SAFEGUARD SCIENTIFICS INC - Quarter Report: 2021 September (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549      

______________________________________________________________________________________________

 

FORM 10-Q

(Mark One)

 

☑  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2021

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____________ to ___________

 

Commission File Number 1-5620      

______________________________________________________________________________________________

 

Safeguard Scientifics, Inc.

(Exact name of registrant as specified in its charter)      

______________________________________________________________________________________________

Pennsylvania
(State or other jurisdiction of	23-1609753
incorporation or organization)	(I.R.S. Employer ID No.)
150 N. Radnor Chester Road
Suite F-200
Radnor, PA	19087
(Address of principal executive offices)	(Zip Code)

(610) 293-0600

Registrant’s telephone number, including area code      

______________________________________________________________________________________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
common stock, par value $0.10	SFE	New York Stock Exchange

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☑    No  ☐

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

 

Yes  ☑    No  ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

   

Large accelerated filer  ☐	Accelerated filer  ☐		Smaller reporting company  ☑
Non-accelerated filer  ☐
			Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☑

 

Number of shares outstanding as of November 1, 2021

Common Stock 16,505,594

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SAFEGUARD SCIENTIFICS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

   

PART I – FINANCIAL INFORMATION
	Page
Item 1 – Financial Statements:
Consolidated Balance Sheets (unaudited) – September 30, 2021 and December 31, 2020	3
Consolidated Statements of Operations (unaudited) – Three and Nine Months Ended September 30, 2021 and 2020	4
Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2021 and 2020	5
Consolidated Statements of Changes in Equity (unaudited) – Three and Nine Months Ended September 30, 2021 and 2020	6
Notes to Consolidated Financial Statements (unaudited)	8
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	28
Item 4 – Controls and Procedures	28
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings	29
Item 1A – Risk Factors	29
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3 – Defaults Upon Senior Securities	29
Item 4 – Mine Safety Disclosures	29
Item 5 – Other Information	29
Item 6 – Exhibits	30
Signatures	31

 

 

 

		September 30, 2021				December 31, 2020
ASSETS
Current Assets:
Cash and cash equivalents		$	64,211			$	15,601
Restricted cash			25				—
Ownership interests			10,792				—
Prepaid expenses and other current assets			1,343				462
Total current assets			76,371				16,063
Property and equipment, net			1,622				1,790
Ownership interests and advances			25,492				50,398
Other assets			233				784
Total Assets		$	103,718			$	69,035
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable		$	77			$	56
Accrued compensation and benefits			2,817				2,677
Accrued expenses and other current liabilities			643				410
Lease liability - current			362				327
Total current liabilities			3,899				3,470
Lease liability - non-current			1,776				2,053
Other long-term liabilities			50				637
Total Liabilities			5,725				6,160
Commitments and contingencies (Note 9)
Equity:
Preferred stock, $0.10 par value; 1,000 shares authorized			—				—
Common stock, $0.10 par value; 83,333 shares authorized; 21,573 shares issued and outstanding at September 30, 2021 and December 31, 2020			2,157				2,157
Additional paid-in capital			806,550				807,582
Treasury stock, at cost; 777 and 688 shares at September 30, 2021 and December 31, 2020, respectively			(9,688	)			(10,200	)
Accumulated deficit			(701,001	)			(736,639	)
Accumulated other comprehensive loss			(25	)			(25	)
Total Equity			97,993				62,875
Total Liabilities and Equity		$	103,718			$	69,035

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2021				2020				2021				2020
General and administrative expense		$	1,564			$	2,275			$	6,018			$	7,835
Operating loss			(1,564	)			(2,275	)			(6,018	)			(7,835	)
Other income (loss), net			20,588				(820	)			28,027				(7,045	)
Interest income			70				52				197				209
Equity income (loss), net			(761	)			(1,300	)			13,432				(15,591	)
Net income (loss) before income taxes			18,333				(4,343	)			35,638				(30,262	)
Income tax benefit (expense)			—				—				—				—
Net income (loss)		$	18,333			$	(4,343	)		$	35,638			$	(30,262	)
Net income (loss) per share:
Basic		$	0.88			$	(0.21	)		$	1.71			$	(1.46	)
Diluted		$	0.88			$	(0.21	)		$	1.71			$	(1.46	)
Weighted average shares used in computing income (loss) per share:
Basic			20,786				20,786				20,847				20,731
Diluted			20,786				20,786				20,847				20,731

 

		Nine Months Ended September 30,
		2021				2020
Cash Flows from Operating Activities:
Net cash used in operating activities		$	(5,444	)		$	(7,025	)
Cash Flows from Investing Activities:
Proceeds from sales of ownership interests			58,559				7,587
Acquisitions of ownership interests			—				(7,510	)
Advances and loans to ownership interests			(2,718	)			(1,638	)
Net cash provided by (used in) investing activities			55,841				(1,561	)
Cash Flows from Financing Activities:
Repurchases of Company common stock			(1,639	)			—
Tax withholdings related to equity-based awards			(123	)			(30	)
Net cash used in financing activities			(1,762	)			(30	)
Net change in cash, cash equivalents and restricted cash			48,635				(8,616	)
Cash, cash equivalents and restricted cash at beginning of period			15,601				25,053
Cash, cash equivalents and restricted cash at end of period		$	64,236			$	16,437

