UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
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 | 23-1609753 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification 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 ($.10 par value) | SFE | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company in Rule 12b-2 of the Exchange Act.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of June 30, 2019,2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $237,111,560$154,839,292 based on the closing sale price as reported on the New York Stock Exchange.
The number of shares outstanding of the registrant’s common stock as of February 24, 2020March 7, 2022 was 20,650,958.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission for the Company’s 20202022 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
FORM 10-K
December 31, 2019
Page | ||
Cautionary Note Concerning Forward-Looking Statements
This Annual Report on Form 10-K 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 ownership interests, fluctuations in the market prices of our publicly traded ownership interests, competition, our inability to obtain maximum value for our ownership interests, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our companies 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 our ownership interests operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. “Risk Factors.” 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,Typically, we are actively involved in these businesses, influencing developmentstrategic and operational decisions through our 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 would not deploy anyceased deploying capital into new opportunities and wouldin order to focus on supporting ourthe existing companiesownership interests and maximizing monetization opportunities of our ownership interests in such existing companies to enable returning value to shareholders. In that context, weWe have areconsidered and will considertaken action on various initiatives including among others: the sale of our ownership interests, the sale of certain or all of our 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 inIn December 2019, withwe paid a $1.00 per share special dividend. Moving forward,In 2021, we anticipate additional actionsrepurchased 4.5 million shares through a combination of open market purchases and a tender offer for an aggregate of $40.7 million resulting in the forman average price of stock repurchases and/or special dividends based on available cash resources, prevailing market conditions and other factors.
We incorporated in the Commonwealth of Pennsylvania in 1953. Our corporate headquarters are located at 100 Matsonford150 N. Radnor Chester Road, One Radnor Corporate Center, Suite 110,F-200, Radnor, Pennsylvania 19087.
Our Strategy
Founded in 1953, Safeguard has a distinguished track record of building market leaders byleading companies through providing capital and operational support to entrepreneurs across an evolving and innovative spectrum of industries. Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses in healthcare, financial services and digital media. Safeguard's existing group of companies consists of companies that are capitalizing on the next wave of enabling technologies. Since January 2018, Safeguard is no longerceased deploying capital into new companies. Safeguard remains focusedopportunities in order to focus on managing and financially supporting itsthe existing ownership interests with the goal of pursuing monetization opportunities and maximizing the value returned to shareholders.
Helping Our Companies Build Value
We offer strategic, operational and management support to certain of our ownership interests.
Strategic Support.
We play an active role in developing the strategic direction to certain of our ownership interests, which include:• | defining short and long-term strategic goals; |
• | identifying and planning for the critical success factors to reach these goals; |
• | identifying and addressing the challenges and operational improvements required to achieve the critical success factors and, ultimately, the strategic goals; |
• | identifying and implementing the business measurements that we and others will apply to measure a company’s success; and |
• | identifying sources of and providing capital to drive growth. |
Management and Operational Support.
Our executives serve on the boards of directors of certain of our companies, working with them to develop and implement strategic and operating plans. We measure and monitor achievement of these plans through regular review of operational and financial performance measurements.Realizing Value
The primary way we realize value returned to shareholders. We have, are and will consider initiatives including, among others: the sale offrom our ownership interests is when the underlying company enters into a sale of certain or all ofmerger transaction and we receive cash consideration for our ownership interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value.
Given our recent change in strategy, the value of Safeguard is now virtually whollyprimarily dependent upon the value of our existing ownership interests and our ability to translate that value into cash as efficiently as possible and to return thatinterests. We have returned capital to our shareholders in the form of stock repurchases and/orand a special dividends to shareholders.
Our Ownership Interests
An understanding of our ownership interests is important to understanding Safeguard. We generally categorize the companies inour ownership interests into stages based upon revenue generation. This includes those positions which we have an ownership interest and accountare accounted for under the equity method into stages based upon revenue generation—Initial Revenue Stage, Expansion Stage, Traction Stage, High Traction Stage, and a stage for companies greater than $15 million. We also categorize in these stagesas well as certain companies where we do not have significant influence but whose value is a substantial portion of our portfolio. The Initial Revenue Stage is made upCompany reflects revenue categories based on a one quarter lag, i.e. the categories below reflect the trailing year ended September 30, 2021.
The ownership percentages indicated below are presented as of December 31, 20192021 for certain companies in which we held ownership interests at February 25, 2020 and reflect the percentage of the vote we were entitled to cast at that date based on issued and outstanding voting securities (on a common stock equivalent basis), excluding the effect of options, warrants and convertible debt (primary ownership).
Initial Revenue Stage: Up to $1 million
There are no companies in which we have an ownership interest and account for under the equity method that are within this stage of growth. However, see section below regarding Other Ownership Interests.
Revenue of $1 million to $5 million
Moxe Health Corporation | (Safeguard Ownership: |
Headquartered in Madison, Wisconsin, Moxe Health
provides a clinical data clearinghouse that connects health systems with their network of health plans. Moxe’s key products, Substrate and Convergence, allow for bi-directional data flow between payors and providers to complete various risk adjustment, quality, and prior authorization useRevenue of $5 million to $10 million
Lumesis, Inc. | (Safeguard Ownership: 43.2%) |
Headquartered in Stamford, Connecticut, Lumesis is a financial technology company focused on providing business efficiency, data and regulatory solutions to the municipal bond marketplace. Lumesis’ DIVER platform helps more than 500 firms with more than 43,000 users efficiently meet credit, regulatory and risk needs. www.lumesis.com
Revenue of $10 million to $20 million
Clutch Holdings, Inc. | (Safeguard Ownership: 41.7%) |
Headquartered in Ambler, Pennsylvania, Clutch has revolutionized how marketing teams for premier brands develop and foster relationships with their customers. Clutch’s advanced marketing platform serves as a customer hub, delivering deep intelligence derived from real-time behaviors and transactions across in-store, online, mobile and social channels. www.clutch.com
InfoBionic, Inc. | (Safeguard Ownership: 25.2%) |
Headquartered in Waltham, Massachusetts, InfoBionic is an emerging digital health company focused on creating patient monitoring solutions for cardiac arrhythmias. InfoBionic’s MoMe
® Kardia cloud-based, remote patient monitoring platform delivers on-demand, actionable monitoring data and analytics directly to the physicians themselves. www.infobionic.commeQuilibrium | ||
(Safeguard Ownership: |
Headquartered in Boston, Massachusetts, meQuilibrium
is an engagement and performance platform that leverages behavioral psychology and data science to improve workforce resilience, agility, and adaptive capacity. The Company offers solutions for managers, teams, and individualSyapse, Inc. | (Safeguard Ownership: 11.1%) |
Headquartered in Palo Alto, California, Syapse is on a mission to deliver the best care for every cancer patient through precision medicine. Syapse’s platform, data sharing network, and industry partnerships enable healthcare providers to bring precision cancer care to every patient who needs it. www.syapse.com
Trice Medical, Inc. | (Safeguard Ownership: |
Headquartered in Malvern, Pennsylvania, Trice Medical was founded to fundamentally improve orthopedic diagnostics for the patient, physician and payor by providing instant, eyes-on, answers. Trice has pioneered fully integrated camera-enabled technologies that provide a clinical solution that is optimized for the physician's office. Trice's mission is to provide more immediate and definitive patient care, eliminating the false reads associated with current indirect modalities and significantly reduce the overall cost to the healthcare system.
www.tricemedical.comRevenue of $20 million to $50 million
Aktana, Inc. | ||
(Safeguard Ownership: |
Headquartered in San Francisco, California, Aktana is a pioneer in decision support for global life science sales teams. Aktana helps its customers improve their commercial effectiveness by delivering data-driven insights and suggestions directly to sales reps, coordinating multi-channel actions and providing insight regarding which strategies work best for which customers under which conditions.
www.aktana.comPrognos Health Inc. | ||
(Safeguard Ownership: |
Headquartered in New York, New York, FlashtalkingPrognos is a data-driven ad managementhealthcare platform company transforming the ability to access, manage and analyze healthcare data in partnership with Life Sciences brands, payers, and clinical diagnostics organizations. Prognos’ innovations enhance the value of laboratory results and clinical diagnostic data through advanced analytics technology company that uses data to personalize advertising in real-time, analyze its effectiveness and enable optimization that drives better engagement and ROI for sophisticated global brands. Spongecell, Inc. merged into Flashtalking in January 2018.
Greater than $50 million
MediaMath, Inc. | (Safeguard Ownership: |
Headquartered in New York, New York, MediaMath is a global technology company that is leading the movement to revolutionize traditional marketing and drive transformative results for marketers through its TerminalOne Marketing Operating System
®. MediaMath empowers marketers with an extensible, open platform that activates data, automates executionOther ownership interests
In addition to the above companies, we also have smaller ownership interests in a variety of other companies where we do not exert significant influence and do not participate in any management activities. In some cases, these ownership interests generally are the result of previous positions that have been diluted or residual interests resulting from the acquisition of companies where we had an ownership interest.
Bright Health Group: A technology-enabled, fully aligned sytem of digital marketingcare built for healthcare's consumer retail market. Bright HealthCare offers commercial and advertising services createdMedicare health plan products to serveover 1 million consumers across the nation. www.brighthealthgroup.com
BigToken: A consumer-managed data marketplace providing consumers, advertisers and media companies access to transparent, verified consumer data. BigToken merged with Britepool in December 2021. BigToken became a free website, online newspapers and magazines. Thepublic company specializesearlier in identity verification, advertising and privacy, digital marketing and data for its clients, enabling its clients to inherently collect and match identities with large quantities of personal information for targeted advertising.
MedCrypt:
Developer of a data security platform designed to protect medical devices. The company's platform enables functions such as authenticating users, encrypting data and cryptographically sign settings and patient prescriptions, as well as has the ability to monitor transactions between clinicians and devices for malicious behavior, enabling hospitals and health systems to prevent unauthorized access and misuse of their medical devices. www.medcrypt.coWellTrackONE:
Provider of wellness programWe also have residual interests in a variety of private funds that are in the process of winding down and other companies, and we participate in several loans to or equity investments in private companies in the Philadelphia area in conjunction with an on-going initiative of the Pennsylvania Department of Community and Economic Development.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
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.
OTHER INFORMATION
The operations of Safeguard and the companies in which it has ownership interests are subject to environmental laws and regulations. Safeguard does not believe that expenditures relating to those laws and regulations will have a material adverse effect on the business, financial condition or results of operations of Safeguard.
AVAILABLE INFORMATION
Safeguard is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. Therefore, we file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements and other information with, and furnish other reports to, the Securities and Exchange Commission (“SEC”). You can read and copy such documents at the SEC’s public reference facilities in Washington, D.C., New York, New York and Chicago, Illinois. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. Such material may also be accessed electronically by means of the SEC’s home page on the Internet at www.sec.gov or through Safeguard’s website at www.safeguard.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) also may be obtained free of charge, upon written request to: Investor Relations, Safeguard Scientifics, Inc., 100 Matsonford150 N. Radnor Chester Road, One Radnor Corporate Center, Suite 110,F-200, Radnor, Pennsylvania 19087.
The Internet website addresses for Safeguard and its ownership interests are included in this report for identification purposes. The information contained therein or connected thereto is not intended to be incorporated into this Annual Report on Form 10-K.
The following corporate governance documents are available free of charge on Safeguard’s website: the charters of our Audit, Compensation and Nominating & Corporate Governance Committees, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics. We also will post on our website any amendments to or waivers of our Code of Business Conduct and Ethics that relate to our directors and executive officers.
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.
Our ability to obtain value from our company interestscompanies and the return of such value to our 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. In that context, we have, are and will consider monetization 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, the sale of all of our ownership interests in a single transaction or a series of transactions, business combinations and other strategic transactions as well as other opportunities to maximize shareholder value. 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 interestscomplete any such transaction 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. ThereIn addition, there can be no assurance that any exploration of a strategic transaction will result in any strategic change or outcome and disclosure of any developments related to such exploration may not be disclosed until required. Further, if one or more transactions are completed, 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.such transaction. Additionally, there can be no assurance that we will be able to satisfy our liabilities during this process. Further, theThe method, timing and amount of any return of value resulting from the monetization of existing company interestssuch a transaction will also be at the discretion of our Board of Directors and willmay 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.
The continuing costseffects of theCOVID-19 pandemic mayadversely affectthe businesses, financial conditions and burdens associated with beingoperating 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 public companyresult, we may be required to provide additional capital to certain companies, which may cause us to face liquidity issues that will constitute a much larger percentageconstrain our ability to execute our business strategy and limit our ability to provide financial support to all of our expenses and we mayexisting companies in the future delist our Common Stock withamounts that we desire. The COVID-19 pandemic is also impacting the New York Stock Exchangemergers and seek to deregister our Common Stock withacquisitions 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 SEC.
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 fewer companies.These remaining companies operating in the same or similar industries, limiting our diversification.
As we execute against our strategy, our capital deployments will be deployed in a decreasing number of companies. Further, our remaining companies could be concentrated in the same or similar industries. Fewer companies, as well as potential industry concentration, may cause us to be more susceptible to any single economic, regulatory or other occurrence affecting thosea single company or a particular industriesindustry than we would have otherwise bebeen if we had a larger number of companies and 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. On April 6,In connection with our strategy announced in 2018, we publicly announcedmade a series of management changes intended to streamline our organizational structure and reduce our operating costs. Further,costs and since then we have made, and may make, further management changes occurred after suchfrom time as well. These aggressive cost-reduction initiatives better aligned our cost structure with the strategy we announced in January 2018.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
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 ofour 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 have negative repercussionsadversely 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 us.
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. Rapidrapidly, including through acquisitions of other businesses. Such growth often places considerable operational, managerial, integration and financial strain on a business. To successfully manage rapidsuch 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.
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.
