sfe20210930_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

______________________________________________________________________________________________

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2021

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

For the Transition Period From ____________ to ___________

Commission File Number 1-5620

______________________________________________________________________________________________

Safeguard Scientifics, Inc.

(Exact name of registrant as specified in its charter)

______________________________________________________________________________________________


Pennsylvania
(State or other jurisdiction of	23-1609753
incorporation or organization)	(I.R.S. Employer ID No.)

150 N. Radnor Chester Road
Suite F-200
Radnor, PA	19087
(Address of principal executive offices)	(Zip Code)

(610) 293-0600

Registrant’s telephone number, including area code

______________________________________________________________________________________________

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

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

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

Yes ☑ No ☐

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

Yes ☑ No ☐

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

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

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

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

Number of shares outstanding as of November 1, 2021

Common Stock 16,505,594

SAFEGUARD SCIENTIFICS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	Page
Item 1 – Financial Statements:

Consolidated Balance Sheets (unaudited) – September 30, 2021 and December 31, 2020	3

Consolidated Statements of Operations (unaudited) – Three and Nine Months Ended September 30, 2021 and 2020	4

Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2021 and 2020	5

Consolidated Statements of Changes in Equity (unaudited) – Three and Nine Months Ended September 30, 2021 and 2020	6

Notes to Consolidated Financial Statements (unaudited)	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	28

Item 4 – Controls and Procedures	28

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	29

Item 1A – Risk Factors	29

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3 – Defaults Upon Senior Securities	29

Item 4 – Mine Safety Disclosures	29

Item 5 – Other Information	29

Item 6 – Exhibits	30

Signatures	31

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited - In thousands, except per share data)

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

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited - In thousands, except per share data)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2021*			*2020*			*2021*			*2020*
General and administrative expense	$	1,564		$	2,275		$	6,018		$	7,835
Operating loss		(1,564	)		(2,275	)		(6,018	)		(7,835	)
Other income (loss), net		20,588			(820	)		28,027			(7,045	)
Interest income		70			52			197			209
Equity income (loss), net		(761	)		(1,300	)		13,432			(15,591	)
Net income (loss) before income taxes		18,333			(4,343	)		35,638			(30,262	)
Income tax benefit (expense)		—			—			—			—
Net income (loss)	$	18,333		$	(4,343	)	$	35,638		$	(30,262	)

Net income (loss) per share:
Basic	$	0.88		$	(0.21	)	$	1.71		$	(1.46	)
Diluted	$	0.88		$	(0.21	)	$	1.71		$	(1.46	)
Weighted average shares used in computing income (loss) per share:
Basic		20,786			20,786			20,847			20,731
Diluted		20,786			20,786			20,847			20,731

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In thousands)

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

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited – In thousands, except share data)

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

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited – In thousands)

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

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. General

The accompanying unaudited interim Consolidated Financial Statements of Safeguard Scientifics, Inc. (“Safeguard” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial statement rules and regulations of the SEC. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year or for any interim period. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q and with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s 2020 Annual Report on Form 10-K.

Liquidity

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

In January 2018, Safeguard announced that the Company will not deploy any capital into new opportunities and will focus on supporting our existing companies and maximizing monetization opportunities to return value to shareholders. In that context, the Company has, is and will consider initiatives including, among others: the sale of individual ownership interests, the sale of certain or all ownership interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. As we seek to provide additional funding to existing companies where we have an ownership interest, we may be required to expend our cash or incur debt, which will decrease our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly. Accordingly, the Company could also pursue other sources of capital in order to maintain its liquidity.

The Company believes that its cash and cash equivalents at September 30, 2021 will be sufficient to fund operations past one year from the issuance of these Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Principles of Accounting for Ownership Interests

The Company accounts for its ownership interests, which primarily consist of equity interests in the form of common and preferred equity, 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, 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 the 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. 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 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. When 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 for ownership interests in companies that are not accounted for under the equity method that do not have a readily determinable fair value under the fair value measurement alternative. Under the fair value measurement alternative, these ownership 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 interest 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, however, the result of observable price changes, if any, are reflected in Other income (loss), net. We include the carrying value of these interests 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. As of September 30, 2021 those ownership interests consist of approximately 1.3 million shares of Bright Health Group ("Bright Health") common shares valued at $10.8 million. The Company is restricted from trading these securities until December 2021 as a result of a six-month lock-up agreement resulting from the Bright Health Group initial public offering.

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.

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 ownership interests in companies and funds accounted for under the equity method are included in Equity income (loss), net in the Consolidated Statements of Operations. Impairment charges related to ownership interests and funds accounted for at fair value or the fair value measurement alternative 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 is not written-up even if circumstances suggest the value of the company has subsequently recovered.

