
Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections aboutSafeguard Scientifics, Inc. ("Safeguard" or "we"), the industries in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainties. Factors that could cause actual results to differ materially, include, among others, our ability to make good decisions about the deployment of capital, the fact that our ownership interests may vary from period to period, our substantial capital requirements and absence of liquidity from our holdings, fluctuations in the market prices of our publicly traded holdings, competition, our inability to obtain maximum value for our ownership interests, or at all, and the return of value to our shareholders, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our ownership interests operate, our inability to control our ownership interests, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our ownership interests and their performance, including the fact that most of our ownership interests 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 ownership interests operate, including the impact of COVID-19, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. "Risk Factors" in Safeguard's Annual Report on Form 10-K and updated, as applicable, in "Factors that May Affect Future Results" and Item 1A. "Risk Factors" below. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur. 16 --------------------------------------------------------------------------------
Business Overview Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses. In many, but not all cases, we are actively involved, influencing development through board representation and management support, in addition to the influence we exert through our equity ownership. We also continue to hold relatively small equity interests in other enterprises where we do not exert significant influence and do not participate in management activities. In some cases, those ownership interests relate to residual interests from prior larger interests or from companies that acquired companies in which we had ownership interests. InJanuary 2018 , Safeguard announced that we will not deploy any capital into new opportunities and will focus on supporting our existing companies and maximizing monetization opportunities to enable the return of value to shareholders. In that context, we have, are and will consider initiatives including, among others: the sale of our ownership interests, the sale of certain or all ownership interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We initiated the return of value to shareholders in 2019 with a$1.00 per share special dividend and continued in 2021 through share repurchases aggregating to 4.5 million shares for$40.3 million . We anticipate additional actions could occur in the future, once significant dispositions occur, in the form of stock repurchases and/or special dividends based on available cash resources, prevailing market conditions and other factors. Results of Operations
We operate as a single operating segment based on the similar nature of our technology-driven companies, functional alignment of organizational structure and reports that are regularly reviewed by the chief operating decision maker with the aim of evaluating performance and d ‘allocate resources.
There is intense competition in the markets in which our companies operate. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company's ability to execute its business plan and to adapt to its respective rapidly changing market.
The following is a list of some of our participations in
Safeguard Primary Ownership as of September 30, Company Name 2021 2020 Accounting Method Aktana, Inc. 15.0% 15.2% Equity Clutch Holdings, Inc. 41.7% 41.2% Equity InfoBionic, Inc. 25.2% 25.2% Equity Lumesis, Inc. 43.2% 43.5% Equity MediaMath, Inc. 13.2% 13.3% Other meQuilibrium 31.9% 32.0% Equity Moxe Health Corporation 27.6% 29.9% Equity Prognos Health Inc. 28.5% 28.5% Equity Syapse, Inc. 11.1% 19.6% Equity Trice Medical, Inc. 12.6% 16.6% Equity 17
-------------------------------------------------------------------------------- Three months endedSeptember 30, 2021 versus the three months endedSeptember 30, 2020 Three Months Ended September 30, 2021 2020 Variance (In thousands)
General and administrative expenses
711 Other income (loss), net 20,588 (820 ) 21,408 Interest income 70 52 18 Equity income (loss), net (761 ) (1,300 ) 539$ 18,333 $ (4,343 ) $ 22,676 General and Administrative Expense. Our general and administrative expenses consist primarily of employee compensation, stock based compensation, insurance, office costs, and professional services. General and administrative expense decreased for the three months endedSeptember 30, 2021 as compared to the prior year quarter due to lower employee compensation of$0.5 million , lower insurance costs of$0.1 million and various other lower costs. General and administrative expense includes stock based compensation of$0.5 million for the three months endedSeptember 30, 2021 as compared to$0.5 million in the comparable prior year quarter. General and administrative expenses also include amounts estimated for the Transaction Bonus Plan (the "LTIP"), which is a component of employee compensation. As described in Note 9, the LTIP provides a cash bonus pool to employees based upon meeting certain thresholds of sales of the Company's ownership interests. Expense recognized pursuant to the LTIP was$0.2 million and$0.4 million for the three month period endedSeptember 30, 2021 and 2020, respectively. The Company did not make any payments during the quarter. The remaining$2.1 million accrual is presented as a current liability atSeptember 30, 2021 and was paid inOctober 2021 in accordance with the terms of the LTIP. Other Income (loss), net. Other income (loss), net increased$21.4 million for the three months endedSeptember 30, 2021 compared to the prior year quarter. During the three months endedSeptember 30, 2021 , the Company recorded a gain of$32.3 million resulting from the acquisition ofFlashtalking by another entity. The Company also recorded an unrealized loss of$11.9 million related to the decline in the fair value of Bright Health common stock. During the three months endedSeptember 30, 2020 , the Company recorded an impairment of$0.4 million related to the ownership interests of T-REX and an unrealized loss from an observable price change of$0.5 million related to BritePool. The impairment was determined based on continued decline in the fair value of our ownership interest resulting from reduced expectations and extended exit timelines.