Economic disruptions and downturns may negatively affect our companies’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’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 regulationscould increase operating costs at certain of our companies, and the failure to comply could negatively affect theoperations and results of some of our companies.Catastrophic events may disrupt our companies’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.
None.
Our current corporate headquarters and administrative offices in Radnor, Pennsylvania containis approximately 100 square feet of office space in one building. The lease term expires in November 2022. The sublease for our previous corporate headquarters and administrative offices for approximately 4,000 square feet of office space in one building under a sublease fromRadnor, Pennsylvania expired in November 2020 (from a company in which we have an equity interest. The initial lease term expires in November 2020, with three, six month extensions available upon agreement of the parties.
Additionally, we have additional administrative offices also located in Radnor, Pennsylvania and comprising approximately 15,600 square feet, that have been sublet to an unaffiliated party through April, 2026, the remainder of the lease term.
We, as well as our companies in which we hold ownership interests, are from time to time involved in various claims and legal actions arising in the ordinary course of business. While in the current opinion of management, the ultimate disposition of any of these matters which are currently pending will not have a material adverse effect on our consolidated financial position or results of operations, no assurance can be given as to the outcome of these situations, and one or more adverse dispositions could have a material adverse effect on our consolidated financial position and results of operations, or that of our companies. See Note 1211 to the Consolidated Financial Statements for a discussion of ongoing claims and legal actions.
Not applicable.
ANNEX TO PART I — EXECUTIVE OFFICERS OF THE REGISTRANT
Name | Age | Position | Executive Officer Since | ||
Brian J. Sisko | 59 | President and Chief Executive Officer | 2007 | ||
Mark A. Herndon | 50 | Senior Vice President and Chief Financial Officer | 2018 |
Name | Age |
| Position |
| Executive Officer Since |
Eric C. Salzman | 54 |
| Chief Executive Officer |
| 2020 |
Mark A. Herndon | 52 |
| Senior Vice President and Chief Financial Officer |
| 2018 |
Mr. SiskoSalzman joined Safeguard as Senior Vice President and General CounselChief Restructuring Officer in August 2007 and served as Executive Vice President and Managing Director from November 2012 until his promotion to Chief Operating Officer, Executive Vice President and Managing Director in January 2014.April 2020. Mr. SiskoSalzman began serving as President andthe Chief Executive Officer July 1, 2018. Prior to joining Safeguard,in December 2020. Mr. Sisko servedSalzman has a 25-year track record partnering with growth companies as Chief Legal Officer, Senior Vice President and General Counsel of Traffic.com (at the time, a public company), a company formerly owned in part by Safeguard, from February 2006 until June 2007 (following its acquisition by NAVTEQ Corporation in March 2007); Chief Operating Officer from February 2005 to January 2006 of Halo Technology Holdings, Inc., a public holding company for enterprise software businesses (Halo Technology Holdings filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in August 2007); ran B/T Business and Technology, an advisorinvestor, board member and strategic management consultant toadvisor. He has worked in M&A, restructuring, growth and special situations investing at a varietynumber of publicinvestment banks and private companies, from January 2002 to February 2005;equity funds, including Credit Suisse and wasLehman Brothers. Mr. Salzman helped oversee the monetization of a Managing Director from April 2000 to January 2002,$2 billion portfolio of Katalyst, LLC, a venture capitalilliquid assets in the Lehman Brothers Bankruptcy Estate and consulting firm. Mr. Sisko also previously served as Senior Vice President-Corporate Development and General Counsel of National Media Corporation, at the time a New York Stock Exchange-listed multi-media marketing company with operations in 70 countries, andsubsequently advised several investment funds on value-maximization strategies for their respective portfolios. He currently serves as a partner indirector on a number of Safeguard portfolio companies as well as an independent director at publicly traded 8x8, Inc. Mr. Salzman earned a B.A. Honors from the corporate finance, mergersUniversity of Michigan and acquisitions practice group of the Philadelphia-based law firm, Klehr, Harrison, Harvey, Branzburg LLP.
Mr. Herndon joined Safeguard as Senior Vice President and Chief Financial Officer in September 2018. Prior to joining Safeguard, Mr. Herndon served in a variety of client service and national office roles at PricewaterhouseCoopers from 1991 to 2018, including his position as Assurance Partner from 2006 until 2018.
Our common stock is listed on the New York Stock Exchange (Symbol: SFE). The high and low sale prices reported within each quarter of 20192021 and 20182020 were as follows:
High | Low | ||||||
Fiscal year 2019: | |||||||
First quarter | $ | 11.66 | $ | 8.36 | |||
Second quarter | 12.91 | 10.59 | |||||
Third quarter | 12.79 | 10.92 | |||||
Fourth quarter | 12.43 | 10.57 | |||||
Fiscal year 2018: | |||||||
First quarter | $ | 13.10 | $ | 10.83 | |||
Second quarter | 13.95 | 11.95 | |||||
Third quarter | 13.18 | 8.85 | |||||
Fourth quarter | 9.88 | 7.98 |
High | Low | |||||||
Fiscal year 2021: | ||||||||
First quarter | $ | 8.59 | $ | 6.35 | ||||
Second quarter | 7.90 | 5.95 | ||||||
Third quarter | 8.93 | 7.38 | ||||||
Fourth quarter | 8.98 | 6.23 | ||||||
Fiscal year 2020: | ||||||||
First quarter | $ | 11.11 | $ | 4.43 | ||||
Second quarter | 7.87 | 4.92 | ||||||
Third quarter | 7.12 | 5.15 | ||||||
Fourth quarter | 7.25 | 5.33 |
The high and low sale prices reported in the first quarter of 20202022 through February 24, 2020March 11, 2022 were $11.11 $7.53 and $9.44 $5.32respectively, and the last sale price reported on February 24, 2020,March 11, 2022, was $9.50.$5.35. As of February 25, 2020,March 11, 2022, there were approximately 11,8008,570 beneficial holders of our common stock.
Special Dividend
On November 7, 2019, the Board of Directors declared a special cash dividend of $1.00 per share, payable on December 30, 2019 to shareholders of record as of the close of business on December 23, 2019.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of equity securities during the quarter ended December 31, 20192021 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) | |||||||||
October 1, 2019 - October 31, 2019 | — | $ | — | — | $ | 14,636,135 | |||||||
November 1, 2019 - November 30, 2019 | — | $ | — | — | $ | 14,636,135 | |||||||
December 1, 2019 - December 31, 2019 | 2,180 | $ | 11.92 | — | $ | 14,636,135 | |||||||
Total | 2,180 | $ | 11.92 | — |
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) | ||||||||||||
October 1, 2021 - October 31, 2021 | 4,306,847 | $ | 9.00 | 4,304,826 | $ | 18,996,988 | ||||||||||
November 1, 2021 - November 30, 2021 | 92 | $ | 8.37 | — | $ | 18,996,988 | ||||||||||
December 1, 2021 - December 31, 2021 | 509 | $ | 7.04 | — | $ | 18,996,988 | ||||||||||
Total | 4,307,448 | $ | 9.00 | 4,304,826 |
(a) During the fourth quarter of 2019,2021, we repurchased an aggregate of approximately 23 thousand shares of our 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 October 2021, the Company completed a modified Dutch auction self-tender that resulted in the repurchase of 4.3 million common shares for an aggregated price of $39.0 million, or $9.06 per share, including $0.3 million of transaction costs. In July 2015, our Board of Directors authorized us to repurchase shares of our 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 program doesprograms do not obligate us to acquire any specific number of shares.
Not applicable for a smaller reporting company.
Cautionary Note Concerning Forward-Looking Statements
This Annual Report on Form 10-K 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, competition, our inability to obtain maximum value for our ownership interess,interests, 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 companies, 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 the companies in which we have an ownership interest 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 they operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. “Risk Factors.” 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.
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,Typically, we are actively involved influencing developmentin strategic and operational decisions through our 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 anyceased deploying capital into new opportunities and willin order to focus on supporting ourthe existing companiesownership interests and maximizing monetization opportunities to enable returning value to shareholders. In that context, weWe have areconsidered and will considertaken action on various initiatives including among others: the sale of our ownership interests, the sale of certain or all of our 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 inIn December 2019, withwe declared and paid a $1.00 per share special dividend. Moving forward,In 2021, we anticipaterepurchased 4.5 million shares through a combination of open market purchases and a tender offer for an aggregate of $40.7 million resulting in an average price of $8.95 per share. We will continue to actively work with our ownership interests to seek monetization opportunties while we also evaluate additional actionsstrategic alternatives. These strategic alternatives could include the sale of all of our ownership interests in the forma single transaction or a series of stock repurchases and/transactions, merger, business combinations or special dividends based on available cash resources, prevailing market conditions and other factors.
Principles of Accounting for Ownership Interests
We account for our ownership interests using one of the following methods: Equity or other.Other. The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by our voting interest in the entity.
Equity Method.
When the Company’s carrying value of our holdings in an equity method company is reduced to zero, the Company records no further losses are recorded in ourits Consolidated Statements of Operations unless we havethe Company has an outstanding guarantee obligationsobligation or havehas committed additional
Other Method.We account for our equityownership interests in companies whichthat are not accounted for under the equity method or fair value method as equity securities withoutthat do not have a readily determinable fair values. We account for ofvalue under the fair value measurement alternative. Under the fair value measurement alternative, these securitiesownership interests are based on our original cost less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar securitiesinterests of the same issuer. Under this method, our share of the income or losses of such companies is not included in our Consolidated Statements of Operations.Operations, however, the result of observable price changes, if any, are reflected in Other income (loss), net. We include the carrying value of these investmentsinterests in Ownership interests and advances on the Consolidated Balance Sheets.
The Company accounts for ownership interests that are not accounted for under the equity method and have a readily determinable fair value at fair value based on the closing stock price on the last trading day of the reporting period.
Critical Accounting Policies and Estimates
Accounting policies, methods and estimates are an integral part of the Consolidated Financial Statements prepared by management and are based upon management’s current judgments. These judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements as described in Note 1 to our Consolidated Financial Statements, the most significant relate to impairment of ownership interests and advances.
Impairment of Ownership Interests and Advances
On a periodic basis, but no less frequently than at the end of each quarter, we evaluate the carrying value of our ownership interests for possible impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company, market conditions and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. We then determine whether there has been an other than temporary decline in the value of our ownership interest in the company. Any impairment to be recognized is measured as the amount by which the carrying value of an asset exceeds its fair value. The adjusted carrying value of an ownership interest is not increased if circumstances suggest the value of the company has subsequently recovered.
The fair value of privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies, or based on other valuation methods including discounted cash flows, valuations of comparable public companies and valuations of acquisitions of comparable companies.
Our companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests and advances could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and other method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.
Total impairment charges related to our ownershipOwnership interests and advances were as follows:
Year Ended December 31, | |||||||||
Accounting Method | 2019 | 2018 | |||||||
(In thousands) | |||||||||
Equity | $ | 2,965 | $ | 12,626 | |||||
Other | 47 | 1,097 | |||||||
Total | $ | 3,012 | $ | 13,723 |
Year Ended December 31, | ||||||||
Accounting Method | 2021 | 2020 | ||||||
(In thousands) | ||||||||
Equity | $ | — | $ | 11,282 | ||||
Other | 2,521 | 8,757 | ||||||
Total | $ | 2,521 | $ | 20,039 |
Impairment charges related to equity method companies are included in Equity income (loss), net in the Consolidated Statements of Operations. Impairment charges related to other investmentsownership interests are included in Other income (loss), net in the Consolidated Statements 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 December 31, 20192021 and 2020. The ownership percentages indicated below are presented as of December 31, 2018.
Safeguard Primary Ownership as of December 31, | |||||
Company Name | 2019 | 2018 | Accounting Method | ||
Aktana, Inc. | 17.8% | 18.9% | Equity | ||
Clutch Holdings, Inc. | 41.2% | 41.2% | Equity | ||
Flashtalking * | 10.1% | 10.1% | Other | ||
InfoBionic, Inc. | 25.2% | 25.4% | Equity | ||
Lumesis, Inc. | 43.5% | 43.7% | Equity | ||
MediaMath, Inc. ** | 13.3% | 13.4% | Other | ||
meQuilibrium | 32.7% | 33.1% | Equity | ||
Moxe Health Corporation | 29.9% | 32.4% | Equity | ||
Prognos Health Inc. | 28.7% | 28.7% | Equity | ||
QuanticMind, Inc. | 24.2% | 24.2% | Equity | ||
Sonobi, Inc. | 21.6% | 21.6% | Equity | ||
Syapse, Inc. | 20.0% | 20.0% | Equity | ||
T-REX Group, Inc. | 13.7% | 21.1% | Other | ||
Trice Medical, Inc. | 16.6% | 17.4% | Equity | ||
WebLinc, Inc. | 38.5% | 38.5% | Equity | ||
Zipnosis, Inc | 37.7% | 34.7% | Equity |
Safeguard Primary Ownership as of December 31, | ||||||||||
Company Name | 2021 | 2020 | Accounting Method | |||||||
Aktana, Inc. | 13.4 | % | 15.1 | % | Equity | |||||
Clutch Holdings, Inc. | 41.7 | % | 42.3 | % | Equity | |||||
InfoBionic, Inc. | 25.2 | % | 25.2 | % | Equity | |||||
Lumesis, Inc. | 43.2 | % | 43.4 | % | Equity | |||||
MediaMath, Inc. | 13.2 | % | 13.3 | % | Other | |||||
meQuilibrium | 31.9 | % | 32.0 | % | Equity | |||||
Moxe Health Corporation | 27.6 | % | 27.6 | % | Equity | |||||
Prognos Health Inc. | 28.5 | % | 28.5 | % | Equity | |||||
Syapse, Inc. | 11.1 | % | 18.9 | % | Equity | |||||
Trice Medical, Inc. | 12.6 | % | 16.6 | % | Equity |
Year ended December 31, 20192021 versus year ended December 31, 2018
Year Ended December 31, | |||||||||||
2019 | 2018 | Variance | |||||||||
(In thousands) | |||||||||||
General and administrative expense | $ | (9,982 | ) | $ | (16,871 | ) | $ | 6,889 | |||
Other income (loss), net | 12,255 | (5,158 | ) | 17,413 | |||||||
Interest income | 2,044 | 2,806 | (762 | ) | |||||||
Interest expense | (14,023 | ) | (16,067 | ) | 2,044 | ||||||
Equity income (loss), net | 64,267 | 19,661 | 44,606 | ||||||||
Net income (loss) | $ | 54,561 | $ | (15,629 | ) | $ | 70,190 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | Variance | ||||||||||
(In thousands) | ||||||||||||
General and administrative expense | $ | (7,153 | ) | $ | (9,466 | ) | $ | 2,313 | ||||
Other income (loss), net | 22,035 | (7,708 | ) | 29,743 | ||||||||
Interest income | 276 | 261 | 15 | |||||||||
Equity income (loss), net | 11,846 | (20,702 | ) | 32,548 | ||||||||
Net income (loss) | $ | 27,004 | $ | (37,615 | ) | $ | 64,619 |
General and Administrative Expense.