SAFEGUARD SCIENTIFICS, INC.

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.

	*September 30, 2021*		*December 31, 2020*
	(Unaudited - In thousands)
Equity Method:
Companies	$	23,828	$	27,550
Private equity funds		117		271
		23,945		27,821
Other Method:
Companies, fair value		10,792		—
Companies, fair value measurement alternative		514		19,683
Private equity funds, fair value measurement alternative		258		268
		11,564		19,951
Advances to companies		775		2,626
	$	36,284	$	50,398

During the nine months ended September 30, 2021, Zipnosis, Inc. was acquired by another entity, Bright Health. The Company received $3.5 million in cash proceeds, 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 a $17.3 million gain on the sale, which is included in Equity income (loss), net in the Consolidated Statements of Operations. The fair value of the ownership interest received as a result of the acquisition was estimated based on evaluating several valuation methods available, including the value at which independent third parties 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 of these changes, the Company recognized an additional $7.4 million unrealized gain on Bright Health during the three months ended June 30, 2021. The Company recognized an unrealized loss on Bright Health of $11.9 million during the three months ended September 30, 2021.

During the three and nine months ended September 30, 2021, Flashtalking was acquired by another entity. The Company received $44.8 million in cash proceeds and recorded a $32.3 million gain. The Company may receive additional amounts of approximately $0.7 million over the next 24 months from the resolution of escrow contingencies.

During the nine months ended September 30, 2021, WebLinc, Inc. was acquired by another entity. The Company has received $3.6 million in cash proceeds to-date and may receive additional amounts over the next 15 months based on certain transactional performance activities, which could be partially offset by indemnifiable claims. The Company has recognized a $0.1 million loss on the sale during the nine months ended September 30, 2021, which is included in Equity income (loss), as certain contingencies were resolved during the three months ended September 30, 2021. To the extent additional amounts are collected as contingencies are resolved, those amounts will be recorded as gain on the sale and included within Equity income (loss). QuanticMind was acquired during the first quarter by another entity, however there were no resultant proceeds to the Company. There was no resulting gain or loss due to this equity method ownership interest being impaired during the prior year.

During the nine months ended September 30, 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. Hoopla was also acquired during the first quarter of 2021 by another entity, however there were no resultant proceeds to the Company. There was no resulting gain or loss due to this Other method ownership interest being impaired during the prior year.

In April 2021, Velano Vascular was acquired by another entity. The Company has received $3.5 million in cash proceeds and recorded a $1.9 million gain for the nine months ended September 30, 2021. The Company may receive additional amounts over the next 12 months from the resolution of escrow contingencies.

During the three and nine months ended September 30, 2021, the Company recorded an impairment of $2.5 million related to reduced expectations for certain Other ownership interests.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summarized Financial Information

The following table summarizes the statement of operations data for the companies accounted for under the equity method for the three and nine months ended September 30, 2021 and 2020, respectively. These results have been compiled from the respective companies' financial statements, reflect certain historical adjustments, and are reported on a one quarter lag basis. Results of operations of the companies are excluded for periods prior to their acquisition, subsequent to their disposition and subsequent to the discontinuation of the equity method of accounting. Historical results are not adjusted when the Company exits, writes-off or discontinues the equity method of accounting.

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2021*			*2020*			*2021*			*2020*
	(Unaudited - In thousands)
Results of Operations:
Revenue	$	35,447		$	39,388		$	106,097		$	119,270
Gross profit	$	23,023		$	23,244		$	69,124		$	73,395
Net loss	$	(25,390	)	$	(15,650	)	$	(77,092	)	$	(56,684	)

3. Acquisitions of Ownership Interests

The following is a summary of additional deployments during the nine month period ended September 30, 2021:

During the three months ended September 30, 2021, the Company funded $1.7 million of convertible loans to Aktana, Inc. The Company had previously deployed an aggregate of $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

During the nine months ended September 30, 2021, Syapse raised $68 million of preferred equity which reduced the Company's ownership interest to approximately 11%. The Company recorded a $7.3 million dilution gain as a result of this transaction, which is included in 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.

During the nine months ended September 30, 2021, the Company funded an additional $1.0 million of convertible loans to Trice Medical, Inc. The Company had previously deployed an aggregate of $10.8 million. Trice Medical is focused on orthopedic diagnostics using fully integrated camera-enabled technologies to provide clinical solutions to physicians. During the three months ended September 30, 2021, Trice Medical raised additional preferred equity which reduced the Company's ownership interest to 12.6%. The Company's existing convertible loans and related interest in Trice Medical were also converted into this new class of preferred equity. As a result of this transaction, the Company recorded a $2.0 million dilution gain during the three months ended September 30, 2021.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Fair Value Measurements

The Company categorizes its financial instruments into a three-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 or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 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.