Interest income. Interest income increased in the three months ended
Equity Income (loss), net. Equity income (loss), net increased$0.5 million for the three months endedSeptember 30, 2021 compared to the prior year period. The components of equity income (loss), net for the three months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended September 30, 2021 2020 Variance (In thousands)
Capital gains on disposals of shareholdings, net
58$ 288 Unrealized dilution gains 1,950 2,471 (521 ) Loss on impairments - - -
Share of net loss of our associates (3,057)
(3,829 ) 772$ (761 ) $ (1,300 ) $ 539 18
-------------------------------------------------------------------------------- There were no material gains on sales of ownership interests, net, or impairments from ownership interests accounted for under the equity method during the three months endedSeptember 30, 2021 or 2020. The unrealized dilution gains for the three months endedSeptember 30, 2021 was the result of Trice Medical, who raised additional equity capital that diluted the Company's interest. The unrealized dilution gains for the three months endedSeptember 30, 2020 was the result ofAktana, Inc. , who raised additional equity capital during each of those three month periods that diluted the Company's interest. The change in our share of loss of our equity method companies for the three months endedSeptember 30, 2021 compared to the prior year period of$0.8 million was due to less companies in 2021 and a decrease in losses associated with our ownership interests. Nine Months EndedSeptember 30, 2021 versus the Nine Months EndedSeptember 30, 2020 Nine Months Ended September 30, 2021 2020 Variance (In thousands) General and administrative expense$ (6,018 ) $ (7,835 ) $ 1,817 Other income (loss), net 28,027 (7,045 ) 35,072 Interest income 197 209 (12 ) Equity income (loss), net 13,432 (15,591 ) 29,023$ 35,638 $ (30,262 ) $ 65,900 General and Administrative Expense. General and administrative expense decreased$1.8 million for the nine months endedSeptember 30, 2021 compared to the prior year period primarily due to decreases in employee compensation of$1.0 million , lower severance expenses of$1.1 million , lower office rental costs of$0.1 million , lower professional fees of$0.1 million and other various costs, which were partially offset by higher stock based compensation of$0.5 million . General and administrative expense also includes stock based compensation of$1.5 million for the nine months endedSeptember 30, 2021 as compared to$1.0 million in the comparable prior year. Stock based compensation expense for the nine months endedSeptember 30, 2021 includes the impact of a larger proportion of management's compensation, including a portion of existing accruals under the management incentive plan, that are paid in vested stock as well as Director compensation, which is paid entirely in vested stock.
Other income (losses), net. Other income (losses), net increased
During the nine months endedSeptember 30, 2021 , the Company recorded a gain of$32.3 million from the acquisition ofFlashtalking , a$1.9 million gain resulting from Velano Vascular and$0.9 million gain resulting from T-Rex, each of which were acquired by other entities. The Company also recorded unrealized losses, net, of$4.5 million related to the observable price change and additional price movements in Bright Health common stock resulting from the initial public offering and subsequent market activity. During the nine months endedSeptember 30, 2021 , the Company recorded an impairment of$2.5 million related to reduced expectations for certain Other ownership interests. During the nine months endedSeptember 30, 2020 , the Company recorded impairments of$8.1 million related to the ownership interests of T-REX, b8ta, Velano Vascular and others accounted for under the Other method. The impairments were determined based on declines in the fair value of our ownership interests resulting from reduced valuation expectations and extended exit timelines resulting from the more challenging mergers and acquisitions environment related to COVID-19 and the related uncertain economic impact. Partially offsetting these impairments, the nine months endedSeptember 30, 2020 also included a$1.5 million non-cash gain for our ownership interest inFlashtalking based upon an observable price change. Interest Income. Interest income decreased during the nine months endedSeptember 30, 2021 compared to the prior year period primarily attributable to lower average advances to ownership interests and lower average cash equivalent balances at lower rates. Equity Income (loss), net. Equity income (loss), net increased$29.0 million for the nine months endedSeptember 30, 2021 compared to the prior year period. The components of equity income (loss), net for the nine months endedSeptember 30, 2021 and 2020 were as follows: Nine Months Ended September 30, 2021 2020 Variance (In thousands) Gains on sales of ownership interests$ 17,134 $ 183 $ 16,951 Unrealized dilution gains 9,252 3,161 6,091 Loss on impairments - (9,200 ) 9,200 Share of loss of our equity method companies, net (12,954 ) (9,735 ) (3,219 )$ 13,432 $ (15,591 ) $ 29,023 During the nine months endedSeptember 30, 2021 ,Zipnosis, Inc. was acquired by another entity, Bright Health. The Company received$3.5 million in cash proceeds and$15.3 million in preferred equity in the acquiror in connection with this transaction. This ownership interest represented a security that did not have a readily determinable fair value. Due to the inherent uncertainty of determining the fair value of ownership interests that did not have a readily determinable fair value, this estimated value could have differed significantly from the value that would have been reported had a ready market for the security existed, and it is reasonably possible that the difference could be material. The Company recognized a$17.3 million gain on the sale, which is included in Equity income (loss), net in the Consolidated Statements of Operations. The fair value of the ownership interest received as a result of the acquisition was estimated based on evaluating several valuation methods available, including the value at which independent third parties recently invested, the valuation of comparable public companies, and