 

						Accumulated				Accumulated Other				Common Stock								Additional Paid-in				Treasury Stock
		Total				Deficit				Comprehensive Loss				Shares				Amount				Capital				Shares				Amount
Balance - December 31, 2020		$	62,875			$	(736,639	)		$	(25	)			21,573			$	2,157			$	807,582				688			$	(10,200	)
Net income			17,625				17,625				—				—				—				—				—				—
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net			370				—				—				—				—				(593	)			(58	)			963
Stock-based compensation expense			122				—				—				—				—				122				—				—
Balance - March 31, 2021		$	80,992			$	(719,014	)		$	(25	)			21,573			$	2,157			$	807,111				630			$	(9,237	)
Net loss			(320	)			(320	)			—				—				—				—				—				—
Repurchases of common stock			(1,588	)			—				—				—				—				—				229				(1,588	)
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net			137				—				—				—				—				(839	)			(73	)			976
Stock-based compensation expense			175				—				—				—				—				175				—				—
Balance - June 30, 2021		$	79,396			$	(719,334	)		$	(25	)			21,573			$	2,157			$	806,447				786			$	(9,849	)
Net income			18,333				18,333				—				—				—				—				—				—
Repurchases of common stock			(51	)			—				—				—				—				—				7				(51	)
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net			114				—				—				—				—				(98	)			(16	)			212
Stock-based compensation expense			201				—				—				—				—				201				—				—
Balance - September 30, 2021		$	97,993			$	(701,001	)		$	(25	)			21,573			$	2,157			$	806,550				777			$	(9,688	)

						Accumulated				Accumulated Other				Common Stock								Additional Paid-in				Treasury Stock
		Total				Deficit				Comprehensive Loss				Shares				Amount				Capital				Shares				Amount
Balance - December 31, 2019		$	101,741			$	(697,223	)		$	(25	)			21,573			$	2,157			$	810,856				930			$	(14,024	)
Net loss			(16,008	)			(16,008	)			—				—				—				—				—				—
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net			72				—				—				—				—				(32	)			(6	)			104
Stock-based compensation expense			3				—				—				—				—				3				—				—
Balance - March 31, 2020		$	85,808			$	(713,231	)		$	(25	)			21,573			$	2,157			$	810,827				924			$	(13,920	)
Net loss			(9,911	)			(9,911	)			—				—				—				—				—				—
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net			72				—				—				—				—				(1,718	)			(114	)			1,790
Stock-based compensation expense			146				—				—				—				—				146				—				—
Change in accounting at ownership interests			(1,801	)			(1,801	)			—				—				—				—				—				—
Balance - June 30, 2020		$	74,314			$	(724,943	)		$	(25	)			21,573			$	2,157			$	809,255				810			$	(12,130	)
Net loss			(4,343	)			(4,343	)			—				—				—				—				—				—
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net			73				—				—				—				—				(251	)			(21	)			324
Stock-based compensation expense			185				—				—				—				—				185				—				—
Balance - September 30, 2020		$	70,229			$	(729,286	)		$	(25	)			21,573			$	2,157			$	809,189				789			$	(11,806	)

 

 

 

 

 

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Concerning Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard 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.

 

 

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.

 

In January 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 one operating segment based upon the similar nature of our technology-driven companies, the functional alignment of the organizational structure, and the reports that are regularly reviewed by the chief operating decision maker for the purpose of assessing performance and allocating 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 listing of certain of our ownership interests as of  September 30, 2021 and 2020, respectively. 

 

		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

 

 

Three months ended September 30, 2021 versus the three months ended September 30, 2020

 

		Three Months Ended September 30,
		2021				2020				Variance
		(In thousands)
General and administrative expense		$	(1,564	)		$	(2,275	)		$	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 ended September 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 ended September 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 ended September 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 at September 30, 2021 and was paid in October 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 ended September 30, 2021 compared to the prior year quarter.  During the three months ended September 30, 2021, the Company recorded a gain of $32.3 million resulting from the acquisition of Flashtalking 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 ended September 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 during the three months ended September 30, 2021 as compared to the prior year period primarily attributable to a higher average balance of advances to ownership interests.