Cash and cash equivalents and accounts payable approximate fair value due to their short term nature. The Company did not have any Level 2 or Level 3 financial assets or liabilities measured at fair value on a recurring basis as of September 30, 2021 or December 31, 2020.

	*Carrying*		*Fair Value Measurement at September 30, 2021*
	*Value*		*Level 1*		*Level 2*		*Level 3*
	(Unaudited - In thousands)
Cash and cash equivalents	$	64,211	$	64,211	$	—	$	—

Restricted cash equivalents	$	25	$	25	$	—	$	—

Ownership interests	$	10,792	$	10,792	$	—	$	—

	*Carrying*		*Fair Value Measurement at December 31, 2020*
	*Value*		*Level 1*		*Level 2*		*Level 3*
	(Unaudited - In thousands)
Cash and cash equivalents	$	15,601	$	15,601	$	—	$	—

Ownership interests accounted for at fair value as of September 30, 2021 consist of approximately 1.3 million common shares of Bright Health. The securities are carried at fair value based on the closing stock price on the last trading day of the reporting period. The Company is restricted from trading these securities until December 2021 as a result of a six-month lock-up agreement from the Bright Health Group initial public offering.

5. Stock-Based Compensation

Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2021*		*2020*		*2021*		*2020*
	(Unaudited - In thousands)
General and administrative expense	$	484	$	452	$	1,469	$	979
	$	484	$	452	$	1,469	$	979

Stock-based compensation consists of time based awards to employees, liability based awards to employees to be settled in stock, performance based awards to employees, other non-employee grants and liability based awards to Directors for quarterly and annual services. During the nine months ended September 30, 2021 and 2020, the Company awarded 74 thousand and 79 thousand restricted stock awards, respectively to non-employee directors for compensation. The Company also issued 45 thousand shares for employee services and 13 thousand shares for non-employee services during the nine months ended September 30, 2021, respectively, based on the terms of service agreements.

6. Income Taxes

The Company recorded no consolidated income tax benefit (expense) for the three and nine months ended September 30, 2021 and 2020. The Company has recorded a valuation allowance to reduce its net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the tax provision that would have been recognized in the three and nine months ended September 30, 2021 was offset by changes in the valuation allowance. During the three and nine months ended September 30, 2021, the Company had no material changes in uncertain tax positions.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Net Income (Loss) Per Share

The calculations of net income (loss) per share were as follows:

	*Three Months Ended September 30,*					*Nine Months Ended September 30,*
	*2021*		*2020*			*2021*		*2020*
	(Unaudited - In thousands, except per share data)
Basic:
Net income (loss)	$	18,333	$	(4,343	)	$	35,638	$	(30,262	)
Weighted average common shares outstanding		20,786		20,786			20,847		20,731
Net income (loss) per share	$	0.88	$	(0.21	)	$	1.71	$	(1.46	)

Diluted:
Net income (loss) for dilutive share computation	$	18,333	$	(4,343	)	$	35,638	$	(30,262	)

Number of shares used in basic per share computation		20,786		20,786			20,847		20,731
Unvested restricted stock and DSU's		—		—			—		—
Employee stock options		—		—			—		—
Weighted average common shares outstanding		20,786		20,786			20,847		20,731

Net income (loss) per dilutive share	$	0.88	$	(0.21	)	$	1.71	$	(1.46	)

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 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 earnings per share 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 September 30, 2021 and 2020, options to purchase 31 thousand and 151 thousand shares of common stock, respectively, at prices ranging from $10.37 to $17.11 and $10.37 to $17.11, respectively, were excluded from the calculations.


	•	At September 30, 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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. 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 September 30, 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 September 30, 2021 included the following:

Company Name	*Safeguard Primary Ownership as of September 30, 2021*	*Accounting Method*
Aktana, Inc.	15.0%	Equity
Clutch Holdings, Inc.	41.7%	Equity
InfoBionic, Inc.	25.2%	Equity
Lumesis, Inc.	43.2%	Equity
MediaMath, Inc.	13.2%	Other
meQuilibrium	31.9%	Equity
Moxe Health Corporation	27.6%	Equity
Prognos Health Inc.	28.5%	Equity
Syapse, Inc.	11.1%	Equity
Trice Medical, Inc.	12.6%	Equity

As of September 30, 2021 and December 31, 2020, all of the Company’s assets were located in the United States.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Commitments and Contingencies

In March 2019, the Company entered into a sublease of its prior corporate headquarters office space beginning in June 2019. 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.