Our general and administrative expenses consist primarily of employee compensation, insurance,Other income (loss), net. Other income (loss), net increased by $29.7 million for the year ended December 31, 2021, compared to the prior year. During the year ended December 31, 2021, the Company recorded a gain from the sale of Flashtalking of $32.5 million and gains aggregating to $2.8 million from the sales of Velano Vascular and T-REX Group. The Company recorded unrealized losses from an observable price change and subsequent changes in the fair value of BHG common stock of $10.8 million, net, and a $2.5 million impairment related to certain other ownership interests. During the year ended December 31, 2020, the Company recorded impairments of $8.8 million related to the ownership interests of T-REX, b8ta 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 make-whole interest provisions of the Credit Facilitymore challenging mergers and accelerated debt issue cost amortization bothacquisitions environment related to COVID-19 and the prepaymentrelated uncertain economic impact. The Company also recorded a $0.3 million reduction in the carrying value of debt associated withan other equity security based on an observable price change. Partially offsetting these impairments, was a $1.5 million non-cash gain for the Credit Facility.
Interest Income. There was no significant change in interest income for the year ended December 31, 2021 compared to the prior year.
Equity Income (Loss).
Equity income (loss), net increased $44.6$32.5 million for the year ended December 31, 20192021 compared to the prior year. The components of equity income (loss), net for the years ended December 31, 20192021 and 20182020 were as follows:
Year ended December 31: | 2019 | 2018 | ||||
(In thousands) | ||||||
Gains on sales of ownership interests | $ | 85,834 | $ | 67,980 | ||
Unrealized dilution gains | 3,206 | 9,154 | ||||
Gains from proceeds received from escrow | 4,305 | 1,838 | ||||
Loss on impairments | (2,965 | ) | (12,626 | ) | ||
Share of losses of our equity method companies, net | (26,113 | ) | (46,685 | ) | ||
$ | 64,267 | $ | 19,661 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | Variance | ||||||||||
(In thousands) | ||||||||||||
Gains on sales of ownership interests | $ | 19,146 | $ | 183 | $ | 18,963 | ||||||
Unrealized dilution gains | 9,252 | 4,246 | 5,006 | |||||||||
Loss on impairments | — | (11,282 | ) | 11,282 | ||||||||
Share of losses of our equity method companies, net | (16,552 | ) | (13,849 | ) | (2,703 | ) | ||||||
$ | 11,846 | $ | (20,702 | ) | $ | 32,548 |
During the year ended December 31, 2021, the gains on salesales of ownership interests are comprised primarily of gains related to Zipnosis for $17.3 million and AHS for $2.0 million. There were no material gains or losses on sales of ownership interests for the year ended December 31, 2019 is comprised primarily2020, however Sonobi was sold resulting in $6.6 million of gains related to the sale of Propeller in the amount of $35.1 million and Transactis in the amount of $50.7 million. The gain on sale of ownership interests for the year ended December 31, 2018 is comprised primarily of gains related to MediaMath in the amount of $45.0 million, Nexxt (fka Beyond.com) in the amount of $9.5 million, AdvantEdge Healthcare Solutions in the amount of $5.5 million and Cask Data in the amount of $4.2 million.
The unrealized dilution gains for the year ended December 31, 20192021 were the result of meQuilibrium, Syapse Trice, T-REX and Moxe,Trice, who each raised additional equity capital that diluted the Company's interest in those entities. The unrealized dilution gains (losses) for the year ended December 31, 20182020 were related to Aktana, Clutch, meQuilibrium, Propeller, Transactis, TriceMoxe and QuanticMind.Syapse.
During the year ended December 31, 2019 was primarily related to additional amounts received for holdbacks and escrows2020 the Company recorded impairments of $11.3 million related to the saleownership interests of Cask, but also included incremental proceeds of Invitae shares received in connection withWebLinc, Inc., QuanticMind, Inc. and Sonobi accounted for under the Good Start Genetics sale.
The decreaseincrease in our share of losses of our equity method companies for the 20192021 year compared to the prior year period was due to increased losses at principally two healthcare companies one of which did not experience their planned revenue growth and the other incurred a variety of financing and acquisition expenses during 2021. These factors were partially offset by the impact due to the decrease in the number of ownership interests accounted for under the equity method companies and a net decrease in losses associated with the individual companies.
Income Tax Benefit (Expense)
There was no income tax benefit (expense) was $0.0 million for the years ended December 31, 20192021 and 2018.2020. 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 benefit of the net operating loss that would have been recognized in each year was offset by changes in the valuation allowance.
Liquidity And Capital Resources
As of December 31, 2019,2021, the Company had $25.0$24.7 million of cash and cash equivalents.
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 years ended December 31, 20192021 and 2018,2020, we did not repurchase any shares under this authorization.
We may consider additional stock repurchases or dividends in the future based on prevailing market conditions and other factors when and if additional liquidity becomes available.
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.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 deploymentsacquisitions 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 December 31, 20192021 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:
Year Ended December 31, | ||||||||||||
2021 | 2020 | Variance | ||||||||||
(In thousands) | ||||||||||||
Net cash used in operating activities | $ | (8,152 | ) | $ | (8,143 | ) | $ | (9 | ) | |||
Net cash provided by (used in) investing activities | 58,114 | (1,269 | ) | 59,383 | ||||||||
Net cash used in financing activities | (40,799 | ) | (40 | ) | (40,759 | ) | ||||||
$ | 9,163 | $ | (9,452 | ) | $ | 18,615 |
Year Ended December 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Net cash used in operating activities | $ | (19,970 | ) | $ | (26,035 | ) | |
Net cash provided by investing activities | 126,303 | 32,103 | |||||
Net cash used in financing activities | (89,483 | ) | (24,952 | ) | |||
$ | 16,850 | $ | (18,884 | ) |
Net Cash Used In Operating Activities
Year ended December 31, 20192021 versus year ended December 31, 2018.
Net Cash Provided(Used in) provided by Investing Activities
Year ended December 31, 20192021 versus year ended December 31, 2018.
Net Cash Used In Financing Activities
Year ended December 31, 20192021 versus year ended December 31, 2018.
Contractual Cash Obligations and Other Commercial Commitments
Payments Due by Period | ||||||||||||||||||||
Total | 2022 | 2023 and 2024 | 2025 and 2026 | After 2026 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Contractual Cash Obligations: | ||||||||||||||||||||
Operating leases (a) | $ | 2.6 | $ | 0.6 | $ | 1.2 | $ | 0.8 | $ | — | ||||||||||
Total Contractual Cash Obligations (b) | $ | 2.6 | $ | 0.6 | $ | 1.2 | $ | 0.8 | $ | — |
(a) In 2015, we entered into an agreement for the lease of our former principal executive offices which expires in April 2026. Payments pursuant to this lease are approximately $2.6 million through expiration, however, in March 2019 we entered into a sublease for this office space which is also expected to result in future aggregate sublease receipts of $2.5 million through April 2026.
(b) The following table summarizes our contractual obligationsmaximum aggregate exposure under employment and other commercial commitments as ofseverance agreements for remaining employees was approximately $1.0 million at December 31, 2019, by period due or expiration of the commitment.
Payments Due by Period | |||||||||||||||||||
Total | 2020 | 2021 and 2022 | 2023 and 2024 | After 2024 | |||||||||||||||
(In millions) | |||||||||||||||||||
Contractual Cash Obligations: | |||||||||||||||||||
Operating leases (a) | $ | 3.9 | $ | 0.7 | $ | 1.2 | $ | 1.2 | $ | 0.8 | |||||||||
Severance payments | 0.1 | 0.1 | — | — | — | ||||||||||||||
Total Contractual Cash Obligations (b) | $ | 4.0 | $ | 0.8 | $ | 1.2 | $ | 1.2 | $ | 0.8 | |||||||||
Not applicable for a smaller reporting company.
The following Consolidated Financial Statements, and the related Notes thereto, of Safeguard Scientifics, Inc. and the Reports of Independent Registered Public Accounting Firm are filed as a part of this Form 10-K.
Page | |
Board of Directors
Opinion on Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheet of Safeguard Scientifics, Inc. (a Pennsylvania corporation) and subsidiaries’subsidiaries (the Company) internal control over financial reporting“Company”) as of December 31, 2019, based on criteria established in
Basis for Opinion
These financial reporting and for its assessmentstatements are the responsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Company’s management. Our responsibility is to express an opinion on the Company’s internal control over financial reportingstatements based on our audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effectivethe financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting was maintained in all material respects. Ourreporting. As part of our audit of internal control over financial reporting included obtainingwe are required to obtain an understanding of internal control over financial reporting assessingbut not for the risk that a material weakness exists, and testing and evaluatingpurpose of expressing an opinion on the design and operating effectiveness of the Company’s internal control basedover financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the assessed risk.amounts and disclosures in the financial statements. Our audit also included performing such other proceduresevaluating the accounting principles used and significant estimates made by management, as we considered necessary inwell as evaluating the circumstances.overall presentation of the financial statements. We believe that our audit providesprovide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of Internal Control Over Financial Reporting
As discussed in Note 1 and expendituresNote 2 to the consolidated financial statements, the Company’s ownership interests balance as of December 31, 2021 was $22.0 million, of which $21.1 million is accounted for under the equity method and $0.9 million is accounted for under the fair value measurement alternative. On a periodic basis, but not less frequently than quarterly, the Company evaluates the carrying value of its ownership interests for impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company, market conditions and other relevant factors. The business plan objectives and milestones the company considers include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. Based on the above, management then determines whether there has been an other than temporary decline in the value of its ownership interest in the portfolio company. If it is determined that there has been an other than temporary decline in the value of its ownership interests in the portfolio company, impairment is measured as the amount by which the carrying value of an asset exceeds its estimated fair value.
The principal consideration for our determination that the identification of other than temporary impairment of ownership interests is a critical audit matter is due to it being made only in accordance with authorizations of management and directorsan area of the company;financial statements requiring significant auditor judgment and (3) provide reasonable assurance regarding prevention or timely detectionsubjectivity in assessing the results of unauthorized acquisition, use, or dispositionmanagement’s qualitative impairment analysis. Ownership interests held by the Company are primarily comprised of the company’s assetsearly-stage companies in industries that could have a material effect on the financial statements.
Our audit procedures related to future periods are subject toidentification of other than temporary impairment of ownership interests included the risk that controls may become inadequate becausefollowing, among others:
● | We evaluated the design of certain internal controls related to the Company’s impairment assessment. This included controls over the identification of other than temporary declines in value and the impairment analysis, including financial condition, prospects and other factors present at the company. |
● | We held discussions with those outside of accounting with intimate knowledge of the portfolio companies, including those with board positions and those employed by the portfolio companies, to gain an understanding of operational performance, milestones achieved, and potential indicators of other than temporary declines in value. |
● | We reviewed the financial performance of the underlying portfolio companies, relevant third-party information with indications of company values, board materials, press releases and other public information relating to the portfolio companies for potential indicators of other than temporary declines in value. |
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Philadelphia, Pennsylvania
March 11, 2022
To the Shareholders and Board of Directors
Opinion on the Consolidated
Financial StatementsWe have audited the accompanying consolidated balance sheetssheet of Safeguard Scientifics, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018,2020, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years thenyear ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,2020, and the results of its operations and its cash flows for each of the years thenyear ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/KPMG LLP
We have served as the Company’s auditor since 1986.
