Cautionary Note Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are
based on current expectations, estimates, forecasts and projections about
Safeguard Scientifics, Inc. ("Safeguard" or "we"), the industries in which we
operate and other matters, as well as management's beliefs and assumptions and
other statements regarding matters that are not historical facts. These
statements include, in particular, statements about our plans, strategies and
prospects. For example, when we use words such as "projects," "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "should,"
"would," "could," "will," "opportunity," "potential" or "may," variations of
such words or other words that convey uncertainty of future events or outcomes,
we are making forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Our forward-looking statements are subject to risks and uncertainties.
Factors that could cause actual results to differ materially, include, among
others, our ability to make good decisions about the deployment of capital, the
fact that our ownership interests may vary from period to period, our
substantial capital requirements and absence of liquidity from our holdings,
fluctuations in the market prices of our publicly traded holdings, competition,
our inability to obtain maximum value for our ownership interests, or at all,
and the return of value to our shareholders, our ability to attract and retain
qualified employees, our ability to execute our strategy, market valuations in
sectors in which our ownership interests operate, our inability to control our
ownership interests, our need to manage our assets to avoid registration under
the Investment Company Act of 1940, and risks associated with our ownership
interests and their performance, including the fact that most of our ownership
interests have a limited history and a history of operating losses, face intense
competition and may never be profitable, the effect of economic conditions in
the business sectors in which Safeguard's ownership interests operate, including
the impact of COVID-19, compliance with government regulation and legal
liabilities, all of which are discussed in Item 1A. "Risk Factors" in
Safeguard's Annual Report on Form 10-K and updated, as applicable, in "Factors
that May Affect Future Results" and Item 1A. "Risk Factors" below. Many of these
factors are beyond our ability to predict or control. In addition, as a result
of these and other factors, our past financial performance should not be relied
on as an indication of future performance. All forward-looking statements
attributable to us, or to persons acting on our behalf, are expressly qualified
in their entirety by this cautionary statement. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law. In light
of these risks and uncertainties, the forward-looking events and circumstances
discussed in this report might not occur.
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Business Overview
Over the recent past, Safeguard has provided capital and relevant expertise to
fuel the growth of technology-driven businesses. In many, but not all cases, we
are actively involved, influencing development through board representation and
management support, in addition to the influence we exert through our equity
ownership. We also continue to hold relatively small equity interests in other
enterprises where we do not exert significant influence and do not participate
in management activities. In some cases, those ownership interests relate to
residual interests from prior larger interests or from companies that acquired
companies in which we had ownership interests.
In January 2018, Safeguard ceased deploying capital into new opportunities in
order to focus on supporting the existing ownership interests and maximizing
monetization opportunities to enable returning value to shareholders. We have
considered and taken action on various initiatives including the sale of
individual ownership interests, the sale of certain or all ownership interests
in secondary market transactions as well as other opportunities to maximize
shareholder value. In December 2019, we declared and paid a $1.00 per share
special dividend. In 2021, we repurchased 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
opportunities while we also evaluate additional strategic alternatives. These
strategic alternatives could include the sale of all of our ownership interests
in a single transaction or a series of transactions, merger, business
combinations or other strategic transactions.
Results of Operations
We operate as one operating segment based upon the similar nature of our
technology-driven companies, the functional alignment of the organizational
structure, and the reports that are regularly reviewed by the chief operating
decision maker for the purpose of assessing performance and allocating
resources.
There is intense competition in the markets in which our companies operate.
Additionally, the markets in which these companies operate are characterized by
rapidly changing technology, evolving industry standards, frequent introduction
of new products and services, shifting distribution channels, evolving
government regulation, frequently changing intellectual property landscapes and
changing customer demands. Their future success depends on each company's
ability to execute its business plan and to adapt to its respective rapidly
changing market.
The following is a listing of certain of our ownership interests as of March 31,
2022 and 2021, respectively. The ownership percentages indicated below are
presented as of March 31, 2022 for certain companies in which we held ownership
interests and reflects 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).
Safeguard Primary Ownership as of March 31,
Company Name 2022 2021 Accounting Method
Aktana, Inc. 13.4% 15.0% 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. 11.0% 11.1% Equity
Trice Medical, Inc. 12.6% 16.6% Equity
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Three months ended March 31, 2022 versus the three months ended March 31, 2021
Three Months Ended March 31,
2022 2021 Variance
(In thousands)
General and administrative expense $ (1,234 ) $ (2,463 ) $ 1,229
Other income (loss), net (1,997 ) 706 (2,703 )
Interest income 101 53 48
Equity income (loss), net (3,579 ) 19,329 (22,908 )
$ (6,709 ) $ 17,625 $ (24,334 )General and Administrative Expense. Our general and administrative expenses
consist primarily of employee compensation, stock based compensation, insurance,
office costs, and professional services. General and administrative expense
decreased for the three months ended March 31, 2022 as compared to the prior
year quarter due to lower severance costs of $0.8 million, lower employee
compensation of $0.5 million, lower insurance costs of $0.1 million and various
other lower costs. General and administrative expense includes stock based
compensation of $0.3 million for the three months ended March 31, 2022 as
compared to $0.25 million in the comparable prior year quarter. General and
administrative expenses for the three months ended March 31, 2021 included $0.25
million estimated for the Transaction Bonus Plan (the "LTIP"), which is a
component of employee compensation. There was no expense recognized pursuant
to the LTIP for the three month period ended March 31, 2022. The Company did
not make any payments during the quarter.