 

Equity Income (loss), net. Equity income (loss), net increased $0.5 million for the three months ended September 30, 2021 compared to the prior year period. The components of equity income (loss), net for the three months ended September 30, 2021 and 2020 were as follows:

 

		Three Months Ended September 30,
		2021				2020				Variance
		(In thousands)
Gains on sales of ownership interests, net		$	346			$	58			$	288
Unrealized dilution gains			1,950				2,471				(521	)
Loss on impairments			—				—				—
Share of loss of our equity method companies, net			(3,057	)			(3,829	)			772
		$	(761	)		$	(1,300	)		$	539

 

 

 

 

 

  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 ended September 30, 2021 or 2020.  The unrealized dilution gains for the three months ended September 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 ended September 30, 2020 was the result of Aktana, 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 ended September 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 Ended September 30, 2021 versus the Nine Months Ended September 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 ended September 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 ended September 30, 2021 as compared to $1.0 million in the comparable prior year.  Stock based compensation expense for the nine months ended September 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 (loss), net. Other income (loss), net increased $35.1 million for the nine months ended September 30, 2021 compared to the prior year period.  During the nine months ended September 30, 2021, the Company recorded a gain of $32.3 million from the acquisition of Flashtalking, 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 ended September 30, 2021, the Company recorded an impairment of $2.5 million related to reduced expectations for certain Other ownership interests.  During the nine months ended September 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 ended September 30, 2020 also included a $1.5 million non-cash gain for our ownership interest in Flashtalking based upon an observable price change.

 

Interest Income. Interest income decreased during the nine months ended September 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 ended September 30, 2021 compared to the prior year period. The components of equity income (loss), net for the nine months ended September 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 ended September 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 ended June 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 ended June 30, 2021. The Company recognized an unrealized loss on Bright Health of $11.9 million during the three months ended September 30, 2021.

 

 

During the nine months ended September 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 ended September 30, 2021, which is included in Equity income (loss), as certain contingencies were resolved during the three months ended September 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 ended September 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.

 

The gains on sales of ownership interests for the nine months ended September 30, 2020 is comprised of the settlement of various escrow arrangements or other minor contingencies related to prior transactions. 

 

The unrealized dilution gains for the nine months ended September 30, 2021 were the result of  Syapse 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 ended September 30, 2020 were the result of Aktana, meQuilibrium and Syapse.

 

There were no impairments during the nine months ended September 30, 2021.  The Company recorded impairments of $9.2 million during the nine months ended September 30, 2020 related to the ownership interests of Sonobi, WebLinc, Inc. and QuanticMind, 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 of our equity method companies for the nine months ended September 30, 2021 compared to the prior year period of $3.2 million was due to an increase in losses associated with our ownership interests. 

 

Income Tax Benefit (Expense)

 

Income tax benefit (expense) was $0.0 million for the three and nine months ended September 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 ended September 30, 2021 and 2020 was offset by changes in the valuation allowance.

 

Liquidity and Capital Resources

 

As of September 30, 2021, we had $64.2 million of cash and cash equivalents.

 

       In January 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 ended December 31, 2020 and the nine months ended September 30, 2021, we did not repurchase any shares under this authorization.  In May 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.  During October 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 the U.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 at September 30, 2021 will be sufficient to fund operations past one year from the issuance of these financial statements.

 

 

Analysis of Consolidated Cash Flows

 

Cash flow activity was as follows:

 

		Nine Months Ended September 30,
		2021				2020				Variance
		(In thousands)
Net cash used in operating activities		$	(5,444	)		$	(7,025	)		$	1,581
Net cash (used in) provided by investing activities			55,841				(1,561	)			57,402
Net cash used in financing activities			(1,762	)			(30	)			(1,732	)
		$	48,635			$	(8,616	)		$	57,251

 

Net Cash Used In Operating Activities

 

Net cash used in operating activities decreased by $1.6 million for the nine months ended September 30, 2021 compared to the prior year period. The activity during the nine months ended September 30, 2021 was primarily the result of net income for the period, which was offset by various non-cash adjustments such as $13.4 million of equity income.  The activity during the nine months ended September 30, 2020 was primarily the result of various non-cash adjustments to net loss, including $15.6 million of equity loss and $8.1 million of impairments to Other method ownership interests, which were partially offset by non-cash gains of $1.5 million for an observable price change.  

 

Net Cash (Used in) Provided by Investing Activities

 

Net cash (used in) provided by investing activities increased by $57.4 million for the nine months ended September 30, 2021 compared to the prior year period. The increase primarily related to proceeds received primarily from the Flashtalking, WebLinc, Zipnosis, T-REX and Velano transactions that aggregated to $58.6 million as well as lower advances and acquisitions of ownership interests in 2021 as compared to 2020.  

 

Net Cash Used In Financing Activities

 

Net cash used in financing activities increased by $1.7 million for the nine months ended September 30, 2021 compared to the prior year.  The increase was primarily the result of $1.6 million in repurchases of our common stock.

 

Contractual Cash Obligations and Other Commercial Commitments

 

The following table summarizes our contractual obligations and other commercial commitments as of September 30, 2021, by period due or expiration of the commitment. 

 

		Payments Due by Period
		Total				2021 (remainder)				2022 and 2023				2024 and 2025				After 2025
		(In millions)
Contractual Cash Obligations:
Operating leases (a)		$	2.8				0.2				1.2				1.2				0.2
Total Contractual Cash Obligations (b)		$	2.8			$	0.2			$	1.2			$	1.2			$	0.2

 

(a)

In 2015, we entered into an agreement for the lease of our former principal executive offices which expires in April 2026. In March 2019, we entered into a sublease for these offices which is expected to result in future aggregate sublease receipts of $2.6 million through April 2026.

(b)

The maximum aggregate exposure under employment and severance agreements for remaining employees was approximately $0.6 million at September 30, 2021 (not reflected in the table above).

