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Item 7. Management’s Discussion and Analysis

2019-03-01 compared with 2018-03-07 · 113 added, 206 removed, 142 unchanged (69% of the section changed)

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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 partner companies may vary from period to period, our substantial capital requirements and absence of liquidity from our partner company holdings, our ability to service the indebtedness under and remain in compliance with the terms of our credit facility, a fluctuations in the market prices of our publicly traded partner company holdings, competition, our inability to obtain maximum value for our partner company holdings, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our partner companies and their performance, including the fact that most of our partner companies have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which our partner companies operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A.

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 partner companies may vary from period to period, our substantial capital requirements and absence of liquidity from our partner company holdings, our ability to service and pay the indebtedness under and remain in compliance with the terms of our credit facility, fluctuations in the market prices of our publicly traded partner company holdings, competition, our inability to obtain maximum value for our partner company holdings, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our partner companies and their performance, including the fact that most of our partner companies have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which our partner companies operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A.

“Risk Factors.” Many of these factors are beyond our ability to predict or control.

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Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses in healthcare, financial services and digital media.

Throughout this document, we use the term “partner company” to generally refer to those companies in which we have an equity interest and in which we are actively involved, influencing development through board representation and management support, in addition to the influence we exert through our equity ownership.

Throughout this document, we use the term “partner company” to generally refer to those companies in which we have a significant equity interest.

In many, but not all cases, we will also be actively involved, influencing development through board representation and management support, in addition to the influence we exert through our equity ownership.

From time to time, in addition to these partner companies, we also 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, these interests relate to former partner companies.

In January 2018, Safeguard announced that, from that date forward, we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities for partner company interests to enable distributions of net proceeds to shareholders.

In that context, we will consider initiatives including, among others:

the sale of individual partner companies, the sale of certain partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value.

We anticipate distributing to shareholders net proceeds from the sale of partner companies or partner company interests, as applicable, after satisfying our debt obligations and working capital needs.

Safeguard's existing group of partner companies consist of technology-driven businesses in healthcare, financial services and digital media that are capitalizing on the next wave of enabling technologies with a particular focus on the Internet of Everything, enhanced security and predictive analytics.

In January 2018, Safeguard announced that we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities to enable returning value to shareholders.

In that context, we have, are and will consider initiatives including, among others:

the sale of individual partner companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value.

We anticipate returning value to shareholders after satisfying our debt obligations and working capital needs.

Safeguard's existing group of partner companies consists principally of technology-driven businesses in healthcare, financial services and digital media that are capitalizing on the next wave of enabling technologies including enhanced security and predictive analytics.

We strive to create long-term value for our shareholders by helping our partner companies to increase their market penetration, grow revenue and improve cash flow.

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We account for our interests in our partner companies using one of the following methods:

consolidation, fair value, equity or cost.

Equity or other.

The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by our voting interest in the entity.

Consolidation Method.

We account for partner companies in which we maintain a controlling financial interest, generally those in which we directly or indirectly own more than 50% of the outstanding voting securities, using the consolidation method of accounting.

Upon consolidation of our partner companies, we reflect the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company as a non-controlling interest in the Consolidated Balance Sheet.

The non-controlling interest is presented within equity, separately from the equity of the parent company.

Losses attributable to the parent company and the non-controlling interest may exceed their interest in the subsidiary’s equity.

As a result, the non-controlling interest shall continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance as of each balance sheet date.

Revenue, expenses, gains, losses, net income or loss are reported in the Consolidated Statements of Operations at the consolidated amounts, which include the amounts attributable to the parent company’s common shareholders and the non-controlling interest.

As of December 31, 2017 , we did not hold a controlling interest in any of our partner companies.

Fair Value Method.

Unrealized gains and losses on the mark-to-market of our holdings in fair value method companies and realized gains and losses on the sale of any holdings in fair value method companies are recognized in Other income (loss), net in the Consolidated Statements of Operations.

As of December 31, 2017 , we did not account for any of our partner companies under the fair value method.

Equity Method.

We account for partner companies whose results are not consolidated, but over whom we exercise significant influence, using the equity method of accounting.

We also account for our interests in some private equity funds under the equity method of accounting, based on our non-controlling general and limited partner interests.

We also account for our interests in some private equity funds

under the equity method of accounting, based on our non-controlling general and limited partner interests.

Under the equity method of accounting, our share of the income or loss of the partner company is reflected in Equity income (loss) in the Consolidated Statements of Operations.

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When the equity method partner company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized.

We account for partner companies which are not consolidated or accounted for under the equity method or fair value method under the cost method of accounting.

Under the cost method, our share of the income or losses of such partner companies is not included in our Consolidated Statements of Operations.