Other Income (loss), net. Other income (loss), net decreased $2.7 million for
the three months ended March 31, 2022 compared to the prior year quarter.
During the three months ended March 31, 2022, the Company recorded an unrealized
loss of $2.0 million related to the decline in the fair value of Bright Health
common stock. During the three months ended March 31, 2021, the Company recorded
a $0.7 million gain on the sale of T-REX Group, Inc to a secondary investor for
$3 million in cash proceeds.
Interest Income. Interest income increased during the three months ended March
31, 2022 as compared to the prior year period primarily attributable to a higher
average balance of advances to ownership interests.
Equity Income (loss), net. Equity income (loss), net decreased $22.9 million for
the three months ended March 31, 2022 compared to the prior year period. The
components of equity income (loss), net for the three months ended March 31,
2022 and 2021 were as follows:
Three Months Ended March 31,
2022 2021 Variance
(In thousands)
Gains on sales of ownership interests, net $ 298 $ 16,508 $ (16,210 )
Unrealized dilution gains
- 7,302 (7,302 )
Share of loss of our equity method companies, net (3,877 ) (4,481 ) 604
$ (3,579 ) $ 19,329 $ (22,908 )
There were no material gains on sales of ownership interests, net, or
impairments from ownership interests accounted for under the equity
method during the three months ended March 31, 2022 and 2021 During the three
months ended March 31, 2021, Zipnosis was acquired by Bright Health. The
Company received $3.3 million in cash proceeds and $15.3 million in preferred
equity in Bright Health. The unrealized dilution gains for the three months
ended March 31, 2021 was the result of Syapse, who raised additional equity
capital that diluted the Company's interest. The change in our share of loss of
our equity method companies for the three months ended March 31, 2022 compared
to the prior year period of $0.6 million was due to less companies in 2022 and
a decrease in losses associated with our ownership interests.
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Income Tax Benefit (Expense)
Income tax benefit (expense) was $0.0 million for the three months ended March
31, 2022 and 2021. We have recorded a valuation allowance to reduce our net
deferred tax asset to an amount that is more likely than not to be realized in
future years. Accordingly, the income tax provision that would have been
recognized in the three months ended March 31, 2022 and 2021 was offset by
changes in the valuation allowance.
Liquidity and Capital Resources
As of March 31, 2022, we had $19.4 million of cash and cash equivalents.
In January 2018, Safeguard announced that we will not deploy any capital
into new opportunities and will focus on supporting our existing ownership
interests and maximizing monetization opportunities to return value to
shareholders. In that context, we have, are and will consider initiatives
including, among others: the sale of individual ownership interests, the sale of
certain ownership interests in secondary market transactions, or a combination
thereof, as well as other opportunities to maximize shareholder value.
In 2015, the Company's Board of Directors authorized us, from time to time and
depending on market conditions, to repurchase up to $25.0 million of the
Company's outstanding common stock. During the year ended December 31, 2021 and
the three months ended March 31, 2022, we did not repurchase any shares under
this authorization. In March 2022, the Company's Board of Directors replaced a
previously existing share repurchase plan that was authorized in May 2021 with a
newly authorized $3.0 million share repurchase plan using existing funds in
accordance with the requirements of Rule 10b5-1 and Rule 10b-18 under the
Securities Exchange Act of 1934, as amended. The Company purchased
147,795 shares for an aggregate price of $0.8 million at an average cost
at $5.27 per share pursuant to this plan.
Our ability to generate liquidity from transactions involving our ownership
interests has been adversely affected from time to time by adverse circumstances
in the U.S. capital markets and other factors, including the impact of
COVID-19. We may be requested to provide additional capital to our companies,
which may cause us to face liquidity issues that will constrain our ability to
execute our business strategy and limit our ability to provide financial support
to all of our existing companies in the amounts that we desire. The
transactions we enter into in pursuit of our strategy could increase or decrease
our liquidity at any point in time. As we seek to provide additional funding to
existing companies where we have an ownership interest or commit capital to
other initiatives, we may be required to expend our cash or incur debt, which
will decrease our liquidity. Conversely, as we dispose of our interests in our
ownership interests, we may receive proceeds from such sales, which could
increase our liquidity. From time to time, we are engaged in discussions
concerning acquisitions and dispositions which, if consummated, could impact our
liquidity, perhaps significantly. Accordingly, the Company could also pursue
other sources of capital in order to maintain its liquidity. The Company
believes that its cash and cash equivalents at March 31, 2022 will be sufficient
to fund operations past one year from the issuance of these financial
statements.
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