 

 

Factors That May Affect Future Results

 

You should carefully consider the information set forth below. The following risk factors describe situations in which our business, financial condition and/or results of operations could be materially harmed, and the value of our securities may be adversely affected. You should also refer to other information included or incorporated by reference in this report. 

 

The effects of the COVID-19 pandemic may adversely affect the businesses, financial conditions and operating results of the companies in which we have an ownership interest, as well as our ability to monetize such interests, and it may also cause us to increase the amount of additional capital we will need to provide to such companies.

 

To varying degrees, the economic and market conditions caused by the COVID-19 pandemic have, and continue to, negatively impact the companies in which we have ownership interests, including, without limitation, their operations, supply chains, sales infrastructures and the demand for their products and services.  This is negatively affecting their businesses, financial conditions and operating results.  As a result, we may be required to provide additional capital to certain 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 COVID-19 pandemic is also impacting the mergers and acquisitions market for certain companies, which in some cases has resulted in lower valuation expectations and extended exit timelines for such companies. This, in turn, could negatively affect the amount and timing of the monetization opportunities for such companies and our ability to return value to shareholders.  

 

The intended monetization of our company interests and the return of value to shareholders are subject to factors beyond our control.

 

In January 2018, we announced that we will not deploy any capital into new companies.  We will instead focus on supporting, and maximizing monetization opportunities for, our existing company interests to return value to shareholders.  However, this strategic plan may require providing additional capital and operational support to such existing companies and we may not be able to sell our company interests during any specific time frame or otherwise on desirable terms, if at all, and there can be no assurance as to how long this process will take or the results that this process will yield.  There can be no assurance as to whether we will realize the value of escrowed proceeds, holdbacks or other contingent consideration, if any, associated with the sale of our company interests.  Additionally, there can be no assurance that we will be able to satisfy our liabilities during this process.  Further, the method, timing and amount of any return of value resulting from the monetization of existing company interests will be at the discretion of our Board of Directors and will depend on market and business conditions and our overall liabilities, capital structure and liquidity position.

 

A disposition of one or more of our company interests may occur at a time that will yield less value than if we held such interests for a longer period of time.

 

Our companies are at various stages in their lifecycles. The value of our interests in our companies at any point in time is highly dependent on the progress and success such companies have made at such time with respect to the development and marketing of their products and services and that value may fluctuate significantly. In order to effect our strategy of monetizing our interests in our companies, we may dispose of such interests at a time prior to the applicable company reaching its maximum value. Doing so will result in a return of value to shareholders that is less than that which may have been returned if we retained our interests in such company for a longer period of time

 

 

Our principal business strategy depends upon our ability to make good decisions regarding the deployment of capital into, and subsequent disposition of, our existing company interests and, ultimately, the performance of such companies, which is uncertain.

 

If we make poor decisions regarding the deployment of capital into, and subsequent disposition of, our existing companies, our business strategy will not succeed. If such companies do not succeed, the value of our assets could be significantly reduced and require substantial impairments or write-offs and our results of operations and the price of our common stock would be adversely affected. The risks relating to our companies include:

 

•

most of our companies have a history of operating losses and/or limited operating history;

 

•

the intense competition affecting the products and services our companies offer could adversely affect their businesses, financial condition, results of operations and prospects for growth;

 

•

the inability to adapt to changing marketplaces;

 

•

the inability to manage growth;

 

•

the need for additional capital to fund their operations, which we may not be able to fund or which may not be available from third parties on acceptable terms, if at all;

 

•

the inability to protect their proprietary rights and/or infringing on the proprietary rights of others;

 

•

that our companies could face legal liabilities from claims made against them based upon their operations, products or work;

 

•

the impact of economic downturns on their operations, results and growth prospects;

 

•

the inability to attract and retain qualified personnel;

 

•

the existence of government regulations and legal uncertainties may place financial burdens on the businesses of our companies; and

 

•

the inability to plan for and manage catastrophic events.

 

These and other risks are discussed in detail under the caption “Risks Related to Our Companies” below.

 

As we execute against our strategy, a significant amount of our deployed capital may be concentrated in companies operating in the same or similar industries, limiting our diversification.

 

Our capital deployments could be concentrated in several companies that operate in the same or similar industries. This may cause us to be more susceptible to any single economic, regulatory or other occurrence affecting those particular industries than we would otherwise be if our companies operated in more diversified industries.

 

Our business model does not rely upon, or plan for, the receipt of operating cash flows from our companies. Our companies do not provide us with cash flow from their operations. We rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations.

 

We need capital to fund the capital needs of our existing companies. We also need cash to finance our corporate overhead and meet our existing funding commitments. As a result, we have substantial cash requirements. Our companies do not provide us with cash flow from their operations. To the extent our companies generate any cash from operations, they generally retain the funds to develop their own businesses. As a result, we must rely on cash on hand, company liquidity events and new capital raising activities to meet our cash needs. If we are unable to find ways of monetizing our holdings of company interests or raising additional capital on attractive terms, we may face liquidity issues that will require us to constrain our ability to execute our business strategy and limit our ability to provide financial support to our existing companies.