We include the carrying value of cost method partner companies in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

Other Method.

We account for our equity interests in companies which are not accounted for under the equity method or fair value method as equity securities without readily determinable fair values.

We account for of these securities 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 investment 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.

We include the carrying value of these investments in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

Critical Accounting Policies and Estimates

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While there are a number of accounting policies, methods and estimates affecting our financial statements as described in Note 1 to our Consolidated Financial Statements, the most significant relate to impairment of ownership interests in and advances to partner companies.

Valuation of Credit facility repayment feature

The fair value of the Credit Facility repayment feature is determined quarterly based on the present value of make-whole interest payments that are expected to be paid based on cash flow estimates that include a probability weighted estimate of exit transactions, estimated follow-on deployments, estimated quarterly operating cash flows and other cash commitments that would result in qualified cash exceeding the $50 million threshold specified in the Credit facility.

Impairment of Ownership Interests In and Advances to Partner Companies

On a periodic basis, but no less frequently than at the end of each quarter, we evaluate the carrying value of our equity and cost method partner companies for possible impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company, market conditions and other relevant factors.

On a periodic basis, but no less frequently than at the end of each quarter, we evaluate the carrying value of our interests in partner companies for possible impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company, market conditions and other relevant factors.

The business plan objectives and milestones we consider include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships.

We then determine whether there has been an other than temporary decline in the value of our ownership interest in the company.

For our equity and cost method partner companies, impairment to be recognized is measured as the amount by which the carrying value of an asset exceeds its fair value.

Any impairment to be recognized is measured as the amount by which the carrying value of an asset exceeds its fair value.

The adjusted carrying value of a partner company is not increased if circumstances suggest the value of the partner company has subsequently recovered.

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It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests in and advances to partner companies could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material.

While we believe that the current recorded carrying values of our equity and cost method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.

While we believe that the current recorded carrying values of our equity and other method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.

Total impairment charges related to ownership interests in and advances to our equity and cost method partner companies were as follows:

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Impairment charges related to equity method partner companies are included in Equity income (loss) in the Consolidated Statements of Operations.

Impairment charges related to cost method partner companies are included in Other income (loss), net in the Consolidated Statements of Operations.

Impairment charges related to other investments are included in Other income (loss), net in the Consolidated Statements of Operations.

In addition to ownership interests in our partner companies, we also maintain an interest in the management company and general partner of Penn Mezzanine, a mezzanine lender focused on lower middle-market, Mid-Atlantic companies.

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Penn Mezzanine is not making any new loans and we have no remaining loans in which we have participating interests.

The carrying value of our remaining participating interests in debt and equity securities associated with Penn Mezzanine was zero as of December 31, 2017.

During the years ended December 31, 2017 and 2016, we recognized a $0.4 million gain and a $2.4 million loss on impairment of our Penn Mezzanine debt and equity participations, which are included in Other income (loss), net in the Consolidated Statements of Operations.

The carrying value of our remaining participating interests in debt and equity securities associated with Penn Mezzanine was zero as of December 31, 2018 and 2017.

During the year ended December 31, 2017, we recorded a $0.4 million loss on impairment of our Penn Mezzanine debt and equity participations in Other income (loss), net in the Consolidated Statements of Operations.

Results of Operations

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Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing market.

As previously stated, throughout this document, we use the term “partner company” to generally refer to those companies in which we have an economic interest and in which we are actively involved influencing their development, usually through board representation in addition to our equity ownership.

As previously stated, throughout this document, we use the term “partner company” to generally refer to those companies in which we have an economic interest and in which we, generally, but not in all cases, are actively involved, influencing development, usually through board representation, in addition to our equity ownership.

The following listing of our partner companies only include entities which were considered partner companies as of December 31, 2018 .

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Accounting Method

AdvantEdge Healthcare Solutions, Inc.

Apprenda, Inc.

Cask Data, Inc.

CloudMine, Inc.

Brickwork ***

Clutch Holdings, Inc.

Flashtalking *

Hoopla Software, Inc.

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NovaSom, Inc.

Prognos (formerly Medivo)

Propeller Health, Inc.

Prognos Health Inc.

Propeller ***

QuanticMind, Inc.

Spongecell, Inc.

T-REX Group, Inc.

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merged into Flashtalking in January 2018.

** The Company sold 39.1% of its ownership interest back to MediaMath, Inc.

for $45 million of proceeds in July 2018.

*** The Company's ownership interests in Brickwork and Propeller Health were both disposed of, in separate transactions, in January 2019.