A summary of the Company's operating lease cash flows at September 30, 2021 follows:

	*Operating lease payments*			*Expected sublease receipts*
	(Unaudited - In thousands)
2021 (three months ending December 31)	$	149		$	132
2022		601			540
2023		607			556
2024		613			573
2025		619			590
2026		207			199
Thereafter		—			—
Total future minimum lease payments		2,796		$	2,590
Less imputed interest		(658	)
Total operating lease liabilities	$	2,138

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, it is not reasonably possible that the ultimate disposition of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations, however, no assurance can be given as to the outcome of these actions, and one or more adverse rulings could have a material adverse effect on the Company’s consolidated financial position and results of operations or that of its companies. The Company records costs associated with legal fees as such services are rendered.

The Company has provided a guarantee, which is fully funded by escrowed funds held by a third party, of $3.8 million at September 30, 2021 which related to one of the Company's private equity fund interests.

In 2018, the Board of Directors (the “Board”) of the Company adopted a long-term incentive plan, which was amended in February 2019 and 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 0.2% (previously 1.0%) of received proceeds at the first threshold to 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 within 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 paid $0.4 million during the nine months ended September 30, 2021 and has accrued approximately $2.1 million under the LTIP as of September 30, 2021, all of which is presented as current accrued compensation and was paid in October 2021 in accordance with the terms of the plan.

The Company recorded severance expense for certain employees of $0.8 million during the nine months ended September 30, 2021 in accordance with existing employment arrangements. During the three and nine months ended September 30, 2021, cash payments of $0.1 and $0.9 million, respectively, were made pursuant to obligations under these arrangements and prior actions. Remaining amounts to be paid pursuant to severance agreements aggregate to $0.1 million. Accrued compensation of previously deferred amounts of $0.4 million was also paid during the quarter ended June 30, 2021. Additional contingent amounts will be paid based on continued participation in prior awards granted pursuant to the LTIP. The Company has agreements with certain remaining 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 employment and severance agreements for remaining employees was approximately $0.6 million at September 30, 2021.

In June 2011, the Company's former ownership interest, 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.

10. 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. The Company has not repurchased any shares under such authorization during 2020 or the nine months ended September 30, 2021.

In May 2021, the Company's Board of Directors authorized a new $6.0 million share repurchase program using existing funds in accordance with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2021, the Company repurchased 236,159 shares for an aggregate price of $1.6 million at an average cost at $6.94 per share.

11. Subsequent Event

During October 2021, the Company completed a modified Dutch auction self-tender that resulted in the repurchase of 4.3 million common shares for an aggregate price of $38.7 million, or $9.00 per share.

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

Cautionary Note Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc. (“Safeguard” or “we”), the industries in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainties. Factors that could cause actual results to differ materially, include, among others, our ability to make good decisions about the deployment of capital, the fact that our ownership interests may vary from period to period, our substantial capital requirements and absence of liquidity from our holdings, fluctuations in the market prices of our publicly traded holdings, competition, our inability to obtain maximum value for our ownership interests, or at all, and the return of value to our shareholders, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our ownership interests operate, our inability to control our ownership interests, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our ownership interests and their performance, including the fact that most of our ownership interests have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which Safeguard's ownership interests operate, including the impact of COVID-19, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. “Risk Factors” in Safeguard's Annual Report on Form 10-K and updated, as applicable, in “Factors that May Affect Future Results” and Item 1A. “Risk Factors” below. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

Business Overview

Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses. In many, but not all cases, we are actively involved, influencing development through board representation and management support, in addition to the influence we exert through our equity ownership. We also continue to hold relatively small equity interests in other enterprises where we do not exert significant influence and do not participate in management activities. In some cases, those ownership interests relate to residual interests from prior larger interests or from companies that acquired companies in which we had ownership interests.

In January 2018, Safeguard announced that we will not deploy any capital into new opportunities and will focus on supporting our existing companies and maximizing monetization opportunities to enable the return of value to shareholders. In that context, we have, are and will consider initiatives including, among others: the sale of our ownership interests, the sale of certain or all ownership interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We initiated the return of value to shareholders in 2019 with a $1.00 per share special dividend and continued in 2021 through share repurchases aggregating to 4.5 million shares for $40.3 million. We anticipate additional actions could occur in the future, once significant dispositions occur, in the form of stock repurchases and/or special dividends based on available cash resources, prevailing market conditions and other factors.

Results of Operations

We operate as one operating segment based upon the similar nature of our technology-driven companies, the functional alignment of the organizational structure, and the reports that are regularly reviewed by the chief operating decision maker for the purpose of assessing performance and allocating resources.

There is intense competition in the markets in which our companies operate. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing market.

The follow

SEC Form 10-Q filed by Safeguard Scientifics, Inc.