year.

At the company’s recent annual resilience conference, Paychex, PepsiCo, Marriott, Florida Blue, Ford Motor Company and Xcel Energy were all honored for their achievements in supporting employee resilience, a strong endorsement of equilibrium value proposition by these hallmark companies. Moxe implemented 56 new connections in Q3 and each quarter of 2022 has seen a record number of connections. The company has 24 new providers in its network as of Q3 and and the fourth quarter provider sales pipeline is strong.

For Clutch, September was the company’s highest recurring revenue month in its history, achieving over 20% growth for the 9 months through September. It also had its strongest sales quarter in company history, adding over $1 million in ARR in Q3 2022.

I’ll now provide an update on our strategic process with Houlihan Lokey. Let me start by reminding investors that our base case plan is to run off the portfolio in the ordinary course and return capital to shareholders. We retained Houlihan Lokey in Q1 2021 to see if we could enhance shareholder value over and above this base case plan. This enhanced value could come from, among other things, monetizing our net operating losses, or NOLs, the public shell or other aspects of Safeguard’s infrastructure and operating footprint. Anything we consider on this front must be superior to the risk-adjusted returns of the base case runoff plan. Having said that, we are in discussions with a number of parties and wanted to provide you with an update.

First, based on the feedback we have received from parties, we do not anticipate selling the portfolio in bulk or in packages. Put simply, this portfolio does not fit well as the secondary sale and that approach would not be in the shareholders’ best interests. An approach that we have been exploring is to design a structure that ring fences our portfolio interests and allows the exits to occur in the ordinary course similar to our base case plan with proceeds returned to Safeguard’s current shareholders.

We would then use the public shell that would have the NOLs and some cash left behind. And with this shell, we would acquire another entity assets for a company thereby preserving the NOLs and building an additional potential source of value to Safeguard shareholders. In this way, shareholders would receive the vast majority of the proceeds from the legacy portfolio as it runoff, while maintaining an ownership interest and the upside in a new go-forward business.

There are a variety of regulatory and economic complexities to finding a structure that meets our objectives, but we’ve worked with outside tax and legal advisers and have come up with an approach that we believe achieves these goals. The next requirement is finding a target that we believe would create meaningful value as a public company and enhance returns to Safeguard shareholders.

Working with Houlihan Lokey, we’ve examined a number of potential targets, including operating companies, portfolios of assets and asset managers to name a few, each of whom could be viable as a public company. We’ve also considered whether any of our existing portfolio companies would be an appealing merger partner, and if it made sense for that company to effectively go public through Safeguard. We continue to spend time on this and are in discussions with several parties. There’s no assurance that we’ll be able to settle on a specific structure and/or find a specific target that meets our objectives. We will keep you updated on the progress with these efforts. At this time, I’d like to hand the call over to our CFO, Mark Herndon.

Mark Herndon

Thanks, Eric. The Safeguard’s net loss for the quarter ended September 30, 2020, was $3.2 million or $0.19 per share as compared to net income for 2021’s third quarter of $18.3 million or $0.88 per share. This quarter’s results were primarily impacted by $4.7 million gain resulting from Lumesis exit. The remaining results were fairly typical with respect to general and administrative expenses and other aspects of equity income loss net. As a reminder, the prior year quarter’s net income was driven primarily by the $32 million gain from the sale of Flash trucking.

We have continued with our open market stock repurchases resulting in the repurchase of approximately 84,000 shares during the quarter for $0.3 million at an average price of $4 per share. And subsequent to the quarter, approximately 37,000 additional shares have been acquired and accumulated during a low volume trading environment for approximately $0.1 million or $3.60 per share. This brings our total repurchases this year to over 490,000 shares for approximately $2.2 million or $4.47 per share.

We have approximately $800,000 or $0.8 million of authorization for open market purchases remaining pursuant to this planned program. Safeguard ended the quarter with $21 million of cash, cash equivalents, marketable securities and restricted cash, and we continue to have no debt obligations. Our general and administrative expenses were $1.4 million for the third quarter of 2018, which was 13% lower than the $1.6 million reported in the comparable quarter 2021. This decline was principally attributable to the absence of an LTIP expense that did not recur in 2022.

Corporate expenses for the quarter, which represent general and administrative expenses, excluding stock-based compensation, severance expenses and nonrecurring and other items, such as the LTIP accruals and transaction expenses were $0.8 million as compared to $0.9 million in the comparable quarter of 2021, a 13% decline. On a sequential basis, this quarter’s corporate expenses were slightly down from last quarter, about $57,000 lower or 7%.

We continue to expect the quarterly level of corporate expenses have stabilized at this approximate level. Corporate expenses continue to benefit from director fees mean pay again equity and a significant portion of management’s compensation being paid in equity. Additionally, you may have noticed that we moved the SFE listing to the NASDAQ recently. This change should not have any impact to you in terms of trading as we continue to use the ticker SFE.