Year ended December 31, 2018 versus year ended December 31, 2017

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General and administrative expense

Other income (loss), net

Other loss, net

Interest income

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General and administrative expense also includes stock-based compensation expense which consists primarily of expense related to grants of stock options, restricted stock and deferred stock units to our employees and directors.

General and administrative expense decreased $1.6 million for the year ended December 31, 2017 compared to the prior year primarily due to a decrease of $1.2 million in stock-based compensation mostly related to performance-based awards and a $0.4 million decrease in professional fees.

Other Income (Loss), Net.

Other income (loss), net decreased $1.3 million for the year ended December 31, 2017, compared to the prior year.

The components of other income (loss) for the years ended December 31, 2017 and 2016 were as

Year ended December 31, 2017:

Decrease in fair value of shares of Invitae Corporation

Impairment of interest in legacy private equity fund

Gain on legacy Penn Mezzanine debt and equity participations

Loss on extinguishment of 2018 Debentures

Year ended December 31, 2016:

Loss on impairment of Penn Mezzanine debt and equity participations

Gain on sale of Bridgevine

General and administrative expense decreased $0.3 million for the year ended December 31, 2018 compared to the prior year primarily due to a $4.1 million decrease in employee compensation from reduced staffing levels and a decrease of $0.2 million in stock-based compensation mostly related to performance-based awards, which was offset by an increase in severance benefits of $3.3 million, an increase of $0.4 million for depreciation of our leasehold improvements, and higher professional fees of $1.6

million related primarily to responding to shareholder proposals.

The accelerated depreciation in the fourth quarter of 2018 of approximately $0.5 million is the result of our expectation to exit our current facility by June 2019.

Other Loss, net.

Other loss, net increased $4.8 million for the year ended December 31, 2018, compared to the prior year.

Other loss, net for the year ended December 31, 2018 consists of a $4.5 million loss related to the increase in the fair value of the amended credit facility repayment feature liability derivative and a $1.2 million loss from the decrease in the fair value of escrow shares of Invitae Corporation common stock obtained in connection with the sale of Good Start Genetics in August 2017.

These losses were partially offset by a $1.4 million gain on the increase in the value of certain non-partner company equity securities based upon an observable price change.

Other loss, net for the year ended December 31, 2017 consists of a $0.5 million decrease in the fair value of escrow shares of Invitae Corporation common stock and a $0.2 million impairment of an interest in a legacy private equity fund, net of a $0.4 million gain on legacy Penn Mezzanine debt and equity participations.

Interest Income.

Interest income includes all interest earned on available cash and marketable security balances as well as interest earned on notes receivable from our partner companies.

Interest income increased $1.8 million compared to the prior year due to higher average notes receivable from our partner companies.

Interest income decreased $1.1 million compared to the prior year due to lower average notes receivable from our partner companies partially offset by higher average investment balances in marketable securities during the fourth quarter of 2018.

Interest Expense.

Interest expense is primarily related to our credit facility and convertible senior debentures.

Interest expense increased $4.0 million compared to the prior year primarily due to $4.4 million of interest expense related to borrowings under the new credit facility we entered into in May 2017, partially offset by a $0.4 million decrease in interest expense due to the repurchase of $14.0 million face value of convertible senior debentures in June and July 2017.

Interest expense increased $7.4 million compared to the prior year primarily due to accelerated interest resulting from the make-whole interest provisions of the credit facility and accelerated debt issue cost amortization both related to the prepayment of debt associated with the credit facility.

Equity Income (Loss).

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We report our share of the results of our equity method partner companies on a one quarter lag basis.

Equity income (loss) decreased $67.0 million for the year ended December 31, 2017 compared to the prior year.

The components of equity income (loss) for the years ended December 31, 2017 and 2016 were as follows:

Year ended December 31, 2017:

Gain on sale of Good Start Genetics

Gain on proceeds received from escrow related to sale of Putney

Gain on proceeds received from escrow related to sale of Quantia

Gain on proceeds received from escrow related to the sale of AppFirst assets

Gain on sale of Nexxt (fka Beyond.com)

Unrealized dilution gain on the decrease of our percentage ownership in partner companies

Loss on impairment of Spongecell

Loss on impairment of Pneuron

Loss on impairment of Full Measure

Share of loss of our equity method partner companies

Year ended December 31, 2016:

Gain on sale of Putney

Gain on performance milestone proceeds related to sale of Thingworx

Unrealized dilution gain on the decrease of our ownership percentage in partner companies

Gain on proceeds received from escrow related to sale of DriveFactor

Gain on proceeds received from escrow related to sale of Quantia

Loss on impairment of AppFirst

Loss on impairment of Aventura

Share of net loss of our equity method partner companies

The change in our share of net loss of our equity method partner companies for the year ended December 31, 2017 compared to the prior year was due to an increase in losses associated with our partner companies.