Philadelphia, Pennsylvania
March 5, 2021
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of December 31, | ||||||||
2021 | 2020 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 24,739 | $ | 15,601 | ||||
Restricted cash | 25 | 0 | ||||||
Ownership interests | 4,549 | 0 | ||||||
Prepaid expenses and other current assets | 965 | 462 | ||||||
Total current assets | 30,278 | 16,063 | ||||||
Right-of-use asset, net | 1,561 | 1,790 | ||||||
Ownership interests and advances | 21,972 | 50,398 | ||||||
Other assets | 217 | 784 | ||||||
Total Assets | $ | 54,028 | $ | 69,035 | ||||
LIABILITIES AND EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 41 | $ | 56 | ||||
Accrued compensation and benefits | 794 | 2,677 | ||||||
Accrued expenses and other current liabilities | 524 | 410 | ||||||
Lease liability - current | 375 | 327 | ||||||
Total current liabilities | 1,734 | 3,470 | ||||||
Other long-term liabilities | 50 | 637 | ||||||
Lease liability - non-current | 1,678 | 2,053 | ||||||
Total Liabilities | 3,462 | 6,160 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Equity: | ||||||||
Preferred stock, $0.10 par value; 1,000 shares authorized | 0 | 0 | ||||||
Common stock, $0.10 par value; 83,333 shares authorized; 21,573 issued at December 31, 2021 and 2020, respectively | 2,157 | 2,157 | ||||||
Additional paid-in capital | 806,638 | 807,582 | ||||||
Treasury stock, at cost; 5,068 and 688 shares at December 31, 2021 and 2020, respectively | (48,569 | ) | (10,200 | ) | ||||
Accumulated deficit | (709,635 | ) | (736,639 | ) | ||||
Accumulated other comprehensive loss | (25 | ) | (25 | ) | ||||
Total Equity | 50,566 | 62,875 | ||||||
Total Liabilities and Equity | $ | 54,028 | $ | 69,035 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
General and administrative expense | $ | 7,153 | $ | 9,466 | ||||
Operating loss | (7,153 | ) | (9,466 | ) | ||||
Other income (loss), net | 22,035 | (7,708 | ) | |||||
Interest income | 276 | 261 | ||||||
Equity income (loss), net | 11,846 | (20,702 | ) | |||||
Net income (loss) before income taxes | 27,004 | (37,615 | ) | |||||
Income tax benefit (expense) | — | — | ||||||
Net income (loss) | $ | 27,004 | $ | (37,615 | ) | |||
Net income (loss) per share: | ||||||||
Basic | $ | 1.36 | $ | (1.81 | ) | |||
Diluted | $ | 1.36 | $ | (1.81 | ) | |||
Weighted average shares used in computing net income (loss) per share: | ||||||||
Basic | 19,827 | 20,751 | ||||||
Diluted | 19,827 | 20,751 |
As of December 31, | |||||||
2019 | 2018 | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 25,028 | $ | 7,703 | |||
Restricted cash | 25 | 500 | |||||
Marketable securities | — | 37,955 | |||||
Prepaid expenses and other current assets | 1,297 | 577 | |||||
Total current assets | 26,350 | 46,735 | |||||
Property and equipment, net | 2,101 | 808 | |||||
Ownership interests and advances | 77,129 | 95,585 | |||||
Other assets | 1,997 | 2,609 | |||||
Total Assets | $ | 107,577 | $ | 145,737 | |||
LIABILITIES AND EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 39 | $ | 165 | |||
Accrued compensation and benefits | 1,364 | 3,433 | |||||
Accrued expenses and other current liabilities | 627 | 2,182 | |||||
Credit facility - current | — | 22,100 | |||||
Credit facility repayment feature | — | 5,060 | |||||
Lease liability - current | 399 | — | |||||
Total current liabilities | 2,429 | 32,940 | |||||
Other long-term liabilities | 1,027 | 2,804 | |||||
Lease liability - non-current | 2,380 | — | |||||
Credit facility - non-current | — | 43,014 | |||||
Total Liabilities | 5,836 | 78,758 | |||||
Commitments and contingencies (Note 12) | |||||||
Equity: | |||||||
Preferred stock, $0.10 par value; 1,000 shares authorized | — | — | |||||
Common stock, $0.10 par value; 83,333 shares authorized; 21,573 issued at December 31, 2019 and 2018, respectively | 2,157 | 2,157 | |||||
Additional paid-in capital | 810,856 | 810,928 | |||||
Treasury stock, at cost; 930 and 914 shares at December 31, 2019 and 2018, respectively | (14,024 | ) | (15,001 | ) | |||
Accumulated deficit | (697,223 | ) | (731,105 | ) | |||
Accumulated other comprehensive loss | (25 | ) | — | ||||
Total Equity | 101,741 | 66,979 | |||||
Total Liabilities and Equity | $ | 107,577 | $ | 145,737 |
See Notes to Consolidated Financial Statements.
Year Ended December 31, | |||||||
2019 | 2018 | ||||||
General and administrative expense | $ | 9,982 | $ | 16,871 | |||
Operating loss | (9,982 | ) | (16,871 | ) | |||
Other income (loss), net | 12,255 | (5,158 | ) | ||||
Interest income | 2,044 | 2,806 | |||||
Interest expense | (14,023 | ) | (16,067 | ) | |||
Equity income (loss), net | 64,267 | 19,661 | |||||
Net income (loss) before income taxes | 54,561 | (15,629 | ) | ||||
Income tax benefit (expense) | — | — | |||||
Net income (loss) | $ | 54,561 | $ | (15,629 | ) | ||
Net income (loss) per share: | |||||||
Basic | $ | 2.64 | $ | (0.76 | ) | ||
Diluted | $ | 2.64 | $ | (0.76 | ) | ||
Weighted average shares used in computing net income (loss) per share: | |||||||
Basic | 20,636 | 20,544 | |||||
Diluted | 20,636 | 20,544 |
Year Ended December 31, | |||||||
2019 | 2018 | ||||||
Net income (loss) | $ | 54,561 | $ | (15,629 | ) | ||
Other comprehensive (loss) income: | |||||||
Share of other comprehensive (loss) income of equity method investments | (31 | ) | 113 | ||||
Reclassification adjustment for sale of equity method investments | 6 | — | |||||
Total comprehensive income (loss) | $ | 54,536 | $ | (15,516 | ) |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated | Accumulated Other Comprehensive | Common Stock | Additional Paid-In | Treasury Stock | ||||||||||||||||||||||||||||
Total | Deficit | 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 | (37,615 | ) | (37,615 | ) | — | — | — | — | — | — | ||||||||||||||||||||||
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net | (40 | ) | — | — | — | — | (3,864 | ) | (242 | ) | 3,824 | |||||||||||||||||||||
Stock-based compensation | 590 | — | — | — | — | 590 | — | — | ||||||||||||||||||||||||
Change in accounting at ownership interests | (1,801 | ) | (1,801 | ) | — | — | — | — | — | — | ||||||||||||||||||||||
Balance — December 31, 2020 | $ | 62,875 | $ | (736,639 | ) | $ | (25 | ) | 21,573 | $ | 2,157 | $ | 807,582 | 688 | $ | (10,200 | ) | |||||||||||||||
Net income | 27,004 | 27,004 | — | — | — | — | — | — | ||||||||||||||||||||||||
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net | 736 | — | — | — | — | (1,550 | ) | (161 | ) | 2,286 | ||||||||||||||||||||||
Stock-based compensation | 606 | — | — | — | — | 606 | — | — | ||||||||||||||||||||||||
Repurchases of common stock | (40,655 | ) | — | — | — | — | — | 4,541 | (40,655 | ) | ||||||||||||||||||||||
Balance — December 31, 2021 | $ | 50,566 | $ | (709,635 | ) | $ | (25 | ) | 21,573 | $ | 2,157 | $ | 806,638 | 5,068 | $ | (48,569 | ) |
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||
Accumulated Deficit | Common Stock | Additional Paid-In Capital | Treasury Stock | ||||||||||||||||||||||||||
Total | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance — December 31, 2017 | $ | 81,796 | $ | (715,476 | ) | $ | (113 | ) | 21,573 | $ | 2,157 | $ | 812,536 | 999 | $ | (17,308 | ) | ||||||||||||
Net loss | (15,629 | ) | (15,629 | ) | — | — | — | — | — | — | |||||||||||||||||||
Stock options exercised, net of tax withholdings | — | — | — | — | — | (16 | ) | — | 16 | ||||||||||||||||||||
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net | (267 | ) | — | — | — | — | (2,558 | ) | (85 | ) | 2,291 | ||||||||||||||||||
Stock-based compensation | 966 | — | — | — | — | 966 | — | — | |||||||||||||||||||||
Other comprehensive income | 113 | — | 113 | — | — | — | — | — | |||||||||||||||||||||
Balance — December 31, 2018 | $ | 66,979 | $ | (731,105 | ) | $ | — | 21,573 | $ | 2,157 | $ | 810,928 | 914 | $ | (15,001 | ) | |||||||||||||
Net income | 54,561 | 54,561 | — | — | — | — | — | — | |||||||||||||||||||||
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net | (236 | ) | — | — | — | — | (1,213 | ) | 16 | 977 | |||||||||||||||||||
Stock-based compensation | 1,141 | — | — | — | — | 1,141 | — | — | |||||||||||||||||||||
Other comprehensive loss | (25 | ) | — | (25 | ) | — | — | — | — | — | |||||||||||||||||||
Dividends paid | (20,679 | ) | (20,679 | ) | — | — | — | — | — | — | |||||||||||||||||||
Balance — December 31, 2019 | $ | 101,741 | $ | (697,223 | ) | $ | (25 | ) | 21,573 | $ | 2,157 | $ | 810,856 | 930 | $ | (14,024 | ) | ||||||||||||
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | 27,004 | $ | (37,615 | ) | |||
Adjustments to reconcile to net cash used in operating activities: | ||||||||
Amortization of right of use asset | 229 | 311 | ||||||
Equity (income) loss, net | (11,846 | ) | 9,420 | |||||
Impairments of ownership interests and advances | 2,521 | 20,039 | ||||||
Gain from observable price changes | (8,505 | ) | (1,224 | ) | ||||
Gain from sales of ownership interests | (35,284 | ) | 0 | |||||
Change in fair value of ownership interests | 19,255 | 0 | ||||||
Other, net | (22 | ) | 175 | |||||
Stock-based compensation, including liability classified awards | 1,779 | 965 | ||||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other current assets | (238 | ) | (137 | ) | ||||
Accounts payable, accrued expenses, and other current liabilities | (3,045 | ) | (77 | ) | ||||
Net cash used in operating activities | (8,152 | ) | (8,143 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisitions of ownership interests | 0 | (7,534 | ) | |||||
Proceeds from sales and distributions from ownership interests | 60,832 | 7,903 | ||||||
Advances and loans to ownership interests | (2,718 | ) | (1,638 | ) | ||||
Net cash provided by (used in) investing activities | 58,114 | (1,269 | ) | |||||
Cash Flows from Financing Activities: | ||||||||
Repurchases of common stock | (40,655 | ) | 0 | |||||
Tax withholdings related to equity-based awards | (144 | ) | (40 | ) | ||||
Net cash used in financing activities | (40,799 | ) | (40 | ) | ||||
Net change in cash, cash equivalents and restricted cash | 9,163 | (9,452 | ) | |||||
Cash, cash equivalents and restricted cash equivalents at beginning of period | 15,601 | 25,053 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 24,764 | $ | 15,601 |
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | 54,561 | $ | (15,629 | ) | |||
Adjustments to reconcile to net cash used in operating activities: | ||||||||
Depreciation | 808 | 692 | ||||||
Amortization of debt discount | 3,454 | 4,513 | ||||||
Amortization of right of use asset | 260 | — | ||||||
Equity income, net | (64,267 | ) | (19,661 | ) | ||||
(Income) loss from change in fair value of derivative | (5,060 | ) | 4,541 | |||||
Gain from observable price changes | (4,526 | ) | (1,415 | ) | ||||
Other, net | (2,268 | ) | 2,044 | |||||
Stock-based compensation, including liability classified awards | 1,237 | 966 | ||||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other current assets | (823 | ) | (2,065 | ) | ||||
Accounts payable, accrued expenses, and other | (3,346 | ) | (21 | ) | ||||
Net cash used in operating activities | (19,970 | ) | (26,035 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisitions of ownership interests | (11,640 | ) | (3,250 | ) | ||||
Proceeds from sales and distributions | 104,302 | 67,387 | ||||||
Advances and loans | (5,055 | ) | (13,104 | ) | ||||
Repayment of advances and loans | 750 | 10,730 | ||||||
Purchase of marketable securities | (57,243 | ) | (37,809 | ) | ||||
Proceeds, from sales and maturities in securities | 95,189 | 8,148 | ||||||
Proceeds from sales of property and equipment | — | 1 | ||||||
Net cash provided by investing activities | 126,303 | 32,103 | ||||||
Cash Flows from Financing Activities: | ||||||||
Payment of dividend | (20,679 | ) | — | |||||
Proceeds from credit facility | — | 35,000 | ||||||
Issuance costs of credit facility | — | (2,252 | ) | |||||
Repayments on credit facility | (68,568 | ) | (16,433 | ) | ||||
Repurchase of convertible senior debentures | — | (41,000 | ) | |||||
Tax withholdings related to equity-based awards | (236 | ) | (267 | ) | ||||
Net cash used in financing activities | (89,483 | ) | (24,952 | ) | ||||
Net change in cash, cash equivalents and restricted cash equivalents | 16,850 | (18,884 | ) | |||||
Cash, cash equivalents and restricted cash equivalents at beginning of period | 8,203 | 27,087 | ||||||
Cash, cash equivalents and restricted cash equivalents at end of period | $ | 25,053 | $ | 8,203 |
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
Liquidity And Capital Resources
As of December 31, 2019,2021, Safeguard Scientifics, Inc. ("the Company") had $25.0$24.7 million of cash and cash equivalents.
In January 2018, Safeguard announced that, from that date forward, the Company will not deploy anyceased deploying capital into new opportunities and willin order to focus on supporting ourthe existing companiesownership interests and maximizing monetization opportunities to returnenable returning value to shareholders. In that context, the Company has, areWe have considered and will considertaken action on various initiatives including among others: the sale of individualour ownership interests, the sale of certain or all of our ownership interests in secondary market transactions or a combination thereof, as well as other opportunities to maximize shareholder value.
The Company believes that its cash and cash equivalents at December 31, 20192021 will be sufficient to fund operations past one year from the issuance of these consolidated financial statements.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Safeguard and all of its subsidiaries in which a controlling financial interest is maintained.wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Principles of Accounting for Ownership Interests in Companies
The Company accounts for its ownership interests using one of the following methods: Equity or Other. The accounting method applied is generally determined by the degree of the Company's influence over the entity, primarily determined by our voting interest in the entity.
In addition to holding voting and non-voting equity and debt securities, the Company also periodically makes advances to its companies in the form of promissory notes which are included in the Ownership interests and advances on the Consolidated Balance Sheets.
Equity Method.
