sfe20230930_10q.htm

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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, 2023

☐ 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	The NASDAQ Stock Market LLC

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 October 30, 2023

Common Stock 16,575,618

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SAFEGUARD SCIENTIFICS, INC.

QUARTERLY REPORT ON FORM 10-Q

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

Consolidated Balance Sheets – September 30, 2023 (unaudited) and December 31, 2022	3

Consolidated Statements of Operations (unaudited) – Three and Nine Months Ended September 30, 2023 and 2022	4

Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2023 and 2022	5

Consolidated Statements of Changes in Equity (unaudited) – Three and Nine Months Ended September 30, 2023 and 2022	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

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

		(Unaudited)
	*September 30, 2023*			*December 31, 2022*
ASSETS
Current Assets:
Cash and cash equivalents	$	15,660		$	13,331
Restricted cash		25			25
Marketable securities		—			5,956
Ownership interests		—			860
Prepaid expenses and other current assets		593			1,251
Total current assets		16,278			21,423
Right-of-use asset, net		1,055			1,290
Ownership interests and advances		14,839			14,545
Other assets		255			434
Total Assets	$	32,427		$	37,692
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	103		$	16
Accrued compensation and benefits		204			507
Accrued expenses and other current liabilities		782			865
Lease liability - current		474			429
Total current liabilities		1,563			1,817
Lease liability - non-current		888			1,249
Other long-term liabilities		50			50
Total Liabilities		2,501			3,116
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, 2023 and December 31, 2022		2,157			2,157
Additional paid-in capital		801,124			804,752
Treasury stock, at cost; 5,063 and 5,478 shares at September 30, 2023 and December 31, 2022, respectively		(44,018	)		(48,410	)
Accumulated deficit		(729,312	)		(723,898	)
Accumulated other comprehensive loss		(25	)		(25	)
Total Equity		29,926			34,576
Total Liabilities and Equity	$	32,427		$	37,692

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited - In thousands, except share and per share data)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2023*			*2022*			*2023*			*2022*
General and administrative expense	$	1,313		$	1,360		$	3,684		$	3,740
Operating loss		(1,313	)		(1,360	)		(3,684	)		(3,740	)
Other income (loss), net		1,661			(1,012	)		1,486			(2,979	)
Interest income		198			230			721			476
Equity income (loss), net		386			(1,022	)		(3,937	)		(3,147	)
Net income (loss) before income taxes		932			(3,164	)		(5,414	)		(9,390	)
Income tax benefit (expense)		—			—			—			—
Net income (loss)	$	932		$	(3,164	)	$	(5,414	)	$	(9,390	)

Net income (loss) per share:
Basic	$	0.06		$	(0.19	)	$	(0.33	)	$	(0.57	)
Diluted	$	0.06		$	(0.19	)	$	(0.33	)	$	(0.57	)
Weighted average shares used in computing income (loss) per share:
Basic		16,285			16,281			16,167			16,405
Diluted		16,285			16,281			16,167			16,405

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In thousands)

	*Nine Months Ended September 30,*
	*2023*			*2022*
Cash Flows from Operating Activities:
Net cash used in operating activities	$	(2,490	)	$	(2,660	)
Cash Flows from Investing Activities:
Proceeds from sales of ownership interests		2,300			6,534
Acquisitions of ownership interests		(3,000	)		—
Advances and loans to ownership interests		(250	)		(5,045	)
Purchases of marketable securities		(8,530	)		(5,952	)
Proceeds from maturities in marketable securities		14,650			—
Net cash (used in) provided by investing activities		5,170			(4,463	)
Cash Flows from Financing Activities:
Repurchases of Company common stock		(75	)		(2,060	)
Tax withholdings related to equity-based awards		(276	)		(523	)
Net cash used in financing activities		(351	)		(2,583	)
Net change in cash, cash equivalents and restricted cash		2,329			(9,706	)
Cash, cash equivalents and restricted cash at beginning of period		13,356			24,764
Cash, cash equivalents and restricted cash at end of period	$	15,685		$	15,058

See Notes to Consolidated Financial Statements.

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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, 2022	$	34,576		$	(723,898	)	$	(25	)		21,573	$	2,157	$	804,752			5,478		$	(48,410	)
Net loss		(3,484	)		(3,484	)		—			—		—		—			—			—
Repurchases of common stock		(75	)		—			—			—		—		—			25			(75	)
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net		207			—			—			—		—		(1,899	)		(193	)		2,106
Stock-based compensation expense		168			—			—			—		—		168			—			—
Balance - March 31, 2023	$	31,392		$	(727,382	)	$	(25	)		21,573	$	2,157	$	803,021			5,310		$	(46,379	)
Net loss		(2,862	)		(2,862	)		—			—		—		—			—			—
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net		60			—			—			—		—		(1,882	)		(212	)		1,942
Stock-based compensation expense		173			—			—			—		—		173			—			—
Balance - June 30, 2023	$	28,763		$	(730,244	)	$	(25	)		21,573	$	2,157	$	801,312			5,098		$	(44,437	)
Net income		932			932			—			—		—		—			—			—
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net		61			—			—			—		—		(358	)		(35	)		419
Stock-based compensation expense		170			—			—			—		—		170			—			—
Balance - September 30, 2023	$	29,926		$	(729,312	)	$	(25	)		21,573	$	2,157	$	801,124			5,063		$	(44,018	)

See Notes to Consolidated Financial Statements.