Year ended December 31, 2016 versus year ended December 31, 2015

Year Ended December 31,

(In thousands)

General and administrative expense

Other income (loss), net

Interest income

Interest expense

General and Administrative Expense.

General and administrative expense increased $1.1 million for the year ended December 31, 2016, compared to the prior year primarily due to an increase of $0.8 million in stock-based compensation for performance-based awards and an increase of $0.3 million in employee costs.

Other Income (Loss), Net .

Other income (loss), net decreased $1.9 million for the year ended December 31, 2016, compared to the prior year.

The components of other income (loss) for the years ended December 31, 2016 and 2015 were as follows:

Year ended December 31, 2016:

Loss on impairment of Penn Mezzanine debt and equity participations

Gain on sale of Bridgevine

Year ended December 31, 2015:

Gain on proceeds received from escrow related to sale of Crescendo

Loss on impairment of Dabo Health

Loss on impairment of legacy private equity fund

Interest Income.

Interest income remained relatively consistent compared to the prior year.

Interest Expense.

Interest expense remained relatively consistent compared to the prior year.

Equity Income (Loss).

Equity income (loss) increased $86.0 million for the year ended December 31, 2018 compared to the prior year.

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Year ended December 31:

Gain on sale of Putney

Gain on performance milestone proceeds related to sale of Thingworx

Unrealized dilution gain on the decrease of our ownership percentage in partner companies

Gain on proceeds received from escrow related to sale of DriveFactor

Gain on proceeds received from escrow related to sale of Quantia

Loss on impairment of AppFirst

Loss on impairment of Aventura

Share of net loss of our equity method partner companies

Year ended December 31, 2015:

Gain on sale of DriveFactor

Gain on proceeds from escrow related to sale of Thingworx

Gain on performance milestone proceeds related to sale of Thingworx

Gain on proceeds received from escrow related to sale of Alverix

Unrealized dilution loss on the decrease of our percentage ownership in partner companies

Loss on impairment of Quantia

Loss on impairment of InfoBionic

Loss on impairment of AppFirst

Share of net loss of our equity method partner companies

The change in our share of net loss of our equity method partner companies for the year ended December 31, 2016 compared to the prior year was due to an increase in losses associated with our partner companies.

Gain on the sale of partner interests

Unrealized dilution gains on the decrease of our percentage ownership in partner companies

Gain on Spongecell's merger into Flashtalking

Gain on proceeds received from escrow

Loss on impairment of partner companies

Share of losses of our equity method partner companies

The gain on sale of partner interests for the year ended December 31, 2018 is comprised of MediaMath of $45.0 million, Nexxt (fka Beyond.com) of $9.5 million, AdvantEdge Healthcare Solutions of $5.5 million and Cask Data of $4.2 million.

The gain on sale of partner interests for the year ended December 31, 2017 is comprised of Good Start Genetics for $4.3 million and Nexxt (fka Beyond.com) for $0.1 million.

The loss on impairment of partner companies for the year ended December 31, 2018 is comprised of Apprenda of $6.6 million, CloudMine of $4.8 million and Brickwork for $1.2 million.

The loss on impairment of partner companies for the year ended December 31, 2017 is comprised of Spongecell of $3.6 million, Pneuron of $5.2 million and Full Measure of $7.0 million.

The decrease in our share of losses of our equity method partner companies was due to a decrease in the number of partner companies and a decrease in losses associated with our partner companies.

Income Tax Benefit (Expense)

Income tax benefit (expense) was $0.0 million for the three years ended December 31, 2017 , 2016 and 2015 .

Income tax benefit (expense) was $0.0 million for the years ended December 31, 2018 and 2017 .

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.

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Liquidity And Capital Resources

As of December 31, 2017, we had $20.7 million of cash and cash equivalents and $4.5 million of marketable securities for a total of $25.2 million.

As of December 31, 2017, we had $41.0 million of principal outstanding on our 2018 Debentures, which we anticipate repaying or refinancing by the maturity date of May 15, 2018, and $50.0 million of principal outstanding on our Credit Facility due in May 2020.

We currently have $25.0 million of availability under the Credit Facility.

In that context, we will consider initiatives including, among others:

In connection with our change in strategy, in January 2018, we implemented an initiative to generate annual cost savings of between $5 million and $6 million, which reflect changes in our personnel and operating cost requirements under the new strategy.

We will recognize a charge of approximately $1.3 million in the first quarter of 2018 for severance payments to terminated employees that will be paid over approximately twelve months.

In May 2017, the Company entered into a $75.0 million secured, revolving credit facility (“Credit Facility”) with HPS Investment Partners, LLC (“Lender”).