The Company accounts for ownership interests whose results are not consolidated, but over which it exercises significant influence, under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an ownership interest depends on an evaluation of several factors including, among others, representation on the board of directors and our ownership level, which is generally a 20% to 50% interest in the voting securities of a company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. The Company records the initial ownership interest at cost. Under the equity method of accounting, the Company does not reflect a company’s financial statements within our Consolidated Financial Statements; however, our share of the income or loss of such company is reflected in Equity income (loss), net in the Consolidated Statements of Operations. The Company also adjust the carrying value to reflect third party investments in the ownership interests, which typically result in a dilution gain. The Company includes the carrying value of equity method companies in Ownership interests and advances on the Consolidated Balance Sheets. Any excess of the Company’s cost over its underlying interest in the net assets of equity method companies that is allocated to intangible assets is amortized over the estimated useful lives of the related intangible assets. The Company reflects its share of the income or loss of the equity method companies on a one quarter lag. This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these companies.When the Company’s carrying value in an equity method company is reduced to zero, the Company records no further losses in its Consolidated Statements of Operations unless the Company has an outstanding guarantee obligation or has committed additional funding to such equity method company. WhenIf such equity method company subsequently reports income, the Company will not record its share of such income until it exceeds the amount of the Company’s share of losses not previously recognized.
Other Method.
We account forThe Company accounts for ownership interests that are not accounted for under the equity method and have a readily determinable fair value at fair value based on the closing stock price on the last trading day of the reporting period. As of December 31, 2021 those ownership interests consist of approximately 1.3 million common shares of Bright Health Group ("Bright Health") valued at $4.5 million.
Comprehensive Income (loss)
During the years ended December 31, 2021 or 2020, there were no items of comprehensive income (loss).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting Estimates
The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. These estimates include the evaluation of the recoverability of the Company’s ownership interests and advances, the fair value of the credit facility repayment feature derivative, the current portion of the credit facility debt, the recoverability of deferred tax assets, stock-based compensation and commitments and contingencies. Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.
Certain amounts recorded to reflect the Company’s share of income or losses for companies accounted for under the equity method are based on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities’ financial statements are completed.
It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests and advances could change in the near term and that the effect of such changes on the consolidated financial statements could be material. At December 31, 2019,2021, the Company believes the carrying value of the Company’s ownership interests and advances is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future or that a significant loss will not be recorded in the future upon the sale of a company.
Cash and Cash Equivalents and Marketable Securities
The Company considers all highly liquid instruments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits that are readily convertible into cash. The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities were carried at amortized cost, which approximated fair value. Marketable securities consisted of held-to-maturity securities, primarily consisting of government agency bonds, commercial paper and certificates of deposits. Marketable securities with a maturity date greater than one year from the balance sheet date would be considered long-term. The Company has not experienced any significant losses on cash equivalents and does not believe it is exposed to any significant credit risk on cash and cash equivalents.
Restricted Cash
Restricted cash equivalents represents cash required to be set aside by a contractual agreement as a shareholder representative. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets:
December 31, 2019 | December 31, 2018 | ||||||
(In thousands) | |||||||
Cash and cash equivalents | $ | 25,028 | $ | 7,703 | |||
Restricted cash | 25 | 500 | |||||
Total cash, cash equivalents and restricted cash | $ | 25,053 | $ | 8,203 |
December 31, 2021 | December 31, 2020 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents | $ | 24,739 | $ | 15,601 | ||||
Restricted cash | 25 | 0 | ||||||
Total cash, cash equivalents and restricted cash | $ | 24,764 | $ | 15,601 |
Financial Instruments
The Company’s financial instruments (principally cash and cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable and accrued expenses) are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s long-term debt was carried at cost.
Right-of-use asset
Right-of-use assets resulting from the adoption of Accounting Standards Update ("ASU") No. 2016-02,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Lease liability
The initial lease liability represents the present value of the fixed escalating lease payments through April 2026 associated with the Company's prior corporate headquarters operating office lease. The discount rate used to calculate the lease liability was based on the Company's incremental borrowing rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease, which was approximately 12%, at the transition to the guidance of ASU No. 2016-02,
In March 2019, the Company entered into a sublease of its prior corporate headquarters office space. The term of the sublease is through April 2026, the same as the Company's underlying lease. Fixed sublease payments to the Company are escalating over the term of the sublease and are reported as a component of general and administrative expenses.
In April 2019, the Company entered into a sublease for replacement office space with a related party, an equity method ownership interest, beginning in June 2019. The 18 month term of this sublease is 18 months with three conditional six months renewals based on mutual agreement with the sublessor.expired in 2020. The aggregate payments expected under this sublease are were not material.
A summary of the Company's operating lease cash flows at December 31, 20192021 follows:
Operating lease payments | Expected sublease receipts | |||||
(In thousands) | ||||||
2020 | $ | 707 | $ | 509 | ||
2021 | 595 | 525 | ||||
2022 | 601 | 540 | ||||
2023 | 607 | 556 | ||||
2024 | 613 | 573 | ||||
2025 | 619 | 590 | ||||
Thereafter | 207 | 199 | ||||
Total future minimum lease payments | 3,949 | $ | 3,492 | |||
Less imputed interest | (1,170 | ) | ||||
Total operating lease liabilities | $ | 2,779 | ||||
Operating lease payments | Expected sublease receipts | |||||||
(In thousands) | ||||||||
2022 | $ | 601 | $ | 540 | ||||
2023 | 607 | 556 | ||||||
2024 | 613 | 573 | ||||||
2025 | 619 | 590 | ||||||
2026 | 207 | 199 | ||||||
2027 | 0 | 0 | ||||||
Thereafter | 0 | 0 | ||||||
Total future minimum lease payments | 2,647 | 2,458 | ||||||
Less imputed interest | (595 | ) | ||||||
Total operating lease liabilities | $ | 2,052 |
Impairment of Ownership Interests and Advances
On a periodic basis, but no less frequently than quarterly, the Company evaluates the carrying value of its ownership interests and advances for possible impairment based on achievement of business plan objectives and milestones, the estimated fair value of each company relative to its carrying value, the financial condition and prospects of the company and other relevant factors. The business plan objectives and milestones the Company considers include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Management then determines whether there has been an other than temporary decline in the value of its ownership interest in the company. Impairment is measured as the amount by which the carrying value of an asset exceeds its estimated fair value.
The estimated fair value of privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods, including discounted cash flows, valuation of comparable public companies and the valuation of acquisitions of similar companies.
Impairment charges related to equity method companies are included in Equity income (loss), net in the Consolidated Statements of Operations. Impairment charges related to non-equity method companies and funds are included in Other income (loss), net in the Consolidated Statements of Operations.
The reduced cost basis of a previously impaired company accounted for using the Equity method are not written-up if circumstances suggest the value of the company has subsequently recovered.
Income Taxes
The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period of the enactment date. The Company provides a valuation allowance against the net deferred tax asset for amounts which are not considered more likely than not to be realized.
Net Income (Loss) Per Share
The Company computes net income (loss) per share using the weighted average number of common shares outstanding during each year. The Company includes in diluted net income (loss) per share common stock equivalents (unless anti-dilutive) which would arise from the exercise of stock options and conversion of other convertible securities and adjusted, if applicable, for the effect on net income (loss) of such transactions. Diluted net income (loss) per share calculations adjust net income (loss) for the dilutive effect of common stock equivalents and convertible securities issued by the Company’s consolidated or equity method companies.
Segment Information
The Company operates as one operating segment based upon the similar nature of its 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2. Ownership Interests and Advances
The following summarizes the carrying value of the Company’s ownership interests and advances.
December 31, 2019 | December 31, 2018 | ||||||
(In thousands) | |||||||
Equity Method: | |||||||
Companies | $ | 34,271 | $ | 64,097 | |||
Private equity funds | 271 | 392 | |||||
34,542 | 64,489 | ||||||
Other Method: | |||||||
Companies | 27,031 | 15,260 | |||||
Private equity funds | 453 | 511 | |||||
27,484 | 15,771 | ||||||
Advances to companies | 15,103 | 15,325 | |||||
$ | 77,129 | $ | 95,585 |
December 31, 2021 | December 31, 2020 | |||||||
(In thousands) | ||||||||
Equity Method: | ||||||||
Companies | $ | 21,091 | $ | 27,550 | ||||
Private equity funds | 117 | 271 | ||||||
21,208 | 27,821 | |||||||
Other Method: | ||||||||
Companies, fair value | 4,549 | 0 | ||||||
Companies, fair value measurement alternative | 514 | 19,683 | ||||||
Private equity funds, fair value measurement alternative | 250 | 268 | ||||||
5,313 | 19,951 | |||||||
Advances to companies | 0 | 2,626 | ||||||
$ | 26,521 | $ | 50,398 |
In March 2021, Zipnosis, Inc. was acquired by another entity, Bright Health. The Company received $3.5 million in cash proceeds, including escrows, 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 do not have a readily determinable fair value, this estimated value may differ 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 an impairment of $3.0a $17.3 million related to NovaSom,gain on the sale, which is reflectedincluded in Equity income (loss), net in the Consolidated Statements of Operations. The impairment wasfair value of the ownership interest received as a result of NovaSomthe acquisition was estimated based on evaluating several valuation methods available, including the value at which independent third parties have recently invested, the valuation of comparable public companies, and the present value of our expected outcomes. Assumptions considered within these methods include 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 have determined this 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 reported as a component of Other income (loss), net. As a result, the Company recognized a $10.8 million unrealized loss, net, on Bright Health subsequent to the initial public offering during the year-ended December 31, 2021. Subsequent to December 31, 2021, the fair value of our Bright Health ownership interest declined to approximately $2.3 million as of March 7, 2022.
In August 2021, Flashtalking was acquired by another entity. The Company has received $45.0 million in cash proceeds, including escrows, and included a $32.5 million gain in Other income (loss), net, during the year ended December 31, 2021. The Company may receive additional amounts of up to approximately $0.5 million over the next 24 months from the resolution of escrow contingencies.
In January 2021, WebLinc, Inc.'s August 2019 bankruptcy filing.
QuanticMind and Hoopla were acquired in separate transactions during the first quarter of 2021 by other entities, 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.
In January 2019, PropellerMarch 2021, the Company's ownership interest in T-REX Group, Inc., which was accounted for using the fair value measurement alternative, was acquired for $3.0 million in cash. The Company recognized a $0.9 million gain, which is included in Other income (loss), net.
In April 2021, Velano Vascular was acquired by another entity. The Company has received $3.5 million in cash proceeds, including escrows, and included a $1.9 million gain in Other income (loss), net, for the year ended December 31,2021. The Company may receive additional amounts over the next 12 months from the resolution of escrow contingencies.
In December 2021, the Company received $2 million of contingent proceeds resulting from resolution of certain valuation thresholds remaining from the 2018 sale of AdvantEdge Healthcare Solutions.
During the year ended December 31,2021, the Company recorded an impairment of $2.5 million related to reduced expectations for certain Other ownership interests, which is included in Other income (loss), net.
In September 2020, Sonobi, Inc. was acquired by another entity for cash. The Company received $41.5$6.6 million in cash proceeds in connection with the transaction, and $0.7 million in 2020 for amounts held in escrow. The Company recognized a gain of $35.1 million, which is included in Equity income (loss) in the Consolidated Statements of Operations.
During the year ended December 31, 2020, the Company previouslyrecorded impairments of $11.3 million related to the ownership interests of WebLinc, Inc., QuanticMind, Inc. and Sonobi, Inc. accounted for its ownership interest in MediaMath under the equity method, which are reflected in Equity income (loss), net in the Consolidated Statement of accounting. Immediately afterOperations. During the initial transaction,year ended December 31,2020, the Company discontinued utilizingalso recorded impairments of $8.8 million related to the equityownership interests of T-REX Group, Inc., b8ta and others accounted for under the Other method, which are reflected in Other income (loss), net in the Consolidated Statement of accountingOperations. 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 measurement of fair value for its remainingthese impairments was estimated based on evaluating several valuation inputs available for each of the applicable ownership interests, primarily including the value at which independent third parties have invested, the valuation of comparable public companies, the valuation of acquisitions of similar companies and the present value of our expected outcomes. Assumptions considered within these methods include determining which public companies are comparable, projecting forward revenues for the measured ownership interest, discounts to apply for the lack of marketability or lack of comparability, other factors and the relative weight to apply to each valuation input available. Due to the unobservable nature of some of these inputs, we have determined these fair value estimates to be non-recurring Level 3 fair value measurements.
During the year ended December 31, 2020, the Company recorded a $1.5 million non-cash gain based upon an observable price change related to our ownership interest in MediaMath. The Company's remaining ownership interest was recorded at its carrying value immediately prior toFlashtalking Inc. accounted for under the July 2018 transaction. The carrying value will be adjusted for any observable price changes in the same or similar equity securities of MediaMath as those held by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2021, the Company held ownership interests accounted for using the equity method in 9 non-consolidated companies.
Certain of the Company’s ownership interests as of December 31, 2021 and 2020 included the following:
Safeguard Primary Ownership as of December 31, | ||||||
Company Name | 2021 | 2020 | Accounting Method | |||
Aktana, Inc. | 13.4% | 15.1% | Equity | |||
Clutch Holdings, Inc. | 41.7% | 42.3% | Equity | |||
InfoBionic, Inc. | 25.2% | 25.2% | Equity | |||
Lumesis, Inc. | 43.2% | 43.4% | Equity | |||
MediaMath, Inc. | 13.2% | 13.3% | Other | |||
meQuilibrium | 31.9% | 32.0% | Equity | |||
Moxe Health Corporation | 27.6% | 27.6% | Equity | |||
Prognos Health Inc. | 28.5% | 28.5% | Equity | |||
Syapse, Inc. | 11.1% | 18.9% | Equity | |||
Trice Medical, Inc. | 12.6% | 16.6% | Equity |
Summarized Financial Information
The following table provides summarized financial information for ownership interests accounted for under the equity method for the periods presented and has been compiled from respective company financial statements, reflect certain historical adjustments, and are reported on a one quarter lag. Results of operations are excluded for periods prior to their acquisition and subsequent to their disposition. Historical results are not adjusted when the Company exits or writes-off a company.