 

 

We may be unable to obtain maximum value for our holdings or to sell our holdings on a timely basis.

 

We hold significant positions in our companies. If we were to divest all or part of our holdings in a company, we may have to sell our interests at a relative discount to intrinsic value. For companies with publicly traded stock, we may be unable to sell our holdings at then-quoted market prices. The trading volume and public float in the common stock of a publicly traded company in which we have an interest may be small relative to our holdings. As a result, any significant open-market divestiture by us of our holdings in such a company, if possible at all, would likely have a material adverse effect on the market price of its common stock and on our proceeds from such a divestiture. Additionally, we may not be able to take our companies public as a means of monetizing our position or creating shareholder value. Registration and other requirements under applicable securities laws and contractual restrictions also may adversely affect our ability to dispose of our company holdings on a timely basis.

 

Our success is dependent on our senior management.

 

Our success is dependent on our senior management team’s ability to execute our strategy. In connection with our new strategy announced in 2018, we made a series of management changes intended to streamline our organizational structure and reduce our operating costs and since then we have made, and may make, further management changes from time to time.  A loss of one or more of the remaining members of our senior management team without adequate replacement could have a material adverse effect on us.

 

Our business strategy may not be successful if valuations in the market sectors in which our companies participate decline.

 

Our strategy involves creating value for our shareholders by helping our companies build value and, if appropriate, accessing the public and private capital markets. Therefore, our success is dependent on the value of our companies as determined by the public and private capital markets. Many factors, including reduced market interest, may cause the market value of our companies to decline. If valuations in the market sectors in which our companies participate decline, their access to the public and private capital markets on terms acceptable to them may be limited.

 

Our companies could make business decisions that are not in our best interests or with which we do not agree, which could impair the value of our holdings.

 

Although we currently own a significant, influential interest in some of our companies, we do not maintain a controlling interest in any of our companies. Acquisitions of interests in companies in which we share or have no control, and the dilution of our interests in or a further reduction of our control of companies, will involve additional risks that could cause the performance of our interests and our operating results to suffer, including:

 

•

the management teams or other equity or debt holders of our companies having economic or business interests or objectives that are different from ours; and

 

•

the companies not taking our advice with respect to the financial or operating issues they may encounter.

 

Our inability to control our companies also could prevent us from assisting them, financially or otherwise, or could prevent us from liquidating our interests in them at a time or at a price that is favorable to us. Additionally, our companies may not act in ways that are consistent with our business strategy. These factors could hamper our ability to maximize returns on our interests and cause us to incur losses on our interests in these companies.

 

We may have to buy, sell or retain assets when we would otherwise not wish to do so in order to avoid registration under the Investment Company Act.

 

The Investment Company Act of 1940 regulates companies which are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. Under the Investment Company Act, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. We refer to this test as the “40% Test.” Securities issued by companies other than consolidated companies are generally considered “investment securities” for purposes of the Investment Company Act, unless other circumstances exist which actively involve the company holding such interests in the management of the underlying company. We are a company that partners with growth-stage companies to build value; we are not engaged primarily in the business of investing, reinvesting or trading in securities. We are in compliance with the 40% Test. Consequently, we do not believe that we are an investment company under the Investment Company Act.

 

We monitor our compliance with the 40% Test and seek to conduct our business activities to comply with this test. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively helping our companies in their efforts to build value. In order to continue to comply with the 40% Test, we may need to take various actions which we would otherwise not pursue. For example, we may be limited in the manner or timing in which we sell our interests in a company. Our ownership levels also may be affected if our companies are acquired by third parties or if our companies issue stock which dilutes our ownership interest. The actions we may need to take to address these issues while maintaining compliance with the 40% Test could adversely affect our ability to create and realize value at our companies.

 

The COVID-19 pandemic may adversely affect parties with obligations to us, including the subtenant of our previous office space.

 

In March 2019, we entered into a sublease of our prior corporate headquarters office space beginning in June 2019. The term of the sublease is through April 2026, the same as our underlying lease. Fixed sublease payments to us are escalating over the term of the sublease.  We remain obligated under the original lease for such office space and, in the event the subtenant of such office space fails to satisfy its obligations under the sublease, we would be required to satisfy our obligations directly to the landlord under such original lease.

 

 

Risks Related to Our Companies

 

Most of our companies have a history of operating losses and/or limited operating history and may never be profitable.

 

Most of our companies have a history of operating losses and/or limited operating history, have significant historical losses and may never be profitable. Many have incurred substantial costs to develop and market their products, have incurred net losses and cannot fund their cash needs from operations. We expect that the operating expenses of certain of our companies will increase substantially in the foreseeable future as they continue to develop products and services, increase sales and marketing efforts, and expand operations.

 

Our companies face intense competition, which could adversely affect their business, financial condition, results of operations and prospects for growth.