As of December 31, 2017, we had $50.0 million of principal outstanding on the Credit Facility due in May 2020.

The Credit Facility requires us to maintain (i) a liquidity threshold of at least $20 million of unrestricted cash;

(ii) a tangible net worth, plus unrestricted cash, of at least 1.75x the amount then outstanding under the Credit Facility;

(iii) a minimum aggregate appraised value of ownership interests in its partner companies, plus unrestricted cash in excess of the liquidity threshold, of at least $350 million;

and (iv) certain diversification requirements and concentration limits with respect to its capital deployments to its partner companies.

As of the date these consolidated financial statements were issued, we were in compliance with all of these covenants.

We fund our operations with cash and marketable securities on hand as well as proceeds from the sales of its interests in its partner companies.

Due to the nature of the mergers and acquisitions market, and the developmental cycle of companies like our partner companies, our ability to generate specific amounts of liquidity from sales of its partner company interests in any given period of time cannot be assured.

Accordingly, the forecasts which we utilize for projecting future compliance with covenants related to our Credit Facility include significantly discounted probability-weighted proceeds from the sales of our interests in our partner companies.

Based on these forecasts, it is probable that we will not be able to remain in compliance with certain of our debt covenants over the next twelve months.

As of December 31, 2018, the Company had $7.7 million of cash and cash equivalents and $38.0 million of marketable securities for a total of $45.7 million .

As of December 31, 2018, the Company had $ 68,600,000.0 million of principal outstanding on its Amended Credit Facility (as defined below) due in May 2020.

In January 2018, the Company announced that, from that date forward, we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities to return value to shareholders.

In that context, we have, are and will consider initiatives including, among others:

We anticipate returning value to shareholders from the sale of partner companies or partner company interests, as applicable, after satisfying our debt obligations and working capital needs.

In connection with our change in strategy, in January 2018, we implemented an initiative to reduce the operating costs of the Company.

In April 2018, the Company announced additional management changes intended to further streamline the Company's organizational structure and further reduce its operating costs.

In connection with the changes that the Company has implemented, the Company has incurred approximately $2.8 million of severance payments to terminated employees and will pay an additional $1.2 million in 2019.

As of December 31, 2018, the Company had $68.6 million of principal outstanding on its revolving credit facility with HPS Investment Partners, LLC ("Lender") due in May 2020.

The Credit Facility requires the Company to maintain (i) a liquidity threshold of at least $20 million of unrestricted cash;

(ii) a minimum aggregate appraised value of ownership interests in its partner companies, plus unrestricted cash in excess of the liquidity threshold, of at least $350 million less the aggregate amount of all prepayments of the Term Loan;

(iii) limit deployments to only existing partner companies and such deployments may not exceed, when combined with deployments after January 1, 2018, $40 million in the aggregate through the maturity date;

(iv) limit certain expenses (which shall exclude severance payments, interest expense, depreciation and stock-based compensation) incurred or paid to no more than $11.5 million in any twelve-month period after the date of the amendment (or such shorter period as has elapsed since the date of the amendment).

Additionally, the Company is restricted from repurchasing shares of its outstanding common stock and/or issuing dividends until such time as the Credit Facility is repaid in full.

As of the date these consolidated financial statements were issued, the Company was in compliance with all of these covenants.

Repayment terms under the Credit Facility include a make-whole interest provision equal to the interest that would have been payable had the principal amount subject to repayment been outstanding through the maturity date.

If the aggregated amount of the Company's qualified cash at any quarter end exceeds $50.0 million, the Company will be required to prepay outstanding principal amounts, plus any applicable accrued and make-whole interest, in an amount equal to 100% of such excess.

The Company anticipates exceeding the qualified cash threshold at March 31, 2019 and making an applicable required prepayment during the second quarter of 2019.

The Company funds its operations with cash and marketable securities on hand as well as proceeds from the sales of its interests in its partner companies.

Due to the nature of the mergers and acquisitions market, and the developmental cycle of companies like the Company's partner companies, the Company's ability to generate specific amounts of liquidity from sales of its partner company interests in any given period of time cannot be assured.

Accordingly, the forecasts which the Company utilizes for projecting future compliance with covenants related to its Credit Facility include significantly discounted probability-weighted proceeds from the sales of its interests in its partner companies.

Based on these forecasts, management believes the Company will remain in compliance with all its debt covenants.

Non-compliance with any of the covenants would constitute an event of default under the Credit Facility, and the Lender could choose to accelerate the maturity of the indebtedness.

If the Lender chose not to provide a waiver and were to accelerate the maturity of the indebtedness, we would not have sufficient liquidity to repay the entire balance of our outstanding borrowings and other obligations under the Credit Facility.