As of December 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Balance Sheets: | |||||||
Current assets | $ | 91,968 | $ | 168,659 | |||
Non-current assets | 26,231 | 24,432 | |||||
Total assets | $ | 118,199 | $ | 193,091 | |||
Current liabilities | $ | 80,783 | $ | 88,988 | |||
Non-current liabilities | 87,081 | 109,924 | |||||
Shareholders’ equity | (49,665 | ) | (5,821 | ) | |||
Total liabilities and shareholders’ equity | $ | 118,199 | $ | 193,091 | |||
Number of equity method ownership interests | 13 | 19 |
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
(In thousands) | ||||||||
Results of Operations: | ||||||||
Revenue | $ | 145,632 | $ | 283,009 | ||||
Gross profit | $ | 78,465 | $ | 181,571 | ||||
Net loss | $ | (127,007 | ) | $ | (154,696 | ) |
As of December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands) | ||||||||
Balance Sheets: | ||||||||
Current assets | $ | 127,651 | $ | 104,024 | ||||
Non-current assets | 53,220 | 26,352 | ||||||
Total assets | $ | 180,871 | $ | 130,376 | ||||
Current liabilities | $ | 62,538 | $ | 72,972 | ||||
Non-current liabilities | 158,975 | 105,506 | ||||||
Shareholders’ deficit | (40,642 | ) | (48,102 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 180,871 | $ | 130,376 | ||||
Number of equity method ownership interests | 9 | 12 |
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands) | ||||||||
Results of Operations: | ||||||||
Revenue | $ | 140,670 | $ | 153,875 | ||||
Gross profit | $ | 90,388 | $ | 92,039 | ||||
Net loss | $ | (106,363 | ) | $ | (82,216 | ) |
As of December 31, 2019,2021, the Company’s carrying value in equity method companies, in the aggregate, exceeded the Company’s share of the net assets of such companies by approximately $24.3$11.4 million. Of this excess, $19.0$10.4 million was allocated to goodwill and $5.3$1.0 million was allocated to intangible assets.
3. Acquisitions of Ownership Interests
2021 Transactions
The Company deployed an additional $5.0funded $1.7 million to Syapse,Aktana, Inc. during the three months ended September 30, 2021. The Company had previously deployed an aggregate of $15.6$14.2 million. Aktana helps its customers improve their commercial effectiveness by delivering data-driven insights and suggestions directly to sales reps, coordinating multi-channel actions and providing insight regarding which strategies work best for which customers under which conditions.
Syapse raised $68 million of preferred equity during the three months ended March 31, 2021, which reduced the Company's ownership interest to approximately 11.1%. The Company recorded a $7.3 million dilution gain as a result of this transaction, which is included in Syapse.Equity income (loss), net in the Consolidated Statements of Operation. Syapse drives healthcare transformation through precision medicine, enabling provider systems to improve clinical outcomes, streamline operations, and shift to new payment models.
The Company deployed an additional $2.0funded $1 million of convertible loans to Moxe Health Corporation, including $0.3 million that was funded initially as a convertible loan. The Company had previously deployed $5.5 million in Moxe Health. Moxe Health connects payers to their provider networks, facilitating real-time data exchange through its electronic integration platform.
2020 Transactions
The Company deployed an additional $1.5$2.5 million to meQuilibrium.Aktana, Inc.
The Company had previously deployed $11.5an additional $4.4 million into Syapse, Inc.
The Company deployed an additional $1.0 million to meQuilibrium. meQuilibrium is a digital coaching platform that delivers clinically validated and highly personalized resilience solutions to employers, health plans, wellness providers, and consumers increasing engagement, productivity and performance, as well as improving outcomes in managing stress, health and well-being.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company deployedfunded an additional $1.5$0.7 million of convertible loans to Zipnosis,Trice Medical, Inc. The Company had previously deployed $8.5 million in Zipnosis. Zipnosis provides health systems with a white-labeled, fully integrated virtual care platform.
The Company deployed an aggregate of $0.4$0.2 million to Clutch Holdings. The Company had previously deployed an aggregate of $16.3 million in Clutch. Clutch provides customer intelligence and personalized engagements that empower consumer-focused businesses to identify, understand and motivate each segment of their customer base.
The Company funded an additional $2.0$0.2 million of convertible loans to Sonobi, Inc. The Company had previously deployed $11.4 millionQuanticMind. See Note 2 for impairment recorded in Sonobi. Sonobi is an advertising technology developer that designs advertising tools2020 and solutions for the industry's leading media, publishers, brand advertisers, media agencies, DSPs, and media technology providers.
The Company funded an aggregate of $1.1$0.1 million of convertible loans to WebLinc, Inc. The Company had previously deployed an aggregate of $15.0 million in WebLinc. WebLinc is an e-commerce platform for online retailers.
4. Fair Value Measurements
The Company categorizes its financial instruments into a three-levelthree-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1)1) and the lowest priority to unobservable inputs (Level 3)3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial assets recorded at
Cash, cash equivalents and restricted cash approximate fair value on the Company’s Consolidated Balance Sheets are categorized as follows:
Carrying Value | Fair Value Measurement at December 31, 2019 | ||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||
(in thousands) | |||||||||||||||
Cash and cash equivalents | $ | 25,028 | $ | 25,028 | $ | — | $ | — | |||||||
Restricted cash equivalents | 25 | 25 | — | — | |||||||||||
Carrying Value | Fair Value Measurement at December 31, 2018 | ||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | |||||||||||||||
Cash and cash equivalents | $ | 7,703 | $ | 7,703 | $ | — | $ | — | |||||||
Restricted cash equivalents | 500 | 500 | — | — | |||||||||||
Marketable securities—held-to-maturity: | |||||||||||||||
Government agency bond | $ | 21,473 | $ | 21,473 | $ | — | $ | — | |||||||
U.S. Treasury Bills | 16,482 | 16,482 | — | — | |||||||||||
Total marketable securities | $ | 37,955 | $ | 37,955 | $ | — | $ | — | |||||||
Credit facility repayment feature liability | $ | 5,060 | $ | — | $ | — | $ | 5,060 |
Carrying | Fair Value Measurement at December 31, 2021 | ||||||||||
Value | Level 1 | Level 2 | Level 3 | ||||||||
(in thousands) | |||||||||||
Cash and cash equivalents | $ | 24,739 | $ | 24,739 | $ | — | $ | — | |||
Restricted cash | $ | 25 | $ | 25 | $ | — | $ | — | |||
Ownership interests | $ | 4,549 | $ | 4,549 | $ | — | $ | — |
Carrying | Fair Value Measurement at December 31, 2020 | |||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 15,601 | $ | 15,601 | $ | — | $ | — |
Ownership interests accounted for at fair value as of December 31, 2018, $38.02021 consist of approximately 1.3 million common shares of marketable securities had contractual maturities which were less than one year. Held-to-maturityBright Health. The securities are carried at amortized cost, which, due to the short-term maturity of these instruments, approximates fair value using quoted prices in active markets for identical assets or liabilities defined as Level 1 inputs underbased on the fair value hierarchy. As of December 31, 2018, $5.1 million was recorded as a credit facility repayment feature liability due to the provision in the Credit Facility that required prepayments of outstanding principal amounts when the Company's qualified cash at any quarter end date exceeded $50.0 million. This represented an increase of $4.5 million from its initial value established during the second quarter of 2018. The prepayment feature was an embedded derivative that was accounted for as a liability separate from the Credit Facility. The liability was adjusted to zero upon repayment of the Credit Facility, which occurred in July 2019. Management's cash forecasts are defined as Level 3 inputs under the fair value hierarchy.
5. Equity
In July 2015, the Company's Board of Directors authorized the Company, 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 years ended December 31, 20192021 and 2018,2020, the Company did not repurchase any shares under the existing authorization.
In February 2018, May 2021, the Company's Board of Directors adoptedauthorized a tax benefits preservation plan (the "Plan") designed to protectnew $6.0 million share repurchase program using existing funds in accordance with the requirements of Rule 10b5-1 and preserveRule 10b-18 under the Company's ability to utilize its net operating loss carryforwards ("NOLs") which was ratified by shareholders at its 2018 Annual MeetingSecurities Exchange Act of Shareholders. The purpose of1934, as amended. During the Plan is to preserve the Company's ability to use its NOLs, which would be substantially limited if year ended December 31, 2021, the Company experiencedrepurchased 236,159 shares for an "ownership change" as defined under Section 382aggregate price of $1.6 million at an average cost of $6.94 per share.
During October 2021, the Internal Revenue Code. In general, an ownership change would occur if the Company's shareholders who are treated as owning five percent or more of the outstanding shares of Safeguard for purposes of Section 382 ("five-percent shareholders") collectively increase their aggregate ownershipCompany completed a modified Dutch auction self-tender that resulted in the Company's overallrepurchase of 4.3 million common shares outstanding by more than 50 percentage points. Whether this change has occurred would be measured by comparing each five-percent shareholder's current ownership asfor an aggregated price of the$39.0 million, or $9.06 per share, including $0.3 million of transaction costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6. Stock-Based Compensation
Equity Compensation Plans
The 2014 Equity Compensation Plan has 4.1 million shares authorized for issuance. During 20192021 and 2018,2020, the Company issued no stock-based awards outside of existing plans. To the extent allowable, service-based options are incentive stock options. Options granted under the plans are at prices equal to or greater than the fair market value at the date of grant. Upon exercise of stock options, the Company issues shares first from treasury stock, if available, then from authorized but unissued shares. At December 31, 2019,2021, the Company had reserved 3.12.6 million shares of common stock for possible future issuance under its 2014 Equity Compensation Plan and other previously expired equity compensation plans.
Classification of Stock-Based Compensation Expense
Stock-based compensation consists of time based awards to employees, financial liability based awards to employees and non-employees to be settled in stock, performance based awards to employees, and financial liability based awards to Directors for quarterly and annual services. Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
(In thousands) | ||||||||
General and administrative expense | $ | 1,237 | $ | 966 | ||||
$ | 1,237 | $ | 966 |
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands) | ||||||||
General and administrative expense | $ | 1,779 | $ | 965 | ||||
$ | 1,779 | $ | 965 |
Stock-based compensation expense of $1.2 million and $1.0 million was recognized during the years ended December 31, 2019,2021 and 2020, respectively, related to annual and quarterly Board fees, time based management awards and management bonuses earned during the year that were subsequently settled in stock. For the years ended December 31, 2021 and 2020, respectively, the Company issued 83 thousand and 93 thousand of restricted shares to Directors for their annual and quarterly services. The annual grants vest over a one year period, or are vested at issuance for directors 65 or older, while quarterly amounts are paid in arrears. The Company vested 95 thousand and 78 thousand during the years ended December 31, 2021 and 2020. The Company vested 67 thousand and 96 thousand shares during the years ended December 31, 2021 and 2020, respectively, for time based management compensation. The Company settled in stock other management bonuses resulting in the issuance of 60 thousand and 0 thousand vested shares for the years ended December 31, 2021 and 2020, respectively. The Company issued 20 thousand vested shares to a non-employee for services during 2021. The Company had liabilities of $0.8 million and $0.5 million as of December 31, 2021 and 2020, respectively, that were settled through the issuance of common stock in the subsequent period.
The Company has previously granted certain performance-based stock units that vest based on the achievement of targeted capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified companies. The requisite service periods for these performance-based awards were based on the Company’s estimate of when the performance conditions will be met. Compensation expense was recognized for performance-based awards for which the performance condition is considered probable of achievement. During the years ended December 31, 2021 and 2020, respectively, 6 thousand and 129 thousand performance-based stock units pursuant to these targeted capital return pools were canceled or forfeited. The Company recorded a reduction of compensation expense related to these performance-based awards of $0.1 million and $0.7 million for the years ended December 31, 2021 and 2020 respectively. During 2020 and in January 2022, the Company also granted a CEO bonus award that will be settled in the vesting of performance-based units based on criteria determined by the Board of Directors. The performance-based stock units represent the right to receive shares of the Company’s common stock, on a one-for-one basis at target, or up to 120% with respect to the 2020 grant, for certain specified thresholds. The 2020 award resulted in $0.5 million of compensation cost in 2021 based upon the vesting of 85 thousand performance based units. The January 2022 award could result in the vesting of up to 80 thousand performance-based stock units.
Unrecognized compensation expense related to performance stock units and restricted stock at December 31, 2021 was immaterial.
While there were no stock options granted during 2021 and 2020, the Company had outstanding options that vest based on two different types of vesting schedules:
1) performance-based; and
2) service-based.
Performance-based option awards entitlealso entitled participants to vest in a number of awards determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company upon the sale, merger or other exit transaction of certain identified companies. Vesting may occur, if at all, once per year. The requisite service periods for the performance-based awards are based on the Company’s estimate of when the performance conditions will be met. Compensation expense is recognized for performance-based awards for which the performance condition is considered probable of achievement. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. NoThe Company did not issue any performance-based options were issuedunits during the years ended December 31, 2019 or 2018.2021 and 2020. During the years ended December 31, 20192021 and 2018, 02020, respectively, 1 thousand and 1 thousand0 performance-based options vested each year.and an immaterial amount of compensation cost was recognized. During the years ended December 31, 20192021 and 2018,2020, respectively, 17411 thousand and 7672 thousand performance-based options were canceled or forfeited. The Company recorded a reduction of compensation expense related to performance-based options of $0.1 million and $0.7 million for the years ended December 31, 2019 and 2018 respectively. The maximum number of unvested options at December 31, 20192021 attainable under these grants was 8510 thousand shares.
