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Item 7. Management’s Discussion and Analysis

2020-02-28 compared with 2019-03-01 · 105 added, 161 removed, 94 unchanged (74% 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 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.

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, competition, our inability to obtain maximum value for our ownership interess, 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 companies, 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 the companies in which we have an ownership interest 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 they 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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In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

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 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 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.

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 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 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.

Safeguard typically deploys up to $25 million in a company.

Principles of Accounting for Ownership Interests in Partner Companies

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

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.

Moving forward, we anticipate additional actions in the form of stock repurchases and/or special dividends based on available cash resources, prevailing market conditions and other factors.

Principles of Accounting for Ownership Interests

We account for our ownership interests using one of the following methods:

Equity or other.

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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.

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.

We report our share of the income or loss of the equity method partner companies on a one quarter lag.

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

When the carrying value of our holdings in an equity method partner company is reduced to zero, no further losses are recorded in our Consolidated Statements of Operations unless we have outstanding guarantee obligations or have committed additional funding to the equity method partner company.

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 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/or limited partner interests.

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

We report our share of the income or loss of the equity method companies on a one quarter lag.

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

When the carrying value of our holdings in an equity method company is reduced to zero, no further losses are recorded in our Consolidated Statements of Operations unless we have outstanding guarantee obligations or have committed additional

funding to the equity method company.

When the equity method 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.

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.

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

Critical Accounting Policies and Estimates

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Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management’s current judgments.

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 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.

Impairment of Ownership Interests and Advances

On a periodic basis, but no less frequently than at the end of each quarter, we evaluate the carrying value of our ownership interests 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.

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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.

The fair value of privately held partner 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, valuations of comparable public companies and valuations of acquisitions of comparable companies.

Our partner companies operate in industries which are rapidly evolving and extremely competitive.

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.

The adjusted carrying value of an ownership interest is not increased if circumstances suggest the value of the company has subsequently recovered.

The 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, valuations of comparable public companies and valuations of acquisitions of comparable companies.

Our companies operate in industries which are rapidly evolving and extremely competitive.

It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests and advances 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 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:

Total impairment charges related to our ownership interests and advances were as follows:

Year Ended December 31,

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(In thousands)

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

Impairment charges related to equity method companies are included in Equity income (loss) 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.

Through our relationship with Penn Mezzanine, we acquired participating interests in mezzanine loans and related equity interests of the borrowers.

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, 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

We operate as one operating segment based upon the similar nature of our technology-driven partner 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 partner companies operate.

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.

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 .

Certain entities which may have been partner companies in previous periods are omitted if, as of December 31, 2018 , they had been sold or are no longer considered a partner company.

The following is a listing of certain of our ownership interests as of December 31, 2019 and December 31, 2018.

Safeguard Primary Ownership

as of December 31,

Partner Company

Accounting Method

Brickwork ***

Clutch Holdings, Inc.

Flashtalking *

Hoopla Software, Inc.

InfoBionic, Inc.

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Moxe Health Corporation

NovaSom, Inc.

Prognos Health Inc.

Propeller ***

QuanticMind, Inc.

T-REX Group, Inc.

Transactis, Inc.

Trice Medical, Inc.

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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, 2019 versus year ended December 31, 2018

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General and administrative expense

Other loss, net

Other income (loss), net

Interest income

Interest expense

Equity income (loss)

Equity income (loss), net

Net income (loss)

General and Administrative Expense.

Our general and administrative expenses consist primarily of employee compensation, insurance, travel-related costs, depreciation, office rent and professional services such as consulting, legal, and accounting.

Our general and administrative expenses consist primarily of employee compensation, insurance, office costs, travel-related costs, depreciation, office rent and professional services such as consulting, legal, and accounting.

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 $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.

General and administrative expense decreased $6.9 million for the year ended December 31, 2019 compared to the

prior year primarily due to a $1.1 million decrease in employee compensation from the lower overall level of staffing, the absence of the $3.8 million severance charge for employees who were terminated in connection with our change in strategy in 2018, and $2.2 million of lower professional fees, primarily due to costs associated with activist shareholder matters in the prior year.