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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, 2021	$	50,566		$	(709,635	)	$	(25	)		21,573	$	2,157	$	806,638			5,068		$	(48,569	)
Net loss		(6,709	)		(6,709	)		—			—		—		—			—			—
Repurchases of common stock		(779	)		—			—			—		—		—			148			(779	)
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net		303			—			—			—		—		(1,019	)		(122	)		1,322
Stock-based compensation expense		168			—			—			—		—		168			—			—
Balance - March 31, 2022	$	43,549		$	(716,344	)	$	(25	)		21,573	$	2,157	$	805,787			5,094		$	(48,026	)
Net income		483			483			—			—		—		—			—			—
Repurchases of common stock		(945	)		—			—			—		—		—			221			(945	)
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net		65			—			—			—		—		(489	)		(54	)		554
Stock-based compensation expense		143			—			—			—		—		143			—			—
Balance - June 30, 2022	$	43,295		$	(715,861	)	$	(25	)		21,573	$	2,157	$	805,441			5,261		$	(48,417	)
Net loss		(3,164	)		(3,164	)		—			—		—		—			—			—
Repurchases of common stock		(337	)		—			—			—		—		—			84			(337	)
Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net		48			—			—			—		—		(994	)		(110	)		1,042
Stock-based compensation expense		265			—			—			—		—		265			—			—
Balance - September 30, 2022	$	40,107		$	(719,025	)	$	(25	)		21,573	$	2,157	$	804,712			5,235		$	(47,712	)

See Notes to Consolidated Financial Statements.

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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 2022 Annual Report on Form 10-K.

Liquidity

As of September 30, 2023 the Company had $15.7 million of cash and cash equivalents.

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 our ownership interests, the sale of certain or all of our ownership interests in secondary market transactions 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, 2023 will be sufficient to fund operations past one year from the issuance of these Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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. If 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 interests 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.

Comprehensive Income (loss)

During the three months and nine months ended September 30, 2023 and 2022, there were no items of comprehensive income (loss).

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 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 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.

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, 2023*		*December 31, 2022*
	(Unaudited - In thousands)
Equity Method:
Companies	$	10,583	$	8,749
Private equity funds		97		97
		10,680		8,846
Other Method:
Companies, fair value		-		860
Companies, fair value measurement alternative		2,555		1,067
Private equity funds, fair value measurement alternative		250		250
		2,805		2,177
Advances to companies		1,354		4,382
	$	14,839	$	15,405

The Company recorded a $0.2 million impairment during the nine months ended September 30, 2023 related to an Other ownership interest. There were no impairments recorded during the nine months ended September 30, 2022.

As of September 30, 2023, the Company held ownership interests accounted for using the equity method in 5 non-consolidated companies. Certain of the Company's ownership interests as of September 30, 2023 included the following:

Company Name	*Safeguard Primary Ownership as of September 30, 2023*	*Accounting Method*
Clutch Holdings, Inc.	41.7%	Equity
InfoBionic, Inc.	5.5%	Other
meQuilibrium	30.2%	Equity
Moxe Health Corporation	19.3%	Equity
Prognos Health Inc.	19.4%	Equity
Syapse, Inc.	11.0%	Equity

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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, 2023 and 2022, 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,*
	*2023*			*2022*			*2023*			*2022*
	(Unaudited - In thousands)
Results of Operations:
Revenue	$	18,713		$	34,170		$	89,110		$	109,460
Gross profit	$	13,525		$	19,741		$	62,130		$	67,314
Net loss	$	(14,643	)	$	(41,071	)	$	(63,971	)	$	(106,258	)

3. Acquisitions of Ownership Interests

The following is a summary of additional deployments during the nine month period ended September 30, 2023:

The Company deployed $3.0 million to Prognos Health during the three months ended June 30, 2023. The Company had previously deployed an aggregate of $14.6 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.

The Company funded $0.3 million of convertible loans to Trice Medical during the three months ended March, 31 2023. During the three months ended September 30, 2023, Trice Medical completed a recapitalization transaction in which Safeguard declined to participate that resulted in Safeguard retaining a small, subordinated debt position and a de minimis ownership interest. The Company had previously deployed an aggregate of $12.0 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, 2023, InfoBionic completed a recapitalization transaction, in which Safeguard declined to participate, that reduced our ownership position to approximately 5% and resulted in a $1.7 million observable price change gain to reflect the fair value of the ownership interest. InfoBionic provides a remote patient monitoring platform delivering on-demand, actionable monitoring data and analytics directly to physicians.

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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 (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, cash equivalents and restricted cash approximate fair value due to their short term nature. Marketable securities consist of U.S. Treasury Bills and are carried at amortized cost, which approximates fair value at September 30, 2023. 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, 2023 or December 31, 2022.

	*Carrying*		*Fair Value Measurement at September 30, 2023*
	*Value*		*Level 1*		*Level 2*		*Level 3*
	(Unaudited - In thousands)
Cash and cash equivalents	$	15,660	$	15,660	$	—	$	—

Restricted cash	$	25	$	25	$	—	$	—

	*Carrying*		*Fair Value Measurement at December 31, 2022*
	*Value*		*Level 1*		*Level 2*		*Level 3*
	(Unaudited - In thousands)
Cash and cash equivalents	$	13,331	$	13,331	$	—	$	—

Restricted cash	$	25	$	25	$	—	$	—

Marketable securities—held-to-maturity:
U.S. Government securities	$	5,956	$	5,956	$	—	$	—

Ownership interests	$	860	$	860	$	—	$	—

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,

2023

SEC Form 10-Q filed by Safeguard Scientifics Inc.