 

There is intense competition in the technology marketplaces, and we expect competition to intensify in the future. Our business, financial condition, and results of operations will be materially adversely affected if our companies are not able to compete successfully. Many of the present and potential competitors may have greater financial, technical, marketing and other resources than those of our companies. This may place our companies at a disadvantage in responding to the offerings of their competitors, technological changes or changes in client requirements. Also, our companies may be at a competitive disadvantage because many of their competitors have greater name recognition, more extensive client bases and a broader range of product offerings. In addition, our companies may compete against one another.

 

The success or failure of many of our companies is dependent upon the ultimate effectiveness of newly-created technologies, medical devices, financial services, healthcare diagnostics, etc.

 

Our companies’ business strategies are often highly dependent upon the successful launch and commercialization of an innovative technology or device, including, without limitation, technologies or devices used in healthcare, financial services or digital media.  Despite all of our efforts to understand the research and development underlying the innovation or creation of such technologies and devices before we deploy capital into a company, sometimes the performance of the technology or device does not match our expectations or those of such company. In those situations, it is likely that we will incur a partial or total loss of the capital which we deployed in such company.

 

Our companies may fail if they do not adapt to changing marketplaces.

 

If our companies fail to adapt to changes in technology and customer and supplier demands, they may not become or remain profitable. There is no assurance that the products and services of our companies will achieve or maintain market penetration or commercial success, or that the businesses of our companies will be successful.

 

The technology marketplaces 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.

 

Our future success will depend on our companies’ ability to adapt to these evolving marketplaces. They may not be able to adequately or economically adapt their products and services, develop new products and services or establish and maintain effective distribution channels for their products and services. If our companies are unable to offer competitive products and services or maintain effective distribution channels, they will sell fewer products and services and forego potential revenue, possibly causing them to lose money. In addition, we and our companies may not be able to respond to the marketplace changes in an economically efficient manner, and our companies may become or remain unprofitable.

 

 

Our companies may grow rapidly, including through acquisitions of other businesses, and may be unable to manage their growth.

 

We expect some of our companies to grow rapidly, including through acquisitions of other businesses. Such growth often places considerable operational, managerial, integration and financial strain on a business. To successfully manage such growth, our companies must, among other things:

 

•

improve, upgrade and expand their business infrastructures;

 

•

successfully integrate and operate any newly acquired businesses;

 

•

scale up production operations;

 

•

develop appropriate financial reporting controls;

 

•

attract and retain qualified personnel; and

 

•

maintain appropriate levels of liquidity.

 

If our companies are unable to manage their growth successfully, their ability to respond effectively to competition and to achieve or maintain profitability will be adversely affected. Further, a material weakness in any of our companies’ internal controls over their financial reporting could result in material misstatements in our Consolidated Financial Statements. These misstatements could result in a restatement of our Consolidated Financial Statements, cause us to fail to meet our reporting obligations and/or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

Based on our business model, some or all of our companies will need to raise additional capital to fund their operations at any given time. We may not be able to, or decline to, fund some or all of such amounts and such amounts may not be available from third parties on acceptable terms, if at all. Further, if our companies do raise additional capital from third parties, either debt or equity, such capital may rank senior to, or dilute, our interests in such companies.

 

We cannot be certain that our companies will be able to obtain additional financing on favorable terms when needed, if at all. We may not be able to, or decline to, provide our companies with sufficient capital resources to enable them to reach a cash-flow positive position or a sale of the company. General economic disruptions and downturns may also negatively affect the ability of some of our companies to fund their operations from other stockholders and capital sources. We also may fail to accurately project the capital needs of companies. If our companies need capital, but are not able to raise capital from us or other outside sources, they may need to cease or scale back operations. In such event, our interest in any such company will become less valuable. If our companies raise additional capital from third parties, either debt or equity, such capital may be dilutive, making our interests less valuable or if such capital ranks senior to the capital we have deployed, such capital may entitle its holders to receive returns of capital before we are entitled to receive any return of our deployed capital. Also, in the event of any insolvency, liquidation, dissolution, reorganization or bankruptcy of one or more our companies, holders of such company’s instruments that rank senior to our deployed capital will typically be entitled to receive payment in full before we receive any return of our deployed capital. After returning such senior capital, such company may not have any remaining assets to use for returning capital to us, causing us to lose some or all of our deployed capital in such company.

 

Economic disruptions and downturns may negatively affect our companies’ plans and their results of operations.

 

Many of our companies are largely dependent upon outside sources of capital to fund their operations. Disruptions in the availability of capital from such sources will negatively affect the ability of such companies to pursue their business models and will force such companies to revise their growth and development plans accordingly. Any such changes will, in turn, negatively affect our ability to realize the value of our capital deployments in such companies.

 

In addition, downturns in the economy as well as possible governmental responses to such downturns and/or to specific situations in the economy could affect the business prospects of certain of our companies, including, but not limited to, in the following ways: weaknesses in the financial services industries; reduced business and/or consumer spending; and/or systemic changes in the ways the healthcare system operates in the United States.

 

Some of our companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.