These amounts were partially offset by an increase of $0.4 million in stock-based compensation.

Other income (loss), net.

Other income (loss), net improved by $17.4 million for the year ended December 31, 2019, compared to the prior year.

Other income (loss), net for the year ended December 31, 2019 included $5.1 million of income related to the decrease in the fair value of the amended credit facility repayment feature liability as compared to a $4.5 million loss related to the same liability in the prior comparable period.

The 2019 year also included $4.5 million of non-cash gains on the increase in the value of certain equity securities based upon observable price changes as compared to $1.4 million in 2018.

The 2019 year also included a $1.7 million gain resulting from the elimination of the remaining estimated liability established related to the retirement benefit for a former Chairman and CEO of the Company.

Other income (loss), net for the year ended December 31, 2018 also reflected 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 2017.

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 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 income includes all interest earned on available cash and marketable security balances as well as interest earned on notes receivable from certain of our ownership interests.

Interest income decreased $0.8 million compared to the prior year due to lower average notes receivable, which was partially offset by higher average investment balances in marketable securities during the early portion of 2019.

Interest Expense.

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

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.

Interest expense is primarily related to our Credit Facility and, in 2018, our convertible senior debentures.

Interest expense decreased $2.0 million compared to the prior year primarily due to the repayment of all remaining Credit Facility debt in July 2019.

As a result, 2018 included a full year of borrowings while 2019 was a partial year.

However, 2019 also included $7.0 million of accelerated interest expense 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).

Equity income (loss) fluctuates with the number of partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies.

We recognize our share of losses to the extent we have cost basis in the equity of the partner company or we have outstanding commitments or guarantees.

Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final.

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

Equity income (loss) fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in those companies and the net results of operations of those companies.

We recognize our share of losses to the extent we have cost basis in the equity of the company or we have outstanding commitments or guarantees.

Certain amounts recorded to reflect our share of the income or losses of our companies accounted for under the equity method are based on estimates and on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities are made final.

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

Equity income (loss) increased $44.6 million for the year ended December 31, 2019 compared to the prior year.

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Year ended December 31:

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.

(In thousands)

Gains on sales of ownership interests

Unrealized dilution gains

Gains from proceeds received from escrow

Loss on impairments

Share of losses of our equity method companies, net

The gains on sale of ownership interests for the year ended December 31, 2019 is comprised primarily of gains related to the sale of Propeller in the amount of $35.1 million and Transactis in the amount of $50.7 million.

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

The unrealized dilution gains for the year ended December 31, 2019 were the result of meQuilibrium, Syapse, Trice, T-REX and Moxe, who each raised additional equity capital that diluted the Company's interest in those entities.

The unrealized dilution gains (losses) for the year ended December 31, 2018 were related to Aktana, Clutch, meQuilibrium, Propeller, Transactis, Trice and QuanticMind.

The gains from proceeds received from escrow for the year ended December 31, 2019 was primarily related to additional amounts received for holdbacks and escrows related to the sale of Cask, but also included incremental proceeds of Invitae shares received in connection with the Good Start Genetics sale.

The loss on impairments for the year ended December 31, 2019 is related solely to NovaSom, Inc.

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

The decrease in our share of losses of our equity method companies for the 2019 year was due to a decrease in the number of equity method companies and a net decrease in losses associated with the individual companies.

Income Tax Benefit (Expense)

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Liquidity And Capital Resources

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.

As of December 31, 2019, the Company had $25.0 million of cash and cash equivalents.

During April 2019, the Company made a $24.0 million principal payment to its Lender and a related make-whole interest payment of $2.9 million.

During July 2019, the Company made a $49.5 million payment to its Lender consisting of $44.5 million of principal, $4.1 million of make-whole interest and $0.9 million of accrued interest, which satisfied all obligations under the Credit Facility.

In January 2018, Safeguard announced that, from that date forward, we 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, 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, 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.

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.

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

Subsequent to the debt repayment, on November 7, 2019, the Company's Board of Directors declared a special cash dividend of $1.00 per share, payable on December 30, 2019 to shareholders of record as of the close of business on December 23, 2019.