The uncertainty associated with our ability to repay our outstanding debt obligations in such a scenario raises substantial doubt about our ability to continue as a going concern for one year after the issuance date of the financial statements.

In order for us to maintain compliance with these covenants, our plan includes selling certain of our partner company interests in the ordinary course of our business, limiting capital deployments to existing partner companies, and refinancing all or a portion of our 2018 Debentures that mature on May 15, 2018.

Should we not be in compliance with any of our debt covenants and be unable to obtain waivers for such events of default, management would pursue one of a number of potential alternatives to satisfy the obligations, including completing an equity offering or obtaining a new debt facility to refinance our existing debt.

In November 2012, we issued $55.0 million in face amount of our 5.25% convertible senior debentures due on May 15, 2018 (the "2018 Debentures").

Interest on the 2018 Debentures is payable semi-annually.

At the debentures holders’ option, the 2018 Debentures are convertible into our common stock prior to November 15, 2017 subject to certain conditions, and at any time after November 15, 2017.

The conversion rate of the 2018 Debentures is 55.17 shares of common stock per $1,000 principal amount of debentures, equivalent to a conversion price of approximately $18.13 per share of common stock.

The closing price per share of our common stock at December 31, 2017 was $11.20.

The 2018 Debentures holders have the right to require us to repurchase the 2018 Debentures if we undergo a fundamental change as defined in the debenture agreement, including the sale of all or substantially all of our common stock or assets, liquidation, or dissolution;

a change in control;

the delisting of our common stock from the New York Stock Exchange or the NASDAQ Global Market (or any of their respective successors);

or a substantial change in the composition of our board of directors as defined in the agreement.

On or after November 15, 2016, we may redeem for cash some or all of the debentures, subject to certain conditions.

Upon any such redemption of the 2018 Debentures, we will pay a redemption price of 100% of their principal amount, plus accrued and unpaid interest.

Upon the conversion of the 2018 Debentures we have the right to settle the conversion in stock, cash or a combination thereof.

In July and June 2017, we repurchased on the open market, and retired, an aggregate of $14.0 million face value of 2018 Debentures at a cost of $14.5 million, including transaction fees.

If the Lender chose not to provide a waiver and were to accelerate the maturity of the indebtedness, the Company would not have sufficient liquidity to repay the entire balance of its outstanding borrowings and other obligations under the Credit Facility.

In order for the Company to maintain compliance with these covenants, the Company's plan includes selling certain of its partner company interests in the ordinary course of its business and limiting capital deployments to existing partner companies.

Should the Company not be in compliance with any of its debt covenants and be unable to obtain waivers for such events of default, management would pursue one of a number of potential alternatives to satisfy the obligations, including completing an

equity offering or obtaining a new debt facility to refinance its existing debt.

The Company believes that its cash, cash equivalents and marketable securities at December 31, 2018 will be sufficient to fund operations past one year from the issuance of these financial statements.

In 2017, we repurchased on the open market, and retired, an aggregate of $14.0 million face value of 2018 Debentures at a cost of $14.5 million, including transaction fees.

In connection with the repurchase of these 2018 Debentures, we recognized a $0.8 million reduction in equity which is included in Accumulated Paid-In Capital in the Consolidated Balance Sheet as of December 31, 2017 and a $29 thousand loss on extinguishment of the liability which is included in Other income (loss), net in the Consolidated Statements of Operations for the twelve months ended December 31, 2017.

We had $41.0 million face value of 2018 Debentures outstanding at December 31, 2017 due on May 15, 2018.

We have provided a $6.3 million letter of credit that is scheduled to expire on March 31, 2019 to the landlord of CompuCom Systems, Inc.’s Dallas headquarters which was required in connection with the sale of CompuCom Systems in 2004.

The letter of credit is secured by cash which is classified as Long-term restricted cash equivalents on the Consolidated Balance Sheet.

The restriction on the cash will lapse when the related letter of credit is terminated or expires on March 31, 2019.

In July 2015, the Company's Board of Directors authorized us, from time to time and depending on market conditions, to repurchase up to $25.0 million of the Company's outstanding common stock.

During the years ended December 31, 2016 and 2015, we repurchased an aggregate of 0.7 million shares at an aggregate cost of $10.4 million with $14.6 million remaining for repurchase under the existing authorization.

In 2018, we extinguished the remaining $41.0 million face value of 2018 Debentures outstanding.

We previously provided a $6.3 million letter of credit to the landlord of CompuCom Systems, Inc.’s Dallas headquarters as required in connection with the sale of CompuCom Systems in 2004.

The letter of credit was secured by cash and was classified as Long-term restricted cash equivalents on the Consolidated Balance Sheet as of December 31, 2017.

