Safeguard Scientifics, Inc.

What they do

Safeguard historically provided capital and operational support to technology-driven companies, with active board representation. Since January 2018, it ceased new deployments and now manages a portfolio of existing ownership interests, seeking to monetize them. It retains both majority/minority equity stakes and smaller residual interests in other enterprises. The company has delisted from Nasdaq and terminated its SEC reporting obligations, effective February 2024.

Revenue drivers

• Ownership interests — Carrying value of ownership interests was $14.8 million at September 30, 2023; total cost was $122.8 million. Revenue is generated only when these interests are sold or realize cash proceeds.
• Escrow and contingent proceeds — Receives cash from escrow amounts and holdbacks from prior transactions; e.g., $1.0 million received in Q3 2023 primarily from the Lumesis exit.
• Portfolio company operations — Six of its companies (excluding Other Ownership Interests) had aggregate trailing twelve-month revenues of $96 million as of June 30, 2023, up 10.3% from the prior period, but Safeguard does not consolidate these revenues.

Recent performance

Net loss for 2023 was $9.8 million, or $0.61 per diluted share, compared to a net loss of $14.3 million, or $0.87 per share, in 2022. Operating cash flow was negative $3.3 million in both 2023 and 2022. At December 31, 2023, the company had $9.5 million in cash and equivalents, total assets of $22.8 million, and shareholder equity of $20.0 million. In Q3 2023, net income was $0.9 million, or $0.06 per share, versus a net loss of $3.2 million, or $0.19 per share, in the same period of 2022. For the nine months ended September 30, 2023, net loss was $5.4 million, or $0.33 per share, versus a net loss of $9.4 million, or $0.57 per share, in the prior year.

Strategy

Management stated that the cost of being a public company outweighs the benefits and that ceasing registration and delisting allows for cost-cutting to maximize value returned to shareholders. The company has executed a reverse/forward stock split to reduce shareholders below 300, delisted from Nasdaq, and filed Form 15 to terminate SEC reporting. It continues to support existing ownership interests and seek monetization opportunities, including sales, secondary market transactions, and business combinations. No new deployments are expected during 2023, and it is considering a dividend subject to Board approval. Capital return actions have included a $1.00 special dividend in December 2019, a $0.35 special dividend in December 2023, and share repurchases totaling $43.6 million from 2021 through 2022.

Risks

• Monetization uncertainty — There is no assurance the company can complete sales or other monetization events at desirable values or within any timeframe, and returns to shareholders depend on factors beyond its control.
• Portfolio company performance — Most of its ownership interests are in companies with limited history and a history of operating losses; they may never become profitable or generate exit value.
• Liquidity constraints — Safeguard has substantial capital requirements and absence of liquidity from its ownership interests, which may limit its ability to support portfolio companies or return cash.
• Loss of public reporting protections — After deregistering, the company will no longer be subject to Exchange Act reporting, Sarbanes-Oxley, or stock exchange listing standards, reducing transparency to shareholders.

Outlook

Management expects no further deployments in 2023 and continues to estimate exit values from the remaining portfolio companies, though specific amounts were not disclosed. The company is considering declaring a dividend for the quarter ended December 31, 2023, subject to Board approval. Safeguard intends to maximize value to shareholders through additional monetizations, but timing and outcomes are uncertain.