Service-based awards generally vest over four years after the date of grant and expire eight years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period for service-based awards is the period over which the award vests. During the years ended December 31, 2019 2021 and 2018,
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Option activity of the Company is summarized below:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||
(In thousands) | (In years) | (In thousands) | |||||||||
Outstanding at January 1, 2018 | 569 | 14.74 | |||||||||
Options granted | — | — | |||||||||
Options exercised | (15 | ) | 12.29 | ||||||||
Options canceled/forfeited | (144 | ) | 15.21 | ||||||||
Outstanding at December 31, 2018 | 410 | 14.66 | |||||||||
Options granted | — | — | |||||||||
Options exercised | — | — | |||||||||
Options canceled/forfeited | (231 | ) | 14.19 | ||||||||
Outstanding at December 31, 2019 | 179 | 15.27 | 1.65 | $ | — | ||||||
Options exercisable at December 31, 2019 | 89 | 15.38 | 1.35 | — | |||||||
Shares available for future grant | 2,602 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
(In thousands) | (In years) | (In thousands) | ||||||||||||||
Outstanding at January 1, 2020 | 179 | 15.27 | ||||||||||||||
Options granted | 0 | 0 | ||||||||||||||
Options exercised | 0 | 0 | ||||||||||||||
Options canceled/forfeited | (134 | ) | 14.36 | |||||||||||||
Outstanding at December 31, 2020 | 45 | 14.20 | ||||||||||||||
Options granted | 0 | 0 | ||||||||||||||
Options exercised | 0 | 0 | ||||||||||||||
Options canceled/forfeited | (16 | ) | 14.20 | |||||||||||||
Outstanding at December 31, 2021 | 29 | 14.20 | 1.85 | $ | 0 | |||||||||||
Options exercisable at December 31, 2021 | 19 | 14.06 | 2.43 | 0 | ||||||||||||
Shares available for future grant | 2,374 |
At December 31, 2019,2021, total unrecognized compensation cost related to non-vested service-based options was immaterial. At December 31, 2019,2021, total unrecognized compensation cost related to non-vested performance-based options was immaterial.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred stock unit, performance-based stock unit and restricted stock activity are summarized below:
Shares | Weighted Average Grant Date Fair Value | |||||||
(In thousands) | ||||||||
Unvested at January 1, 2020 | 287 | $ | 14.44 | |||||
Granted | 313 | 5.89 | ||||||
Vested | (174 | ) | 7.77 | |||||
Forfeited | (139 | ) | 15.24 | |||||
Unvested at December 31, 2020 | 287 | 8.78 | ||||||
Granted | 163 | 7.21 | ||||||
Vested | (242 | ) | 6.82 | |||||
Forfeited | (6 | ) | 14.99 | |||||
Unvested at December 31, 2021 | 202 | 9.70 |
Shares | Weighted Average Grant Date Fair Value | |||||
(In thousands) | ||||||
Unvested at January 1, 2018 | 1,005 | $ | 14.21 | |||
Granted | 54 | 9.47 | ||||
Vested | (121 | ) | 12.87 | |||
Forfeited | (161 | ) | 14.21 | |||
Unvested at December 31, 2018 | 777 | 14.08 | ||||
Granted | 31 | 12.12 | ||||
Vested | (107 | ) | 11.79 | |||
Forfeited | (414 | ) | 14.28 | |||
Unvested at December 31, 2019 | 287 | 14.44 |
7. Employee Benefit Pla
nThe Company maintains a qualified 401(k)401(k) retirement plan for eligible employees. The Plan’s matching formula is 100% of the first 5% of participants’ qualified compensation. Compensation expense related to our matching contributions to the Plan for the years ended December 31, 20192021 and 2018,2020, were $0.2$0.1 million and $0.2 million, respectively.
8. Income Taxes
The federal and state provision (benefit) for income taxes was $0.0 million for the years ended December 31, 20192021 and 2018.
The total income tax provision (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 21.0% for the years ended December 31, 20192021 and 20182020 to net income (loss) before income taxes as a result of the following:
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Statutory tax expense (benefit) | 21.0 | % | (21.0 | )% | ||||
Increase (decrease) in taxes resulting from: | ||||||||
Nondeductible expenses | 3.3 | 4.1 | ||||||
Valuation allowance | (24.3 | ) | 16.9 | |||||
0.0 | % | 0.0 | % |
Year Ended December 31, | ||||||
2019 | 2018 | |||||
Statutory tax (benefit) expense | 21.0 | % | (21.0 | )% | ||
Increase (decrease) in taxes resulting from: | ||||||
Nondeductible expenses | 0.4 | 1.5 | ||||
Valuation allowance | (21.4 | ) | 19.5 | |||
0.0 | % | 0.0 | % |
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets were as follows:
As of December 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Deferred tax asset: | |||||||
Carrying values of ownership interests and other holdings | $ | 32,760 | $ | 60,951 | |||
Tax loss and credit carryforwards | 70,914 | 62,901 | |||||
Disallowed interest carryforwards | 7,292 | 3,831 | |||||
Credit facility repayment feature | — | 1,312 | |||||
Accrued expenses | 213 | 675 | |||||
Stock-based compensation | 432 | 550 | |||||
Other | 604 | 1,034 | |||||
112,215 | 131,254 | ||||||
Valuation allowance | (112,215 | ) | (131,254 | ) | |||
Net deferred tax asset | $ | — | $ | — |
As of December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands) | ||||||||
Deferred tax asset: | ||||||||
Carrying values of ownership interests and other holdings | $ | 31,985 | $ | 38,361 | ||||
Tax loss and credit carryforwards | 77,045 | 76,023 | ||||||
Disallowed interest carryforwards | 7,120 | 7,292 | ||||||
Accrued expenses | 24 | 497 | ||||||
Stock-based compensation | 268 | 302 | ||||||
Other | 136 | 482 | ||||||
116,578 | 122,957 | |||||||
Valuation allowance | (116,578 | ) | (122,957 | ) | ||||
Net deferred tax asset | $ | 0 | $ | 0 |
As of December 31, 2019,2021, the Company and its subsidiaries had federal net operating and capital loss carryforwards for tax purposes of approximately $337$367 million, of which approximately $34$52 million have an indefinite life. These carryforwards expire as follows:
Total | |||
(In thousands) | |||
2020 | $ | — | |
2021 | 3,728 | ||
2022 | 48,848 | ||
2023 | 20,981 | ||
2024 and thereafter | 229,615 | ||
$ | 303,172 |
Total | ||||
(In thousands) | ||||
2022 | $ | 47,137 | ||
2023 | 47,150 | |||
2024 | 50,140 | |||
2025 | 17,266 | |||
2026 and thereafter | 152,923 | |||
$ | 314,616 |
In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that it is more likely than not that certain future tax benefits may not be realized as a result of current and future income. Accordingly, a valuation allowance has been recorded against substantially all of the Company’s deferred tax assets.
The Company recognizes in its Consolidated Financial Statements the impact of a tax position if that position is more likely than not to be sustained upon examination, based on the technical merits of the position. All uncertain tax positions relate to unrecognized tax benefits that would impact the effective tax rate when recognized.
The Company does not expect any material increase or decrease in its income tax expense, in the next twelve months, related to examinations or changes in uncertain tax positions.
There were no0 changes in the Company’s uncertain tax positions for the years ended December 31,
The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. Tax years 2015 and forward remain open for examination for federal tax purposes and the Company’s more significant state tax jurisdictions. To the extent utilized in future years’ tax returns, net operating loss carryforwards at December 31, 20192021 will remain subject to examination until the respective tax year is closed. The Company recognizes penalties and interest accrued related to income tax liabilities in income tax benefit (expense) in the Consolidated Statements of Operations.
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
9. Net Income (Loss) Per Share
The calculations of net income (loss) per share were:
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
(In thousands, except per share data) | ||||||||
Basic: | ||||||||
Net income (loss) | $ | 54,561 | $ | (15,629 | ) | |||
Weighted average common shares outstanding | 20,636 | 20,544 | ||||||
Net income (loss) per share | $ | 2.64 | $ | (0.76 | ) | |||
Diluted: | ||||||||
Net income (loss) | $ | 54,561 | $ | (15,629 | ) | |||
Weighted average common shares outstanding | 20,636 | 20,544 | ||||||
Net income (loss) per share | $ | 2.64 | $ | (0.76 | ) |
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands, except per share data) | ||||||||
Basic: | ||||||||
Net income (loss) | $ | 27,004 | $ | (37,615 | ) | |||
Weighted average common shares outstanding | 19,827 | 20,751 | ||||||
Net income (loss) per share | $ | 1.36 | $ | (1.81 | ) | |||
Diluted: | ||||||||
Net income (loss) | $ | 27,004 | $ | (37,615 | ) | |||
Weighted average common shares outstanding | 19,827 | 20,751 | ||||||
Net income (loss) per share | $ | 1.36 | $ | (1.81 | ) |
Basic and diluted average common shares outstanding for purposes of computing net income (loss) per share includes outstanding common shares and vested deferred stock units (DSUs).
If an equity method company has dilutive stock options, unvested restricted stock, DSUs, or warrants, diluted net income (loss) per share is computed by first deducting from net income (loss) the income attributable to the potential exercise of the dilutive securities of the company from net income (loss). Any impact is shown as an adjustment to net income (loss) for purposes of calculating diluted net income (loss) per share.
Diluted income (loss) per share for the years ended December 31, 20192021 and 20182020 do not reflect the following potential shares of common stock that would have an anti-dilutive effect or have unsatisfied performance or market conditions:
• | At December 31, 2021 and 2020, options to purchase 29 thousand and 45 thousand shares of common stock, respectively, at prices ranging from $10.37 to $17.11 per share, and $10.37 to $17.11 per share per share, respectively, were excluded from the calculation. |
• | At December 31, 2021 and 2020, unvested restricted stock, performance-based stock units and DSUs convertible into 0.2 million and 0.3 million shares of stock, respectively, were excluded from the calculations. |
10. Related Party Transactions
In the normal course of business, the Company’s officers and employees hold board positions with companies in which the Company has a direct or indirect ownership interest.
11. Commitments and Contingencies
The Company and the companies in which it holds ownership interests are involved in various claims and legal actions arising in the ordinary course of business. In the current opinion of the Company, the ultimate disposition of these matters will
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company had outstanding guaranteeshas provided a guarantee, which is fully funded by escrowed funds held by a third party, of $3.8$3.8 million at December 31, 20192021 which related to one of the Company's private equity holdings.
The Company has agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or an employee terminates his employment for “good reason.” The maximum aggregate exposure under severance agreements for remaining employees is approximately $4.0$1.0 million at December 31, 2019.
In 2018, the Board of Directors (the “Board”) of the Company adopted a long-term incentive plan, which was amended in February 2019and June 2020, known as the Amended and Restated Safeguard Scientifics Transaction Bonus Plan (the “LTIP”). The purpose of the LTIP is to promote the interests of the Company and its shareholders by providing an additional incentive to employees to maximize the value of the Company in connection with the execution of the business strategy that the Company adopted and announced in January 2018.The June 2020 amendment lowered the level of the first threshold and the resulting bonus pool percentage as an incentive to employees to accelerate actions consistent with the business strategy. Under the LTIP, participants, which include certain current and former employees, have received awards that may result in cash payments in connection with sales of the Company’s ownership interests (“Sale Transaction(s)”). The LTIP provides for a bonus pool corresponding to: (i) specified vesting thresholds or (ii) specified events. In the first case, the bonus pool will range from an amount equal to 1%0.2% (previously 1.0%) of received proceeds at the first threshold to 1.333%1.3% at higher thresholds and no bonus pool will be created if the transaction consideration is less than certain minimum thresholds. In the second case, a minimum pool will be created and paid under specified circumstances. The bonus pool will be allocated and paid to participants in the LTIP based on the product of (i) the participant’s applicable bonus pool percentage and (ii) the bonus pool calculated as of the vesting date, minus any previously paid portion of the bonus pool. Any portion of the bonus pool available as of the applicable vesting date that is reserved will be allocated in connection with each vesting date so that the entire bonus pool available as of such vesting date is allocated and payable to participants. Subject to the terms of the LTIP, payments under the LTIP will be paid in cash not later than March 15th of the calendar year following the calendar yearwithin 60 days of the applicable vesting date. All current officers and employees of the Company are eligible to participate in the LTIP. The Board, in its sole discretion, will determine the participants to whom awards are granted under the LTIP. The Company recorded compensation expense of $0.7 million and $1.3 million during the years ended December 31, 2021 and 2020, respectively. The Company paid $2.5 million during the year ended December 31, 2021 and has 0 amounts accrued approximately $0.5 million under the LTIP as of December 31, 2019.
In June 2011, Advanced BioHealing, Inc. (“ABH”) was acquired by Shire plc (“Shire”). Prior to the expiration of the escrow period in March 2012, Shire filed a claim against all amounts held in escrow related to the sale based principally upon a United States Department of Justice (“DOJ”) false claims act investigation relating to ABH (the “Investigation”). In connection with the Investigation, in July 2015 the Company received a Civil Investigation Demand-Documentary Material (“CID”) from the DOJ regarding ABH and Safeguard’s relationship with ABH. Pursuant to the CID, the Company provided the requested materials and information. To the Company’s knowledge, the CID was related to multiple qui tam (“whistleblower”) actions, one of which was filed in 2014 by an ex-employee of ABH that named the Company and one of the Company’s employees along with other entities and individuals as defendants. At this time, the DOJ has declined to pursue the qui tam action as it relates to the Company and such Company employee. In addition, in connection with the above matters, the Company and other former equity holders in ABH entered into a settlement and release with Shire, which resulted in the release to Shire of all amounts held in escrow related to the sale of ABH.