What we gained from this shift was slightly lower base fee structure for 2023 and a greater level of flexibility in the future in relation to continued listing standards and as we become smaller and lower fees if we issue new or additional securities in the future. With respect to ownership interest, we have an aggregate carrying value at September 30 of $19.3 million as compared to $26.5 million at December 31, 2021.

This year-to-date activity included increases for the funding of convertible loans at [indiscernible] that aggregated $3.4 million, the decrease in the Bright Health stock value and the dilution gain of $5.3 million related to marketing. These increases were largely offset by decreases due to the application of the equity method accounting and the [indiscernible]. As we mentioned earlier, our equity loss benefited from the $4.7 million gain on the exit of Lumesis, while our share of the losses of our equity method ownership interest for the 3 months ended September 30, 2022, was higher at $6.0 million as compared to $3.1 million for the comparable period in 2021.

There were no impairments during the quarter. We did benefit by $0.4 million related to the collection of escrows and the resolution of contingent fees related to a variety of prior transactions. The quarter’s increase in equity method loss is a result of a higher level of losses at several companies due to a variety of events, including various accounting charges at those companies who completed financing transactions.

And I would like to also remind everyone that we report our share of the losses from the equity method companies on a 1 quarter lag. So this quarter’s share of losses reflects the second quarter of 2022. Also with respect to our ownership interest, the third-party debt at this group of 8 companies was approximately $206 million versus the $161 million at June 30, 2022. This increase is primarily related to the $35 million Syapse financing transaction disclosed previously.

Cash at the same group of companies has increased to about $90 million from the $70 million last quarter. This increase was also primarily related to the equity raise of Syapse and was offset by the quarterly burn at Syapse as well as all the other companies. In terms of revenue performance, we reported a 10.7% increase at our group of 8 companies for the trailing 12-month period ended June 30, 2022, which reflects the 1 quarter lag. We continue to see our fastest organic growth from meQuilibrium and Moxe. At this time, we’d like to turn it over to the Q&A segment of the call. So operator, I’ll ask — let’s ask you to open the phones up for a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Matt Burmeister from — he’s a private investor.

Matt Burmeister

In the last earnings call, you laid out a time frame for the M&A process is 4 to 6 months and suggested that the Houlihan Lokey strategic alternatives review process should be a comparable time frame. Considering the strategic review process started in March of 2022, why is this plan not finalized yet?

Eric Salzman

Thanks for the question. As it relates to the Houlihan Lokey process as we try to provide a fair amount of detail on today’s call, we went out — we have a base case plan as we described. And the question we have is, given the other assets that Safeguard has NOLs, Shell, et cetera, is there a way to enhance the value beyond just our base case runoff plan. That is not a regular way M&A transaction where you hire a banker, you put a book together and you sell a digit manufacturer or service provider. This is — this involves both tax and legal structuring and it also involves us feeling highly confident that a counterparty or a target would be value accretive or value enhancing to the Safeguard shareholders. So we are taking our time through this process we don’t have a set time by which we have to do anything because we have our base case plan. So I would just compare the approach and the time line and the complexity or complexion of a strategic process with Safeguard differently than a normal, let’s call it, regular way M&A process, if that’s helpful.

Matt Burmeister

Yes. Honestly, the Shell company idea and all the other strategic alternatives, I’m a little skeptical. I’m honestly of strong fan of selling the portfolio lump sum. And a concern I have with the current Houlihan Lokey process is, that on the last call, you stated the objective of not selling assets below natural exit values. I think that’s too stringent. To me, it sounds like we’re trying to squeeze every last drop out of the lemon, but it often ends up in getting some seeds instead. Is there some flexibility that can be built into the strategic review to sell the whole portfolio, say, at a 75% to 90% of natural exit value to get a deal done instead of dragging out the overall portfolio monetization process.

Eric Salzman

It’s a good question, and we appreciate that perspective. As we indicated, this portfolio does not lend itself to a secondary sale, which means a secondary sale happens at — to estimate at some reasonable discount to fair market value, whether it’s a 25% discount or a 10% discount given the numbers you gave 75% or 90% of, if you will, kind of regular exit value or fair market value. This portfolio does not fall into that bucket. So to do a lock stock sale of the portfolio would result in severe impairment of what we believe the natural exits would be. And we have cases in point, for instance, not to get too much into detail, the Lumesis transaction, where we received $5.3 million and have additional proceeds that will be released from escrow. To put it in perspective, secondary interest for that position was substantially less than what we ultimately got in a strategic sale. And that’s just one example. I will say though, in companies, which we’ve done since I’ve joined, where we don’t believe in the company’s long-term prospects or we don’t want to put additional capital in. We have sold in secondary transactions. So there have been a number of situations where we either have decided we’re not going to fund more capital or we went out and we’ve identified secondary buyers of those positions and transacted at what we thought were reasonable discounts to fair market value. So I hope that provides some context, but we are 100% open to selling this portfolio in a secondary transaction at a reasonable price — and we spend a lot of time doing that. There’s — and just on the Houlihan Lokey process, we could spend few more months on Houlihan Lokey and conclude that there’s nothing superior. It doesn’t really change what we’re doing, which is exiting companies and returning capital to shareholders. So we view that as a parallel effort as a parallel effort. But thanks for the question.