During the first quarter of 2018, the restriction on the cash lapsed in connection with the termination of the related letter of credit.

In 2015, the Company's Board of Directors authorized us, from time to time and depending on market conditions, to repurchase up to $25.0 million of the Company's outstanding common stock.

During the years ended December 31, 2018 and 2017, we did not repurchase any shares under this authorization.

We are required to return a portion or all the distributions we received as a general partner of a private equity fund for further distribution to such fund's limited partners (“clawback”).

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The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default.

We believe our potential liability due to the possibility of default by other general partners is remote.

We were notified by the fund's manager that the fund is being dissolved and $1.0 million of our clawback liability was paid in the first quarter of 2017.

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capital markets and other factors.

The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time.

Our current strategy could increase or decrease our liquidity at any point in time.

As we seek to provide additional funding to existing partner companies or commit capital to other initiatives, we may be required to expend our cash or incur debt, which will decrease our liquidity.

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Net cash used in operating activities increased by $5.2 million for the year ended December 31, 2018 compared to the prior year.

The increase was primarily due to $2.5 million of cash interest payments related to our credit facility we entered into in May 2017, partially offset by a $0.4 million decrease in cash used in professional fees.

Year ended December 31, 2016 versus year ended December 31, 2015.

Net cash used in operating activities increased $0.9 million in 2016 compared to the prior year.

The increase was primarily related to an increase of $0.4 million in employee costs, an increase of $0.2 million in cash used for professional fees, and an increase of $0.1 million in cash paid for office rent.

The change was primarily due to the decrease in net loss, resulting from gains on the sales of our interests in partner companies, the decrease of our share of losses of our equity method partner companies, the non-cash gain from an observable price change in an investment, and the non-cash loss from the increase in the fair value of the Credit Facility repayment feature.

Net Cash Provided by (Used In) Investing Activities

Year ended December 31, 2018 versus year ended December 31, 2017.

Net cash provided by (used in) investing activities decreased by $30.2 million for the year ended December 31, 2017 compared to the prior year.

The decrease primarily related to a $57.4 million decrease in proceeds from the sales of and distributions from companies and a $13.9 million decrease in cash proceeds from the net change in marketable securities, partially offset by a $37.3 million decrease in acquisitions of ownership interests in companies and a $3.4 million decrease in advances and loans to companies.

Cash proceeds from the sales of and distributions from companies were $16.6 million for the year ended December 31, 2017 which related primarily to:

In March 2017, we sold our interest in partner company Nexxt, Inc., formerly Beyond.com, back to Nexxt, Inc.

for $26.0 million.

We received $15.5 million in cash and a three-year, $10.5 million note for the balance due.

In February 2018, Nexxt,Inc.

repaid the $10.5 million note in full.

In April 2017, we received $0.7 million in connection with the expiration of the final escrow period related to the 2016 sale of Putney, Inc.

In March 2017, we received $0.6 million of proceeds from the sale of our participating interests in Penn Mezzanine.

In January 2017, we received $0.6 million in connection with the expiration of the final escrow period related to the 2015 sale of Quantia.

These cash proceeds were partially offset by payment of a $1.0 million clawback liability in the first quarter of 2017.

Year ended December 31, 2016 versus year ended December 31, 2015.

Net cash provided by (used in) investing activities increased by $42.2 million for the year ended December 31, 2018 compared to the prior year.

The increase primarily related to a $48.9 million increase in proceeds from the sales of and distributions from companies.

Cash proceeds from the sale of and distributions from companies was $74.0 million for the year ended December 31, 2016 which related to the sale of our interests in Putney and Bridgevine, proceeds received from AppFirst from the sale of its assets, cash received from escrow associated with the sale of our interests in DriveFactor, Thingworx, and Quantia and cash received associated with the achievement of performance milestones related to the sale of our interest in Thingworx.

Cash proceeds from the sale of and distributions from companies was $25.1 million for the year ended December 31, 2015 which related to the sale of our interests in DriveFactor and Quantia, cash received from escrow associated with the sale of our interests in Crescendo Bioscience and Alverix, and cash received associated with the achievement of performance milestones related to the sale of our interest in Thingworx.

The increase in cash provided by (used in) investing activities also related to a $21.2 million increase in cash proceeds from the net change in marketable securities, a $17.8 million decrease in acquisitions of ownership interests in companies, a $1.4 million decrease in capital expenditures, and a $0.4 million increase in repayments of advances and loans to companies which were partially offset by $12.8 million increase in advances and loans to companies.