 

Our companies assert various forms of intellectual property protection. Intellectual property may constitute an important part of our companies’ assets and competitive strengths. Federal law, most typically copyright, patent, trademark and trade secret laws, generally protects intellectual property rights. Although we expect that our companies will take reasonable efforts to protect the rights to their intellectual property, third parties may develop similar intellectual property independently. Moreover, the complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of our companies and the demands of quick delivery of products and services to market, create a risk that our companies’ efforts to prevent misappropriation of their technology will prove inadequate.

 

 

Some of our companies also license intellectual property from third parties and it is possible that they could become subject to infringement actions based upon their use of the intellectual property licensed from those third parties. Our companies generally obtain representations as to the origin and ownership of such licensed intellectual property. However, this may not adequately protect them. Any claims against our companies’ proprietary rights, with or without merit, could subject the companies to costly litigation and divert their technical and management personnel from other business concerns. If our companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our companies will increase and their profits, if any, will decrease.

 

Third parties have and may assert infringement or other intellectual property claims against our companies based on their patents or other intellectual property claims. Even though we believe our companies’ products do not infringe any third party’s patents, they may have to pay substantial damages, possibly including treble damages, if it is ultimately determined that they do. They may have to obtain a license to sell their products if it is determined that their products infringe on another person’s intellectual property. Our companies might be prohibited from selling their products before they obtain a license, which, if available at all, may require them to pay substantial royalties. Even if infringement claims against our companies are without merit, defending these types of lawsuits takes significant time, is expensive and may divert management attention from other business concerns.

 

Certain of our companies could face legal liabilities from claims made against their operations, products or work.

 

Because the manufacture and sale of certain company products entail an inherent risk of product liability, certain of our companies maintain product liability insurance. Although none of our current companies have experienced any material losses in this regard, there can be no assurance that they will be able to maintain or acquire adequate product liability insurance in the future and any product liability claim could have a material adverse effect on a company’s financial stability, revenues and results of operations. In addition, many of the engagements of our companies involve projects that are critical to the operation of their clients’ businesses. If our companies fail to meet their contractual obligations, they could be subject to legal liability, which could adversely affect their business, operating results and financial condition. Our companies’ contracts typically include provisions designed to limit their exposure to legal claims relating to their services and products. However, these provisions may not protect our companies or may not be enforceable. Also, some of our companies depend on their relationships with their clients and their reputation for high-quality services and integrity to retain and attract clients. As a result, claims made against our companies’ work may damage their reputation, which in turn could impact their ability to compete for new work and negatively impact their revenue and profitability.

 

Our companies’ success depends on their ability to attract and retain qualified personnel.

 

Our companies depend upon their ability to attract and retain senior management and key personnel, including trained technical and marketing personnel. Our companies also will need to continue to hire additional personnel as they expand. Although our current companies have not been the subject of a work stoppage, any future work stoppage could have a material adverse effect on their respective operations. A shortage in the availability of the requisite qualified personnel or work stoppage would limit the ability of our companies to grow, to increase sales of their existing products and services, and to launch new products and services.

 

Government regulations and legal uncertainties may place financial burdens on the businesses of our companies.

 

Manufacturers of medical diagnostic devices and operators of laboratory facilities are subject to strict federal and state regulation regarding validation and the quality of manufacturing and laboratory facilities. Failure to comply with these quality regulation systems requirements could result in civil or criminal penalties or enforcement proceedings, including the recall of a product or a “cease distribution” order. The enactment of any additional laws or regulations that affect healthcare insurance policy and reimbursement (including Medicare reimbursement) could negatively affect some of our companies. If Medicare or private payers change the rates at which our companies or their customers are reimbursed by insurance providers for their products, such changes could adversely impact our companies.

 

Some of our companies may be subject to significant environmental, health, data security and safety regulation.

 

Some of our companies may be subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well as to the safety and health of manufacturing and laboratory employees. In addition, some of our companies are subject to federal, state and local financial securities and data security regulations, including, without limitation, the Health Insurance Portability and Accountability Act of 1996, as amended, the California Consumer Privacy Act and the European General Data Protection Regulation, which impose varying degrees of additional obligations, costs and risks upon such companies, including the imposition of significant penalties in the event of any non-compliance. Further, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety. Compliance with such regulations could increase operating costs at certain of our companies, and the failure to comply could negatively affect the operations and results of some of our companies.

 

Catastrophic events may disrupt our companies’ businesses.

 

Some of our companies are highly automated businesses and rely on their network infrastructure, various software applications and many internal technology systems and data networks for their customer support, development, sales and marketing and accounting and finance functions. Further, some of our companies provide services to their customers from data center facilities in multiple locations. Some of these data centers are operated by third parties, and the companies have limited control over those facilities. A disruption or failure of these systems or data centers in the event of a natural disaster, telecommunications failure, power outage, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, delays in product development, breaches of data security and loss of critical data. Such an event could also prevent the companies from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of their SaaS offerings. While certain of our companies have developed certain disaster recovery plans and maintain backup systems to reduce the potentially adverse effect of such events, a catastrophic event that resulted in the destruction or disruption of any of their data centers or their critical business or information technology systems could severely affect their ability to conduct normal business operations and, as a result, their business, operating results and financial condition could be adversely affected.