12. Supplemental Cash Flow Information
During the years ended December 31, 20192021 and 2018,2020, the Company converted $2.3$1.0 million and $12.4$6.8 million, respectively, of advances into ownership interests. Cash paid for interest for the years ended December 31, 2019 and 2018 was $11.5 million and $11.1 million, respectively. Cash paid for taxes in each of the years ended December 31, 2019 and 2018 was $0.0 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. Segment Reporting
The Company operates as one operating segment based upon the similar nature of its 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.
As of December 31, 2019, the Company held ownership interests accounted for using the equity method in
Safeguard Primary Ownership as of December 31, | ||||||||
Company Name | 2019 | 2018 | Accounting Method | |||||
Aktana, Inc. | 17.8% | 18.9% | Equity | |||||
Clutch Holdings, Inc. | 41.2% | 41.2% | Equity | |||||
Flashtalking, Inc.* | 10.1% | 10.1% | Other | |||||
InfoBionic, Inc. | 25.2% | 25.4% | Equity | |||||
Lumesis, Inc. | 43.5% | 43.7% | Equity | |||||
MediaMath, Inc. ** | 13.3% | 13.4% | Other | |||||
meQuilibrium | 32.7% | 33.1% | Equity | |||||
Moxe Health Corporation | 29.9% | 32.4% | Equity | |||||
Prognos Health Inc. | 28.7% | 28.7% | Equity | |||||
QuanticMind, Inc. | 24.2% | 24.2% | Equity | |||||
Sonobi, Inc. | 21.6% | 21.6% | Equity | |||||
Syapse, Inc. | 20.0% | 20.0% | Equity | |||||
T-REX Group, Inc. | 13.7% | 21.1% | Other | |||||
Trice Medical, Inc. | 16.6% | 17.4% | Equity | |||||
WebLinc, Inc. | 38.5% | 38.5% | Equity | |||||
Zipnosis, Inc | 37.7% | 34.7% | Equity |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
14. Selected Quarterly Financial Information (Unaudited)
Three Months Ended | |||||||||||||||
March 31 | June 30 | September 30 (b) | December 31 (b) | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
2019: | |||||||||||||||
General and administrative expense | $ | 3,057 | $ | 2,603 | $ | 2,262 | $ | 2,060 | |||||||
Operating loss | (3,057 | ) | (2,603 | ) | (2,262 | ) | (2,060 | ) | |||||||
Other income (loss), net | (1,885 | ) | 3,118 | 8,777 | 2,245 | ||||||||||
Interest income | 873 | 763 | 234 | 174 | |||||||||||
Interest expense | (2,535 | ) | (5,682 | ) | (5,806 | ) | — | ||||||||
Equity income (loss), net | 28,267 | 40,497 | (3,440 | ) | (1,057 | ) | |||||||||
Net loss before income taxes | 21,663 | 36,093 | (2,497 | ) | (698 | ) | |||||||||
Income tax benefit (expense) | — | — | — | — | |||||||||||
Net income (loss) | $ | 21,663 | $ | 36,093 | $ | (2,497 | ) | $ | (698 | ) | |||||
Net income (loss) per share (a) | |||||||||||||||
Basic | $ | 1.05 | $ | 1.75 | $ | (0.12 | ) | $ | (0.03 | ) | |||||
Diluted | $ | 1.05 | $ | 1.75 | $ | (0.12 | ) | $ | (0.03 | ) | |||||
2018: | |||||||||||||||
General and administrative expense | $ | 5,589 | $ | 5,148 | $ | 3,516 | $ | 2,618 | |||||||
Operating loss | (5,589 | ) | (5,148 | ) | (3,516 | ) | (2,618 | ) | |||||||
Other income (loss), net | (1,435 | ) | (2,452 | ) | (1,078 | ) | (193 | ) | |||||||
Interest income | 798 | 666 | 718 | 624 | |||||||||||
Interest expense | (2,690 | ) | (3,422 | ) | (3,310 | ) | (6,645 | ) | |||||||
Equity income (loss), net | 2,746 | (14,540 | ) | 39,246 | (7,791 | ) | |||||||||
Net income (loss) before income taxes | (6,170 | ) | (24,896 | ) | 32,060 | (16,623 | ) | ||||||||
Income tax benefit (expense) | — | — | — | — | |||||||||||
Net income (loss) | $ | (6,170 | ) | $ | (24,896 | ) | $ | 32,060 | $ | (16,623 | ) | ||||
Net income (loss) per share (a) | |||||||||||||||
Basic | $ | (0.30 | ) | $ | (1.21 | ) | $ | 1.56 | $ | (0.81 | ) | ||||
Diluted | $ | (0.30 | ) | $ | (1.21 | ) | $ | 1.56 | $ | (0.81 | ) |
Three Months Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
2021: | ||||||||||||||||
General and administrative expense | $ | 2,463 | $ | 1,991 | $ | 1,564 | $ | 1,135 | ||||||||
Operating loss | (2,463 | ) | (1,991 | ) | (1,564 | ) | (1,135 | ) | ||||||||
Other income (loss), net | 706 | 6,733 | 20,588 | (5,992 | ) | |||||||||||
Interest income | 53 | 74 | 70 | 79 | ||||||||||||
Equity income (loss), net | 19,329 | (5,136 | ) | (761 | ) | (1,586 | ) | |||||||||
Net loss before income taxes | 17,625 | (320 | ) | 18,333 | (8,634 | ) | ||||||||||
Income tax benefit (expense) | — | — | — | — | ||||||||||||
Net loss | $ | 17,625 | $ | (320 | ) | $ | 18,333 | $ | (8,634 | ) | ||||||
Net loss per share (a) | ||||||||||||||||
Basic | $ | 0.84 | $ | (0.02 | ) | $ | 0.88 | $ | (0.51 | ) | ||||||
Diluted | $ | 0.84 | $ | (0.02 | ) | $ | 0.88 | $ | (0.51 | ) | ||||||
2020: | ||||||||||||||||
General and administrative expense | $ | 3,532 | $ | 2,028 | $ | 2,275 | $ | 1,631 | ||||||||
Operating loss | (3,532 | ) | (2,028 | ) | (2,275 | ) | (1,631 | ) | ||||||||
Other income (loss), net | (3,567 | ) | (2,658 | ) | (820 | ) | (663 | ) | ||||||||
Interest income | 105 | 52 | 52 | 52 | ||||||||||||
Equity income (loss), net | (9,014 | ) | (5,277 | ) | (1,300 | ) | (5,111 | ) | ||||||||
Net income (loss) before income taxes | (16,008 | ) | (9,911 | ) | (4,343 | ) | (7,353 | ) | ||||||||
Income tax benefit (expense) | — | — | — | — | ||||||||||||
Net income (loss) | $ | (16,008 | ) | $ | (9,911 | ) | $ | (4,343 | ) | $ | (7,353 | ) | ||||
Net income (loss) per share (a) | ||||||||||||||||
Basic | $ | (0.77 | ) | $ | (0.48 | ) | $ | (0.21 | ) | $ | (0.35 | ) | ||||
Diluted | $ | (0.77 | ) | $ | (0.48 | ) | $ | (0.21 | ) | $ | (0.35 | ) |
(a) | Per share amounts for the quarters have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period. Additionally, in regard to diluted per share amounts only, quarterly amounts may not add to the annual amounts because of the inclusion of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive, and because of the adjustments to net income (loss) for the dilutive effect of common stock equivalents and convertible securities at our ownership interests. |
15. Subsequent Events
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During February 2022, the Company funded an additional $2.0 million of convertible loans to Prognos Health, Inc. The Company has previously deployed an aggregate of $12.6 million. Prognos is a healthcare platform company transforming the ability to access, manage and analyze healthcare data in partnership with Life Sciences brands, payers, and clinical diagnostics organizations. Prognos’ innovations enhance the value of laboratory results and clinical diagnostic data through advanced analytics and artificial intelligence technique.
None.
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act 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 Principal Executive Officer and Principal 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. Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019.2021. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 20192021 are functioning effectively.
(b) Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.2021. In making this assessment, management used the framework established in
(c) 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.
None.
Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Election of Directors,” “Corporate Governance and Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Information about our Executive Officers is included in Annex to Part I above.
Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.”
The material features of our equity compensation plans are described in Note 7 to the Consolidated Financial Statements filed as part of our Annual Report on Form 10-K for the year ended December 31, 2019.
Equity Compensation Plan Information | |||||||
Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (2) (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | ||||
Equity compensation plans approved by security holders (3) | 455,975 | $16.12 | 2,601,650 | ||||
Equity compensation plans not approved by security holders (4) | 46,468 | $15.10 | — | ||||
Total | 502,443 | $15.27 | 2,601,650 |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to the portions of the Definitive Proxy Statement entitled “Corporate Governance Principles and Board Matters – ‘Board Independence’ and “Review and Approval of Transactions with Related Persons.”
Incorporated by reference to the portion of the Definitive Proxy Statement entitled “Independent Public Accountant – Audit Fees.”
(a) Consolidated Financial Statements and Schedules
Incorporated by reference to Item 8 of this Report on Form 10-K.
(b) Exhibits
The exhibits required to be filed as part of this Report are listed in the exhibit index below.
(c) Financial Statement Schedules
None.
Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Report. For exhibits that previously have been filed, the Registrant incorporates those exhibits herein by reference. The exhibit table below includes the Form Type and Filing Date of the previous filing and the location of the exhibit in the previous filing which is being incorporated by reference herein. Documents which are incorporated by reference to filings by parties other than the Registrant are identified in footnotes to this table.
Incorporated Filing Reference | |||||
Exhibit Number | Description | Form Type & Filing Date | Original Exhibit Number | ||
1.a | Description | ||||
3.1.1 | Form 8-K 10/25/07 | 3.1 | |||
3.1.2 | Form 8-K 8/27/09 | 3.1 | |||
3.1.3 | Form 10-Q 4/25/14 | 3.1 | |||
3.1.4 | Form 8-K 2/20/18 | 3.1 | |||
3.2 | Form 8-K 2/13/18 | 3.1 | |||
4.1 | Form 8-K 2/20/18 | 4.1 | |||
10.1* | Form 10-Q 11/6/08 | 10.4 | |||
10.2 | Form 10-Q 11/6/08 | 10.5 | |||
10.3* | Form 10-Q 7/25/14 | 10.1 | |||
10.4* | Form 10-K 3/19/09 | 10.4 | |||
10.5* | Form 8-K 4/25/08 | 10.1 | |||
10.6* | Form 8-K 2/19/19 | 99.1 | |||
10.7† | — | — | |||
10.9.1* | Form 10-K 3/19/09 | 10.12 | |||
10.9.2* | Form 10-K 3/16/10 | 10.11.2 | |||
10.9.3* | Form 10-K 3/11/13 | 10.10.3 | |||
10.9.4* | Form 8-K 4/10/18 | 99.5 |
10.12* | Form 8-K 9/18/18 | 99.1 | |||
10.13* | Form 10-Q 7/26/13 | 10.2 | |||
10.14 | Form 10-K 3/13/06 | 10.36 | |||
10.15 | Form 8-K 5/18/11 | 10.1 | |||
10.16 | Form 10-Q 4/24/15 | 10.1 | |||
10.17 | Form 8-K 3/20/19 | 10.1 | |||
10.18 | Form 8-K 4/24/18 | 10.1 | |||
10.19 | Form 8-K 3/27/19 | 10.1 | |||
10.20.1 | Form 8-K 7/9/18 | 10.1 | |||
10.20.2 | Form 8-K 1/4/19 | 10.1 | |||
14.1 † | — | — | |||
21.1 † | — | — | |||
23.1 † | — | — | |||
31.1 † | — | — | |||
31.2 † | — | — | |||
32.1 ‡ | — | — | |||
32.2 ‡ | — | — | |||
101 | The following materials from Safeguard Scientifics, Inc. Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. | — | — |
10.12* |
| Form 8-K 9/18/18 |
| 99.1 | |
10.13* |
| Form 10-Q 7/26/13 |
| 10.2 | |
10.14 |
| Form 10-K 3/13/06 |
| 10.36 | |
10.15 |
| Form 8-K 5/18/11 |
| 10.1 | |
10.16 |
| Form 10-Q 4/24/15 |
| 10.1 | |
10.17 |
| Form 8-K 3/20/19 |
| 10.1 | |
14.1 |
| — |
| — | |
21.1 † |
| — |
| — | |
23.1 † |
| Consent of Independent Registered Public Accounting Firm — Grant Thornton LLP | — |
| — |
23.2 † | Consent of Independent Registered Public Accounting Firm — KPMG LLP | — | — | ||
31.1 † |
| — |
| — | |
31.2 † |
| — |
| — | |
32.1 ‡ |
| — |
| — | |
32.2 ‡ |
| — |
| — | |
101 |
| The following materials from Safeguard Scientifics, Inc. Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. | — |
| — |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | — | — |
† | Filed herewith | |
‡ | Furnished herewith |
* | |
These exhibits relate to management contracts or compensatory plans, contracts or arrangements in which directors and/or executive officers of the Registrant may participate. |
Pursuant to the requirements of Section 13 or 15(d) 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. | |||||||
By: | ERIC C. SALZMAN | ||||||
Eric C. Salzman | |||||||
Chief Executive Officer |
Dated: February 28, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
ERIC C. SALZMAN | ||||
Chief Executive Officer | March 11, 2022 | |||
Eric C. Salzman | ||||
MARK A. HERNDON | Senior Vice President and Chief Financial Officer | March 11, 2022 | ||
Mark A. Herndon | ||||
RUSSELL D. GLASS | Director | March 11, 2022 | ||
Russell D. Glass | ||||
JOSEPH M. MANKO, JR. | Director | March 11, 2022 | ||
Joseph M. Manko, Jr. | ||||
MAUREEN F. MORRISON | Director | March 11, 2022 | ||
Maureen F. Morrison | ||||
ROBERT J. ROSENTHAL | Chairman of the Board of Directors | March 11, 2022 | ||
Robert J. Rosenthal |