the present value of our expected outcomes. Assumptions considered within these methods included determining which public companies are comparable, projecting forward revenues, selecting an appropriate valuation multiple, discounts to apply for the lack of marketability or lack of comparability, other factors and the relative weight to apply to each valuation method available. Due to the unobservable nature of some of these inputs, we determined the initial estimate to be a Level 3 fair value measurement. During the three months endedJune 30, 2021 , Bright Health completed an initial public offering that resulted in our ownership interest converting into approximately 1.3 million common shares. Accordingly, the Bright Health common shares represent an ownership interest with a readily determinable fair value (Level 1), which will subsequently be measured at fair value with unrealized gains (losses) being recognized as a component of Other income (loss), net. As a result of these changes, the Company recognized an additional$7.4 million unrealized gain during the six months endedJune 30, 2021 . The Company recognized an unrealized loss on Bright Health of$11.9 million during the three months endedSeptember 30, 2021 . 19 -------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2021 ,WebLinc, Inc. was acquired by another entity. The Company has received$3.6 million in cash proceeds to-date and may receive additional amounts over the next 15 months based on certain transactional performance activities, which could be partially offset by indemnifiable claims. The Company has recognized a$0.1 million loss on the sale during the nine months endedSeptember 30, 2021 , which is included in Equity income (loss), as certain contingencies were resolved during the three months endedSeptember 30, 2021 . To the extent additional amounts are collected as contingencies are resolved, those amounts will be recorded as gain on the sale and included within Equity income (loss). QuanticMind was acquired during the nine months endedSeptember 30, 2021 by another entity, however there were no resultant proceeds to the Company. There was no resulting gain or loss due to this equity method ownership interest being impaired during the prior year.
Capital gains on sales of equity securities for the nine months ended
The unrealized dilution gains for the nine months endedSeptember 30, 2021 were the result ofSyapse and Trice, who each raised additional equity capital that diluted the Company's interest in those entities. The unrealized dilution gains for the nine months endedSeptember 30, 2020 were the result ofAktana , meQuilibrium andSyapse . There were no impairments during the nine months endedSeptember 30, 2021 . The Company recorded impairments of$9.2 million during the nine months endedSeptember 30, 2020 related to the ownership interests of Sonobi,WebLinc, Inc. andQuanticMind, Inc. accounted for under the equity method. The impairments were determined based on declines in the fair value of our ownership interests resulting from reduced valuation expectations and extended exit timelines resulting from the more challenging mergers and acquisitions environment related to COVID-19 and the related uncertain economic impact.
The change in our share of loss from our equity-accounted companies for the nine months ended
Income Tax Benefit (Expense) Income tax benefit (expense) was$0.0 million for the three and nine months endedSeptember 30, 2021 and 2020. We have recorded a valuation allowance to reduce our net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the income tax provision that would have been recognized in the nine months endedSeptember 30, 2021 and 2020 was offset by changes in the valuation allowance.
Liquidity and capital resources
From
InJanuary 2018 , Safeguard announced that we will not deploy any capital into new opportunities and will focus on supporting our existing ownership interests and maximizing monetization opportunities to return value to shareholders. In that context, we have, are and will consider initiatives including, among others: the sale of individual ownership interests, the sale of certain ownership interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. In 2015, the Company's Board of Directors authorized us, from time to time and depending on market conditions, to repurchase up to$25.0 million of the Company's outstanding common stock. During the year endedDecember 31, 2020 and the nine months endedSeptember 30, 2021 , we did not repurchase any shares under this authorization. InMay 2021 , the Company's Board of Directors authorized a new$6.0 million share repurchase program using existing funds in accordance with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company purchased 236,159 shares under this program at an aggregate cost of$1.6 million , or$6.94 per share. DuringOctober 2021 , the Company completed a modified Dutch auction self-tender that resulted in the repurchase of 4.3 million common shares for an aggregate price of$38.7 million , or$9.00 per share. Our ability to generate liquidity from transactions involving our ownership interests has been adversely affected from time to time by adverse circumstances in theU.S. capital markets and other factors, including the impact of COVID-19. We may be requested to provide additional capital to our companies, which may cause us to face liquidity issues that will constrain our ability to execute our business strategy and limit our ability to provide financial support to all of our existing companies in the amounts that we desire. The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time. As we seek to provide additional funding to existing companies where we have an ownership interest or commit capital to other initiatives, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in our ownership interests, we may receive proceeds from such sales, which could increase our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly. Accordingly, the Company could also pursue other sources of capital in order to maintain its liquidity. The Company believes that its cash and cash equivalents atSeptember 30, 2021 will be sufficient to fund operations past one year from the issuance of these financial statements. 20
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