 

 

We cannot provide assurance that our companies’ disaster recovery plans will address all of the issues they may encounter in the event of a disaster or other unanticipated issue, and their business interruption insurance may not adequately compensate them for losses that may occur from any of the foregoing. In the event that a natural disaster, terrorist attack or other catastrophic event were to destroy any part of their facilities or interrupt their operations for any extended period of time, or if harsh weather or health conditions prevent them from delivering products in a timely manner, their business, financial condition and operating results could be adversely affected.

 

 

Risks Related to an Investment in our Securities

 

Fluctuations in the price of the common stock of our publicly traded holdings may affect the price of our common stock.

 

From time to time, we may hold equity interests in companies that are publicly traded. Fluctuations in the market prices of the common stock of publicly traded holdings may affect the price of our common stock. Historically, the market prices of our publicly traded holdings have been highly volatile and subject to fluctuations unrelated or disproportionate to operating performance.

 

The continuing costs and burdens associated with being a public company will constitute a much larger percentage of our expenses and we may in the future delist our common stock with the New York Stock Exchange and seek to deregister our common stock with the SEC.

 

We will remain a public company and will continue to be subject to the listing standards of the New York Stock Exchange and SEC rules and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002.  The costs and burdens of being a public company will be a significant and continually increasing portion of our expenses if we are able to monetize our company interests.  As part of such monetization efforts, we will likely in the future, once the majority of our company interests have been monetized, delist our common stock from the New York Stock Exchange and seek to deregister our common stock with the SEC.  However, there can be no assurance as to the timing of such transactions, or whether such transactions will be completed at all, and we will continue to face the costs and burdens of being a public company until such time as our common stock is delisted with the New York Stock Exchange and deregistered with the SEC.

 

Economic disruptions and downturns may have negative repercussions for us.

 

Events in the United States and international capital markets, debt markets and economies may negatively impact our stock price and our ability to pursue certain tactical and strategic initiatives, such as accessing additional public or private equity or debt financing for us or for our companies and selling our interests in companies on terms acceptable to us and in time frames consistent with our expectations.

 

We cannot provide assurance that material weaknesses in our internal control over financial reporting will not be identified in the future.

 

We cannot assure you that material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in a material weakness, or could result in material misstatements in our Consolidated Financial Statements. These misstatements could result in a restatement of our Consolidated Financial Statements, cause us to fail to meet our reporting obligations and/or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes to the information we previously disclosed under Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021.

 

Item 4.  Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2021 are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

(b) Change in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.  

 

Item 1A. Risk Factors

 

Except as included under the heading “Factors That May Affect Future Results” above, there have been no material changes in our risk factors from the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information about purchases of equity securities by the Company and affiliated purchasers of the Company, during the quarter ended September 30, 2021, which equity securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"):

 

Period		Total Number of Shares Purchased (a)				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plan (b)				Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan (b)
July 1, 2021 - July 31, 2021			2,375			$	7.95				—			$	19,048,315
August 1, 2021 - August 31, 2021			6,873			$	7.47				6,873			$	18,996,988
September 1, 2021 - September 30, 2021			513			$	8.41				—			$	18,996,988
Total			9,761			$	7.64				6,873

 

(a)

During the third quarter of 2021, the Company repurchased an aggregate of 3 thousand shares of its common stock initially issued as restricted stock awards to employees and subsequently withheld from employees to satisfy the statutory withholding tax liability upon the vesting of such restricted stock awards.

 

(b)

In July 2015, our Board of Directors authorized the Company to repurchase shares of its outstanding common stock with an aggregate value of up to $25.0 million. These repurchases may be made in open market or privately negotiated transactions, including under plans complying with Rule 10b5-1 of the Exchange Act, based on market conditions, stock price, and other factors. In May 2021, our 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 share repurchase programs does not obligate the Company to acquire any specific number of shares.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6.  Exhibits

 

(a) Exhibits.

 

The following is a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this Report. For exhibits that previously have been filed, the Registrant incorporates those exhibits herein by reference. Documents which are incorporated by reference to filings by parties other than the Registrant are identified in a footnote to this table.

 

Exhibit Number			Description
31.1 †			Certification of Eric C. Salzman pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.
31.2 †			Certification of Mark A. Herndon pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.
32.1 ‡			Certification of Eric C. Salzman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 ‡			Certification of Mark A. Herndon pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101			The following materials from Safeguard Scientifics, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language); (i) Consolidated Balance Sheets (unaudited); (ii) Consolidated Statements of Operations (unaudited); (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited); (iv) Condensed Consolidated Statements of Cash Flows (unaudited); (v) Consolidated Statement of Changes in Equity (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited).
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

†	Filed herewith

‡	Furnished herewith
*	This exhibit relates to management contracts or compensatory plans, contracts or arrangement in which directors and/or executive officers of the Registrant may participate.  Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   

   

		SAFEGUARD SCIENTIFICS, INC.
Date:	November 4, 2021	/s/    Eric C. Salzman
		Eric C. Salzman
		Chief Executive Officer
Date:	November 4, 2021	/s/    Mark A. Herndon
		Mark A. Herndon
		Senior Vice President and Chief Financial Officer