Matt Burmeister

Yes, I just would appreciate let’s get a plan together. I would appreciate as what the future looks like at Safeguard as an investor, I need clarity in next steps. And honestly, this has been dragging on and I just need some clarity. So when can we have clarity as investors for the plan you have a time line when we could expect the final decision?

Eric Salzman

So the current final decision, the current decision today is we have 8 companies, and we’re selling those companies as and when we can. So as we indicated on our call, there are 3 companies that are in processes. And we’re going to — we have exits, we will sell those companies and we’ll return the capital to shareholders. So 8 companies, 3 are in sale processes. If those sale processes succeed, we’ll have proceeds to return to shareholders. If they do not succeed, meaning there are no buyers or the buyers have indicated values which are not within the range that we or our other shareholders want to transact that, then we will not be forced to sell nor will we just sell for the sake of monetizing if we believe in the portfolio, and these 8 companies are what we’re building the exit value off of. So that is the plan. That is our current base case plan, selling in the ordinary course. We’ve gone from 17 down to 8. Hopefully, these 3 processes will be successful, very tough time in the capital markets to be selling companies, but we are doing everything we can to transact and help these companies sell themselves, and that’s the plan.

Mark Herndon

And let me just reiterate one point for you as well is that we’re investor of several in all these circumstances, right? And we — I think we would say we have alignment with other investors in these companies, make sure that if they’re not already in a sales process to prepare to be in a sales process. But it’s not as if we can just go hit a button and say, tell the company. It’s not a controlled position that allows us to do that. But we are doing everything we can to push the companies towards finding their exit process.

Operator

[Operator Instructions] Our next question comes from Neal Goldman from Goldman Capital.

Unidentified Analyst

In your carrying value, you have $150.5 million. What’s the 19.8% of all others in terms of carrying value?

Mark Herndon

Yes. I think in the table that you’re looking at in the press release, there’s there’s 2 different columns there. And I think the number that you’re referencing is actually the cost or total cash in for each of those investments. The carrying value is $19 million. The carrying — or the cost basis is roughly $150 million — are you — and I think you’re making reference to the cost of the other items, if that’s correct.

Unidentified Analyst

Yes.

Mark Herndon

Yes. So that’s last — last quarter or the quarter before that, — you may recall that MediaMath in the recapitalization. So the basis for them floated down there, and that’s about $16 million of that $19 million

Unidentified Analyst

Okay. So there’s a value, it’s about $4 million maybe incremental to…

Mark Herndon

Yes. Yes. The general rule is from a fair value perspective, I would not look for substantial sums coming out of the other category.

Operator

[Operator Instructions]

Eric Salzman

We did get a question through the web — sorry, Kat, which says, can you elaborate on what a potential transaction with Houlihan Lokey would look like? Would this require using cash on our balance sheet to finance? So just again, maybe provide a little bit more detail and try to answer this question. So it is — it would involve monetizing the portfolio and what we’re calling the regular way, the ordinary course and leaving in the shell, the NOLs and some cash so that Shell company could operate. And then another company would reverse merge effectively into the shell while preserving NOLs and having access to some of that cash. The quantum of cash that we would leave behind is something that’s very, very — it’s a very, very important topic for us because any dollar that we leave behind is the dollar that we’re not returning to shareholders. So as I indicated in the remarks, the opportunity has to be very, very compelling. And as of yet, we continue to have conversations, but we do not have anything that would meet the criteria that we would go and go to the board with and try to take to the next to the next step. I would say though, to put it in perspective, the runoff plan itself also has cost because part of the benefit of doing this reverse merger with another company is the public company costs going forward would be shared with the investors of that company that we just acquired. So one of the calculations that we do, when we analyze this is what are our stand-alone operating costs and what will it be from now until runoff in the base case and compare that to what the operating cost that our shareholders would have to be on the hook for, if you will, if we were to do this reverse merger structure. So we would be comparing the cash used in one 1 alternative or one case versus cash used in another case. But it is something we’re very focused on. As we know, shareholders, and I’m fairly large shareholder, we’re looking to return value to the shareholders. I don’t know, Kat, are there any other questions in the queue?

Operator

There are no phone questions as of yet. [Operator Instructions]

Eric Salzman

Okay. It does not appear that we have any other web questions. So I will then just for closing remarks. Thank you for joining us on the call today and for your continued interest and support of Safeguard. But before I sign off, I must add one thing. So while I am a Mets fan, not a Philly’s fan, Safeguard has long-term Philly roots. And on behalf of management and the Board, we want to wish Philly’s best of luck and the remaining games of the series. So please feel free to contact us if you have any additional questions and go Philly’s.

Operator

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.