We anticipate continuing to return value to shareholders in the form of stock repurchases and/or dividends based on prevailing market conditions and other factors when and if additional liquidity becomes available.

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, 2019 and 2018, 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”).

Our ownership in the fund is 19%.

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

Our ability to generate liquidity from sales of partner companies, sales of marketable securities and from equity and debt issuances has been adversely affected from time to time by adverse circumstances in the U.S.

Our ability to generate liquidity from transactions involving our ownership interests has been adversely affected from time to time by adverse circumstances in the U.S.

capital markets and other factors.

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.

Conversely, as we dispose of our interests in partner companies from time to time, we may receive proceeds from such sales, which could increase our liquidity.

From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly.

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

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

Conversely, as we dispose of our interests in our ownership interests, we may receive proceeds from such sales, which could increase our liquidity.

From time to time, we are engaged in discussions concerning deployments and dispositions which, if consummated, could impact our liquidity, perhaps significantly.

The Company believes that its cash and cash equivalents at December 31, 2019 will be sufficient to fund operations past one year from the issuance of these financial statements.

Analysis of Consolidated Cash Flows

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Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net cash provided by investing activities

Net cash used in financing activities

Net Cash Used In Operating Activities

Year ended December 31, 2019 versus year ended December 31, 2018.

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

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

Net cash used in operating activities decreased by $6.1 million for the year ended December 31, 2019 compared to the prior year.

The activity during the year ended December 31, 2019 was primarily the result of various non-cash adjustments to net income, including the $64.3 million of equity income, a $5.1 million gain from the decrease in the fair value of the repayment feature derivative, non-cash gains of $4.5 million for observable price changes, depreciation, and the $3.5 million amortization of debt discount.

Also, the Company made $11.5 million of cash interest payments for the year ended December 31, 2019 as compared to $10.0 million of cash interest payments for the year ended December 31, 2018.

The activity during the year ended December 31, 2018 was primarily the result of various non-cash adjustments to net income, including $19.7 million of equity income, a $4.5 million loss from the increase in the fair value of the repayment feature derivative, a $1.4 million gain for an observable price change, and the $4.5 million amortization of debt discount.

Net Cash Provided by Investing Activities

Year ended December 31, 2019 versus year ended December 31, 2018.

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 $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

Net cash provided by investing activities increased by $94.2 million for the year ended December 31, 2019 compared to the prior year.

The increase related to $104.3 million in proceeds from the sale and distributions from companies, including Propeller and Transactis as compared to $67.4 million in proceeds from the sales of and distributions from companies and $10.7 million repayment of outstanding notes, primarily from Nexxt, Inc.

in the previous year.

The Company also had $37.9 million of marketable securities mature in excess of purchases during the year ended December 31, 2019 as compared to $29.7 million of marketable securities purchases that exceeded maturities during the year ended December 31, 2018.

We also deployed $16.7 million during 2019 for the acquisition of additional ownership interests and advances and loans to our companies, which was consistent with the $16.4 million deployed in 2018.

Net Cash Used In Financing Activities

Year ended December 31, 2019 versus year ended December 31, 2018.

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.

Net cash used in financing activities increased by $64.5 million for the year ended December 31, 2019 compared to the prior year.

The primary financing activities in 2019 were the $20.7 million special dividend and the repayment of the Credit Facility for $68.6 million.

The primary financing activities in 2018 were primarily the repayment of $41.0 million of our 2018 Debentures, $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.

Contractual Cash Obligations and Other Commercial Commitments

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Contractual Cash Obligations:

Credit Facility

Interest payments on debt

Operating leases (a)

Severance payments

Potential clawback liabilities (b)

Other obligations (c)

Total Contractual Cash Obligations

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

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”).

Our ownership in the fund is 19%.

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 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.

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.

Total Contractual Cash Obligations (b)

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

In March 2019, we entered into a sublease for these offices which is expected to result in future aggregate sublease receipts of $3.5 million through April 2026.

The maximum aggregate exposure under employment and severance agreements for remaining employees was approximately $4.0 million at December 31, 2019 (not reflected in the table above).

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

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

Quantitative and Qualitative Disclosures About Market Risk

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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