The increase primarily related to a $50.8 million increase in proceeds from the sales of and distributions from companies, a $10.5 million repayment of principal outstanding on a note from Nexxt, Inc.

and a $40.9 million decrease in cash proceeds from the net change in marketable

We also invested $21.6 million less in acquisitions of our ownership interests and advances and loans to partner companies.

Cash proceeds from the sales of and distributions from companies were $67.4 million for the year ended December 31, 2018 which related primarily to:

In July 2018, we sold 39.13% of our ownership interest in MediaMath back to MediaMath and received $45.0 million of proceeds from the partial sale.

In July 2018, we received $10.0 million of proceeds from the sale of our interest in AdvantEdge Healthcare Solutions, Inc.

In May 2018, we received $11.5 million of proceeds from the sale of substantially all of the assets of Cask Data, Inc.

In January 2018, we received $0.6 million of proceeds from the sale of the assets of Aventura, Inc., a former partner company that ceased operations and was fully impaired in 2016.

The Company also received shares of Invitae in August 2017 when Invitae, a public company, acquired former partner company Good Start Genetics, Inc.

In February 2018 and October 2018, we sold 414,237 shares and 78,103 shares, respectively, of Invitae Corporation ("Invitae") common stock on the open market for aggregate proceeds of $3.7 million after transaction fees.

Net Cash Provided by (Used In) Financing Activities

Year ended December 31, 2018 versus year ended December 31, 2017.

Net cash provided by (used in) financing activities increased by $35.5 million for the year ended December 31, 2017 compared to the prior year.

The increase was primarily related to $44.3 million of net proceeds from borrowings under the Credit Facility and a decrease of $5.4 million in repurchases of our common stock, which were partially offset by $14.5 million paid to repurchase and retire $14.0 million face value of the 2018 Debentures, including transaction fees.

Year ended December 31, 2016 versus year ended December 31, 2015.

Net cash used in financing activities increased $1.5 million in 2016 compared to the prior year.

The increase related to a decrease of $0.7 million in proceeds received from the exercise of stock options, an increase of $0.5 million in tax withholdings related to share-based payment awards and an increase of $0.4 million in repurchases of our common stock.

Net cash provided by (used in) financing activities decreased by $54.6 million for the year ended December 31, 2018 compared to the prior year.

The primary financing activities in 2018 were the repayment of $41.0 million of our 2018 Debentures on their maturity date of May 15, 2018, $32.7 million of net proceeds from additional borrowings under our Amended Credit Facility and the $16.4 million credit facility payment in the fourth quarter.

The primary financing activities in 2017 were net proceeds of $44.3 million from borrowing under the credit facility we entered into in May 2017 and $14.5 million paid to repurchase and retire $14.0 million face value of the 2018 Debentures, including transaction fees.

Contractual Cash Obligations and Other Commercial Commitments

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Contractual Cash Obligations:

Convertible senior debentures (a)

Credit Facility

Interest payments on debt

Operating leases (b)

Potential clawback liabilities (c)

Other long-term obligations (d)

Operating leases (a)

Severance payments

Potential clawback liabilities (b)

Other obligations (c)

Total Contractual Cash Obligations

Amount of Commitment Expiration by Period

(In millions)

Other Commitments:

Letters of credit (e)

We have outstanding $41.0 million of our 5.25% convertible senior debentures due May 15, 2018.

In 2015, we entered into an agreement for the lease of our principal executive offices which expires in April 2026.

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The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default.

We believe our potential liability due to the possibility of default by other general partners is remote.

We were notified by the fund's manager that the fund is being dissolved and $1.0 million of our clawback liability was paid in the first quarter of 2017.

We were notified by the fund's manager that the fund is being dissolved and $1.0 million of our clawback

liability was paid in the first quarter of 2017.

The maximum clawback liability is $0.3 million which was reflected in Other long-term liabilities on the Consolidated Balance Sheets at December 31, 2018.

Reflects the estimated amount payable to a former Chairman and CEO under an ongoing agreement.

A $6.3 million letter of credit is provided to the landlord of CompuCom Systems' Dallas headquarters lease as required in connection with our sale of CompuCom Systems in 2004.

The letter of credit is now secured by cash which is classified as Long-term restricted cash equivalents on the Consolidated Balance Sheet.

In January 2018, we announced a change in strategy and we implemented an initiative to generate annual cost savings of between $5 million and $6 million.

We will incur approximately $1.3 million of severance payments to terminated employees that will be paid over approximately twelve months.

We have agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or if the employee terminates his employment for “good reason.” The maximum aggregate cash exposure under severance agreements for employees who were not terminated in January 2018 in connection with the change in strategy was approximately $2.9 million at December 31, 2017 .

We are involved in various claims and legal actions arising in the ordinary course of business.

In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position or results of operations.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable for a smaller reporting company.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis