What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2019-03-01 compared with 2018-03-07 · 322 added, 490 removed, 627 unchanged (56% of the section changed)

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Opinion on Internal Control Over Financial Reporting

We have audited Safeguard Scientifics, Inc.

We have audited Safeguard Scientific, Inc.

and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated March 7, 2018 expressed an unqualified opinion on those consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows the years then ended and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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We have audited the accompanying consolidated balance sheets of Safeguard Scientifics, Inc.

and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S.

and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, based upon its projections, the Company will not be able to maintain compliance with certain of its debt covenants over the next twelve months.

If the lender were to accelerate the maturity of the debt as a result of such non-compliance, the Company would not have sufficient liquidity to repay the entire balance of its outstanding debt.

This raises substantial doubt about its ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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Cash and cash equivalents

Restricted cash

Marketable securities

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Ownership interests in and advances to partner companies

Long-term marketable securities

Long-term restricted cash equivalents

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Accrued expenses and other current liabilities

Convertible senior debentures - current

Credit facility - current

Credit facility repayment feature

Convertible senior debentures

Total current liabilities

Other long-term liabilities

Credit facility

Convertible senior debentures - non-current

Credit facility - non-current

Total Liabilities

Commitments and contingencies

Commitments and contingencies (Note 12)

Preferred stock, $0.10 par value;

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Operating loss

Other income (loss), net

Other loss, net

Interest income

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Year Ended December 31,

Other comprehensive income (loss):

Share of other comprehensive income (loss) of equity method investments

Other comprehensive income:

Share of other comprehensive income of equity method investments

Total comprehensive loss

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Balance — December 31, 2016

Stock options exercised, net

Issuance of restricted stock, net

Stock-based compensation expense

Repurchase of common stock

Other comprehensive loss

Balance — December 31, 2015

Stock options exercised, net of tax withholdings

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Stock-based compensation expense

Repurchase of common stock

Cumulative effect adjustment (1)

Other comprehensive loss

Repurchase of convertible senior debentures

Other comprehensive income

Balance — December 31, 2017

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Stock-based compensation expense

Repurchase of convertible senior debentures

Other comprehensive income (loss)

Other comprehensive income

Balance — December 31, 2018

(1) Cumulative effect adjustment reflects adoption of ASU 2016-09 as of January 1, 2016.

See Notes to Consolidated Financial Statements.

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Equity (income) loss

Other (income) loss, net

Loss from increase in fair value of derivative

Gain from observable price changes

Loss on sale of property and equipment

Stock-based compensation expense

Changes in assets and liabilities:

Accounts receivable, net

Prepaid expenses and other current assets

Accounts payable, accrued expenses, and other

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Repayment of advances and loans to companies

Increase in marketable securities

Decrease in marketable securities

Capital expenditures

Purchase of marketable securities

Proceeds, from sales and maturities in securities

Proceeds from sales of property and equipment

Net cash provided by (used in) investing activities

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Issuance costs of credit facility

Repayments on credit facility

Repurchase of convertible senior debentures

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Issuance of Company common stock, net

Repurchase of Company common stock

Net cash provided by (used in) financing activities

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

The Company currently has $25.0 million of availability under the Credit Facility.

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.

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.

As of December 31, 2018, the Company had $68.6 million of debt outstanding due in May 2020.

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.

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.

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

In May 2018, the Company and Lender amended the Credit Facility ("Amended Credit Facility") to increase the principal amount of indebtedness available to be borrowed by the Company from $75.0 million to $100.0 million .

As of December 31, 2018, the Company had $68.6 million of principal outstanding on the Credit Facility 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 tangible net worth, plus unrestricted cash, of at least 1.75 x 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.

(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 and all prepayments of the Revolving Loan made after December 30, 2018;

and (iii) 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 the applicable required prepayment during the second quarter.

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.

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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, it is probable that the Company will not be able to remain in compliance with certain of its debt covenants over the next twelve months.

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.

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

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, limiting capital deployments to existing partner companies, and refinancing all or a portion of its 2018 Debentures that mature on May 15, 2018.

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.

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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

Significant Accounting Policies

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All intercompany accounts and transactions are eliminated in consolidation.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Principles of Accounting for Ownership Interests in Companies

The Company accounts for its interests in its 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 the Company's influence over the entity, primarily determined by our voting interest in the entity.

In addition to holding voting and non-voting equity and debt securities, the Company also periodically makes advances to its partner companies in the form of promissory notes which are included in the Ownership interests in and advances to partner companies line item in the Consolidated Balance Sheets.

Consolidation Method.

The Company generally accounts for partner companies in which it directly or indirectly owns more than 50% of the outstanding voting securities under the consolidation method of accounting.

Under this method, the Company includes the partner companies’ financial statements within the Company’s Consolidated Financial Statements, and all significant intercompany accounts and transactions are eliminated.

The Company reflects participation of other stockholders in the net assets and in the income or losses of these consolidated partner companies in Equity in the Consolidated Balance Sheets and in Net income (loss) attributable to non-controlling interest in the Statements of Operations.

Net income (loss) attributable to non-controlling interest adjusts the Company’s consolidated operating results to reflect only the Company’s share of the earnings or losses of the consolidated partner company.

The Company accounts for results of operations and cash flows of a consolidated partner company through the latest date in which it holds a controlling interest.

If the Company subsequently relinquishes control but retains an interest in the partner company, the accounting method is adjusted to the equity, cost or fair value method of accounting, as appropriate.

As of December 31, 2017 , the Company did not hold a controlling interest in any of its partner companies.

Fair Value Method.

Unrealized gains and losses on the mark-to-market of the Company's 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 , the Company did not account for any of its partner companies under the fair value method.

Equity Method.

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When such equity method partner company subsequently reports income, the Company will not record its share of such income until it exceeds the amount of the Company’s share of losses not previously recognized.

The Company accounts for partner companies not consolidated or accounted for under the equity method or fair value method under the cost method of accounting.

Under the cost method, the Company does not include its share of the income or losses of partner companies in the Company’s Consolidated Statements of Operations.

The Company includes 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 as equity securities without readily determinable fair values.

We estimate the fair value 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.

Accounting Estimates

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Actual results may differ from these estimates.

These estimates include the

These estimates include the evaluation of the recoverability of the Company’s ownership interests in and advances to partner companies, the fair value of the credit facility repayment feature derivative, the current portion of the credit facility debt, the recoverability of deferred tax assets, stock-based compensation and commitments and contingencies.

Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

evaluation of the recoverability of the Company’s ownership interests in and advances to partner companies, income taxes, stock-based compensation and commitments and contingencies.

Certain amounts recorded to reflect the Company’s share of income or losses of partner companies accounted for under the equity method are based on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities’ financial statements are completed.

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The Company has not experienced any significant losses on cash equivalents and does not believe it is exposed to any significant credit risk on cash and cash equivalents.

Restricted Cash Equivalents

Restricted cash equivalents consist of certificates of deposit with various maturity dates.

Amounts included in restricted cash equivalents represent those required to be set aside by a contractual agreement with a bank as collateral for a letter of credit.

The restriction on the cash will lapse when the related letter of credit is terminated or expires on March 19, 2019.

Restricted Cash and Cash Equivalents

Restricted cash equivalents in prior periods represented cash required to be set aside by a contractual agreement as a shareholder representative for 2018 or with a bank as collateral for a letter of credit for 2017.

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

The following table provides a reconciliation of cash, cash equivalents and restricted cash equivalents reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:

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Cash and cash equivalents

Restricted cash

Long-term restricted cash equivalents

Total cash, cash equivalents and restricted cash equivalents

Total cash, cash equivalents, restricted cash and restricted cash equivalents

Financial Instruments

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The Company’s long-term debt is carried at cost.

Property and Equipment

Property and equipment generally represents leasehold improvements and is amortized over the shorter of the estimated useful lives or the expected remaining term of the lease.

Valuation of Credit facility repayment feature

The fair value of the Credit facility repayment feature (a Level 3 measurement) 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 quarterly, the Company evaluates the carrying value of its equity and cost method partner companies for possible impairment based on achievement of business plan objectives and milestones, the fair value of each partner company relative to its carrying value, the financial condition and prospects of the partner company and other relevant factors.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On a periodic basis, but no less frequently than quarterly, the Company evaluates the carrying value of its partner companies for possible impairment based on achievement of business plan objectives and milestones, the fair value of each partner company relative to its carrying value, the financial condition and prospects of the partner company and other relevant factors.

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

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Impairment is measured as the amount by which the carrying value of an asset exceeds its fair value.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, valuation of comparable public companies and the valuation of acquisitions of similar companies.

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 and funds are included in Other income (loss), net in the Consolidated Statements of Operations.

The reduced cost basis of a previously impaired partner company is not written-up if circumstances suggest the value of the company has subsequently recovered.

Impairment charges related to non-equity method partner companies and funds are included in Other income (loss), net in the Consolidated Statements of Operations.

The reduced cost basis of a previously impaired partner company accounted for using the Equity method are not written-up if circumstances suggest the value of the company has subsequently recovered.

The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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ASU 2014-09 and related subsequent amendments outline a single comprehensive model to use to account for revenue arising from contracts with customers and supersede most current revenue recognition guidance.

For public companies, the guidance is effective for annual periods beginning after December 15, 2017 and any interim periods that fall within that reporting period.

For public companies, the guidance was effective for annual periods beginning after December 15, 2017 and any interim periods that fall within that reporting period.

For nonpublic companies, the guidance is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019 with early adoption permitted.

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Any change in revenue or cost recognition for partner companies could affect the Company's recognition of its share of the results of its equity method partner companies.

On July 20, 2017, the SEC staff observer at the FASB’s Emerging Issues Task Force ("EITF") meeting announced that the SEC staff will not object if a private company equity method investee meeting the definition of a public business entity that otherwise would not meet the definition of a public business entity except for the inclusion of its financial statements or financial information in another entity’s filings with the SEC, uses private company adoption dates for the new revenue standard.

As a result, the Company's private, calendar year partner companies will adopt the new revenue standard for the year ending December 31, 2019.

The impact of adoption of the new revenue standard will be reflected in the Company’s financial results for the interim and annual reporting periods beginning in 2020 on a one quarter-lag basis.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities .

ASU 2016-01 requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income.

However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

identical or a similar investment of the same issuer.

Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach.

The amendments in ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively.

The amendments in ASU 2016-01 will become effective for the Company on January 1, 2018.

The adoption of this guidance is not expected to have a material impact upon the Company's financial condition or results of operations.

financial information in another entity’s filings with the SEC, uses private company adoption dates for the new revenue standard.

As a result, the Company's private, calendar year partner companies will adopt the new revenue standard for the year ending December 31, 2019.

The impact of adoption of the new revenue standard will be reflected in the Company’s financial results for the interim and annual reporting periods beginning in 2020 on a one quarter-lag basis.

In February 2016, the FASB issued ASU 2016-02, Leases .

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The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

Based on that evaluation, we expect to record as of January 1, 2019 a lease liability of approximately $2.9 million , a right-to-use asset of $2.2 million and to eliminate the deferred rent liability of $0.7 million currently included in other long-term liabilities.

Ownership Interests in and Advances to Partner Companies

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Private equity funds

Other Method:

Partner companies

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Advances to partner companies

In August 2017, Good Start Genetics, Inc.

was acquired by Invitae Corporation ("Invitae").

The Company received 414,237 shares of Invitae common stock in connection with the transaction, excluding 124,092 shares of Invitae common stock which will be held in escrow until August 2018.

The Company recognized a net gain of $3.8 million on the transaction for the year ended December 31, 2017.

The Invitae shares are classified as Trading securities and recorded at fair value on the Consolidated Balance Sheet at December 31, 2017.

In February 2018, the Company sold 414,237 shares of Invitae common stock on the open market for proceeds of $2.6 million after transaction fees.

In March 2017, the Company sold its interest in partner company Nexxt, Inc., formerly Beyond.com, back to Nexxt, Inc.

for $26.0 million .

The Company received $15.5 million in cash and a three -year, $10.5 million note for the balance due, which accrues interest at a rate of 9.5% per annum.

The receipt of the $15.5 million in cash resulted in a gain of $0.1 million which is included in Equity income (loss) in the Consolidated Statements of Operations for the nine months ended September 30, 2017.

The $10.5 million note was fully reserved and has a carrying value of zero as of December 31, 2017.

In February 2018, Nexxt,Inc.

repaid the $10.5 million note in full.

A gain will be recorded in the first quarter of 2018.

The Company recognized an impairment charge of $7.0 million related to Full Measure, Inc.

which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2017.

The impairment was based

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

on the Company’s decision not to continue to provide additional capital in the absence of significant additional capital raised from new investors.

The adjusted carrying value of the Company's interest in Full Measure was $0.0 million at December 31, 2017.

The Company recognized an impairment charge of $3.6 million related to Spongecell, Inc.

which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2017.

The adjusted carrying value of the Company's interest in Spongecell was $6.0 million at December 31, 2017.

Subsequent to year end, Spongecell merged into Flashtalking, a privately-held company, and the Company received shares equal to approximately 10% of Flashtalking’s issued share capital at the time of the closing.

The Company recognized impairment charges totaling $5.2 million related to Pneuron, Inc.

which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2017.

Pneuron has ceased business operations and the adjusted carrying value of the Company's interest in Pneuron is $0.0 million at December 31, 2017.

In April 2016, Putney, Inc.

was acquired by Dechra Pharmaceuticals Plc.

The Company received $58.6 million in initial cash proceeds and $0.6 million from escrow during 2017.

The Company recognized gains of $55.6 million and $0.6 million on the transaction, which were included in Equity income (loss) in the Consolidated Statements of Operations for the years ended December 31, 2016 and 2017, respectively.

The Company recognized an impairment charge of $3.6 million related to Aventura, Inc.

which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2016.

The adjusted carrying value of the Company's interest in Aventura was $0.0 million at December 31, 2017.

The Company recognized a $0.4 million gain and a $2.4 million loss on impairment related to its Penn Mezzanine debt and equity participations which is reflected in Other income (loss), net in the Consolidated Statements of Operations for the years ended December 31, 2017 and 2016, respectively.

The carrying value of our remaining participating interests in debt and equity securities associated with Penn Mezzanine was $0.0 million and $0.2 million as of December 31, 2017 and 2016, respectively.

The Company recognized a impairment charges of $1.7 million and $3.6 million related to AppFirst, Inc.

which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, respectively.

Appfirst's assets were sold in 2016.

In June 2016, the Company sold its ownership interests in Bridgevine, Inc.

The Company received cash proceeds of $5.0 million and recognized a gain of $0.4 million on the transaction which is included in Other income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2016.

In April 2015, DriveFactor, Inc.

was acquired by CCC Information Services, Inc.

The Company received $9.1 million in initial cash proceeds in connection with the transaction.

The Company recognized a gain of $6.1 million on the transaction, which is included in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2015.

In April 2016, the Company received an additional $1.1 million which was released from escrow resulting in a gain of $1.1 million which is included in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2016.

In April 2016, the Company received $3.3 million associated with the achievement of the final performance milestone related to the December 2013 sale of ThingWorx, Inc.

to PTC, Inc., resulting in a gain of $3.3 million which is included in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2016.

In January 2016, the Company received $4.1 million which was released from escrow resulting in a gain of $4.1 million which is included in Equity income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2015.

In July 2015, the Company received $3.3 million associated with the achievement of performance milestones, resulting in a gain of $3.3 million which is included in Equity income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2015.

In July 2015, Quantia, Inc.

was acquired by Physicians Interactive.

The Company received $7.8 million in initial cash proceeds in connection with the transaction.

In July 2016, the Company received an additional $0.6 million which was released from escrow resulting in a gain of $0.6 million which is included in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2016.

The Company also recognized an impairment charge of $2.9 million related to Quantia in 2015 which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2015.

The impairment was based on the difference between the Company's carrying value in Quantia and the initial net proceeds received in July 2015.

In July 2015, the Company received $1.7 million in connection with the expiration of the escrow period related to the January 2014 sale of Alverix, Inc.

to Becton, Dickinson and Company, resulting in a gain of $1.7 million which is included in Equity income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2015.

During 2018, the Company recognized impairments of $12.6 million related to Apprenda, Inc.

CloudMine, Inc.

and Brickwork, which are reflected in Equity income (loss) in the consolidated Statement of Operations.

The impairments resulted from the discontinuance of operations or sale of the related entities.

In January 2018, Spongecell, Inc.

merged into Flashtalking, a privately-held company.

The Company received Flashtalking ordinary shares equal to approximately 10% of Flashtalking’s issued share capital at the time of the closing.

The Company’s final number of Flashtalking shares are subject to customary indemnification agreements.

The Company recorded its ownership interest in Flashtalking at $11.2 million , which reflects its fair value at the time of closing.

The Company recognized a gain of $3.9 million on the transaction, which is included in Equity income (loss), and has an adjusted carrying value for its interest of approximately $11.0 million at December 31, 2018.

In January 2018, the Company 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 recognized a gain of $0.6 million , which is reflected in Equity income (loss) in the Consolidated Statements of Operations.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In July and March 2015, the Company received an aggregate $2.9 million in connection with the expiration of the escrow period related to the February 2014 sale of Crescendo Bioscience, Inc.

to Myriad Genetics, Inc., resulting in a gain of $2.9 million which is included in Other income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2015.

The Company recognized an impairment charge of $3.2 million related to InfoBionic, Inc.

in 2015 which is reflected in Equity income (loss) in the Consolidated Statements of Operations for the year ended December 31, 2015.

The impairment was due to discontinuation of InfoBionic's first-generation product.

The amount of the impairment was determined based on the value at which InfoBionic raised additional equity financing in July 2015 from the Company and other existing capital providers.

The Company recognized an impairment charge of $2.3 million related to Dabo Health, Inc.

in 2015 which is reflected in Other income (loss), net in the Consolidated Statements of Operations for the year ended December 31, 2015.

The impairment was based on the decision of the Company and other shareholders not to continue to fund Dabo Health's operations.

In February 2018, Nexxt, Inc., formerly Beyond.com, repaid $10.5 million of principal outstanding on a note received in connection with the Company's sale of its interest back to Nexxt for $26.0 million in March 2017.

In that transaction, the Company received $15.5 million in cash and a three -year, $10.5 million note for the balance due, which accrued interest at a rate of 9.5% per annum.

Interest was payable annually and interest income was recorded as earned throughout the year.

The $10.5 million note was fully reserved and had a carrying value of zero as of December 31, 2017.

The Company waived the interest accrued to date in connection with the early repayment of the principal balance.

The receipt of $10.5 million of cash in February 2018 resulted in a gain of $9.5 million , net of the interest accrued to date, which is included in Equity income (loss) in the Consolidated Statements of Operations.

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

The Company recognized a net gain on the transaction of $4.3 million for the year ended December 31, 2017 and an additional gain on the transaction of $1.1 million for the year ended December 31, 2018 as shares were released from escrow.

During 2018, the Company sold an aggregate of 492,340 shares of Invitae Corporation ("Invitae") common stock on the open market for proceeds of $3.7 million after transaction fees.

There are an additional 45,989 shares of Invitae common stock that continue to be held in escrow at December 31, 2018.

In May 2018, Cask Data, Inc.

sold substantially all of its assets to another entity.

The Company received $11.5 million in cash proceeds in connection with the transaction, excluding $2.4 million of holdbacks and escrows that may be released on various dates on or before November 2019.

The Company recognized a gain of $4.2 million on the transaction, which was included in Equity income (loss) in the Consolidated Statements of Operations.

In July 2018, the Company sold 39.13% of its ownership position in MediaMath back to MediaMath for $45.0 million .

The Company also granted MediaMath an option to repurchase an additional 10.87% of the Company’s ownership position in MediaMath for $12.5 million within 180 days after the close of the initial transaction.

The option has since been extended until September 30, 2019.

The Company recognized a gain of $45.0 million on the initial transaction, which was included in Equity income (loss) in the Consolidated Statements of Operations.

The Company previously accounted for its ownership interest in MediaMath under the equity method of accounting.

Immediately after the initial transaction, the Company discontinued utilizing the equity method of accounting for its remaining ownership interest in MediaMath.

The Company's remaining ownership interest was recorded at its carrying value immediately prior to the July 2018 transaction.

The carrying value will be adjusted for any observable price changes in the same or similar equity securities of MediaMath as those held by the Company.

In July 2018, the Company sold its interest in AdvantEdge Healthcare Solutions, Inc.

in a secondary transaction for $10.0 million , excluding an additional $6.3 million that may be realized upon the achievement of certain valuation thresholds in connection with the future sale of Advantage Healthcare Solutions.

The Company recognized a gain of $5.5 million on the transaction, which was included in Equity income (loss) in the Consolidated Statements of Operations.

During 2017, the Company recognized impairments of $16.0 million , including $7.0 million related to Full Measure, Inc., $3.6 million related to Spongecell, Inc., $5.2 million related to Pneuron, Inc and $0.2 million related to Aventura, which is reflected in Equity income (loss) in the Consolidated Statements of Operations.

The impairments were based on the Company’s decision not to continue to provide additional capital in the absence of significant additional capital raised from new investors, merger consideration received that was lower than our carrying value and ceasing operations of the underlying company.

Summarized Financial Information for Partner Companies

The Company categorizes its partner companies into four stages based upon revenue generation—Development Stage, Initial Revenue Stage, Expansion Stage and, High Traction Stage.

The Development Stage is made up of those companies that are pre-revenue businesses.

The Company currently has no partner companies in the Development Stage.

The Initial Revenue Stage is made up of businesses that have revenues of $5 million or less.

The Expansion Stage is made up of companies that have revenue in the range of $5 million to $20 million .

The High Traction Stage is made up of companies that have revenue in excess of $20 million per year.

See Note 14 to the Consolidated Financial Statements for a listing of partner companies in which the Company held an ownership interest as of December 31, 2017 and their respective revenue stages.

The following summarized financial information by revenue stage for partner companies accounted for under the equity method for the periods presented has been compiled from respective partner company financial statements, reflect certain historical adjustments, and are reported on a one quarter lag.

The Company discloses aggregate summarized statements of operations for any partner companies accounted for under the equity method that are deemed significant.

The following table provides summarized financial information for partner companies accounted for under the equity method for the periods presented and has been compiled from respective partner company financial statements, reflect certain historical adjustments, and are reported on a one quarter lag.

Results of operations of the partner companies are excluded for periods prior to their acquisition and subsequent to their disposition.

Historical results are not adjusted when the Company exits or writes-off a partner company.

High Traction Stage

As of December 31,

(In thousands)

Balance Sheets:

Current assets

Non-current assets

Current liabilities

Non-current liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Number of partner companies

Year Ended December 31,

(In thousands)

Results of Operations:

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Expansion Stage

As of December 31,

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Results of Operations:

Initial Revenue Stage

As of December 31,

(In thousands)

Balance Sheets:

Current assets

Non-current assets

Current liabilities

Non-current liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Number of partner companies

Year Ended December 31,

(In thousands)

Results of Operations:

As of December 31, 2018 , the Company’s carrying value in equity method partner companies, in the aggregate, exceeded the Company’s share of the net assets of such companies by approximately $43.0 million .

Of this excess, $33.0 million was allocated to goodwill and $10.0 million was allocated to intangible assets.

Acquisitions of Ownership Interests in Partner Companies

2018 Transactions

The Company funded an aggregate of $0.7 million of term notes and $1.6 million of convertible bridge loans to InfoBionic, Inc.

The Company had previously deployed an aggregate of $19.7 million in InfoBionic.

InfoBionic is an emerging digital health company focused on creating patient monitoring solutions for chronic disease management with an initial market focus on cardiac arrhythmias.

The Company accounts for its interest in InfoBionic under the equity method.

The Company deployed an additional $1.0 million in meQuilibrium.

The Company had previously deployed an aggregate of $10.5 million in meQuilibrium.

meQuilibrium is a digital coaching platform that delivers clinically validated and highly personalized resilience solutions to employers, health plans, wellness providers and consumers increasing engagement, productivity and performance, as well as improving outcomes in managing stress, health and well-being.

The Company accounts for its interest in meQuilibrium under the equity method.

The Company funded an additional $1.0 million of convertible bridge loans to Moxe Health Corporation.

The Company had previously deployed $4.5 million in Moxe Health.

Moxe Health connects payers to their provider networks, facilitating real-time data exchange through its electronic integration platform.

The Company accounts for its interest in Moxe Health under the equity method.

The Company funded an additional $1.5 million in Zipnosis, Inc.

The Company had previously deployed $7.0 million in Zipnosis.

Zipnosis provides health systems with a white-labeled, fully integrated virtual care platform.

The Company accounts for its interest in Zipnosis under the equity method.

The Company deployed an aggregate of $ 1.0 million of convertible bridge loans to CloudMine, Inc.

The Company had previously deployed an aggregate of $10.0 million in CloudMine.

See Note 2 for discussion of the impairment of our interests in 2018.

The Company had previously accounted for its interest in CloudMine under the equity method.

The Company funded an additional $0.5 million in Aktana, Inc.

The Company had previously deployed $9.7 million in Aktana.

Aktana leverages big data and machine learning to enable pharmaceutical brands to dynamically optimize their strategy and enhance sales execution.

The Company accounts for its interest in Aktana under the equity method.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquisitions of Ownership Interests in Partner Companies

The Company funded an additional $1.4 million of convertible bridge loans to QuanticMind.

The Company had previously deployed $11.5 million in QuanticMind.

QuanticMind delivers the most intelligent, scalable and fastest platform for maximizing digital marketing performance, including paid search and social, for enterprises.

The Company accounts for its interest in QuanticMind under the equity method.

The Company deployed an aggregate of $2.2 million of convertible bridge loans to Sonobi, Inc.

The Company had previously deployed $9.2 million in Sonobi.

Sonobi is an advertising technology developer that designs advertising tools and solutions for the industry's leading media, publishers, brand advertisers, media agencies, DSPs, and media technology providers.

The Company accounts for its interest in Sonobi under the equity method.

The Company funded an aggregate of $1.0 million of convertible bridge loans to WebLinc, Inc.

The Company had previously deployed an aggregate of $14.0 million in WebLinc.

WebLinc is an e-commerce platform and services provider for fast growing online retailers.

The Company accounts for its interest in WebLinc under the equity method.

The Company deployed an additional $0.3 million in Propeller.

The Company had previously deployed an aggregate of $14.0 million in Propeller.

Propeller provides digital solutions to measurably improve respiratory health.

The Company accounts for its interest in Propeller under the equity method.

See Note 16 discussion of the sale of this partner company in 2019.

The Company funded an aggregate of $0.4 million of convertible bridge loans to Cask Data, Inc.

The Company had previously deployed an aggregate of $13.0 million in Cask Data.

Cask Data made building and running big data solutions on-premises or in the cloud easy with Cask Data Application Platform.

In May 2018, Cask Data sold substantially all of its assets to another entity resulting in the gain discussed in Note 2.

The Company had previously accounted for its interest in Cask Data under the equity method.

The Company funded an aggregate of $2.2 million of convertible loans to NovaSom, Inc.

The Company had previously deployed an aggregate of $24.1 million in NovaSom.

NovaSom is a medical device company focused on obstructive sleep apnea, specifically home testing with its FDA-cleared wireless device called AccuSom ® home sleep test.

The Company accounts for its interest in NovaSom under the equity method.

The Company funded an aggregate of $0.5 million of convertible bridge loans to Spongecell, Inc.

The Company had previously deployed an aggregate of $18.6 million in Spongecell.

In the first quarter of 2018, Spongecell merged into Flashtalking as discussed in Note 2.

The Company previously accounted for its interest in Spongecell under the equity method.

The Company funded an aggregate of $0.7 million of convertible bridge loans to Brickwork.

The Company had previously deployed an aggregate of $4.2 million in Brickwork.

The Company accounts for its interest in Brickwork under the equity method.

See Note 16 for discussion of the sale of this partner company in 2019.

2017 Transactions

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The Company had previously deployed an aggregate of $18.0 million in Spongecell.

Subsequent to year end, Spongecell merged into Flashtalking.

During 2018, Spongecell merged into Flashtalking.

The Company accounted for its interest in Spongecell under the equity method.

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The Company accounts for its interest in Sonobi under the equity method.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company funded an aggregate of $2.0 million of convertible bridge loans to NovaSom, Inc.

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The Company had previously deployed an aggregate of $11.0 million in Cask Data.

Cask Data makes building and running big data solutions on-premises or in the cloud easy with Cask Data Application Platform.

The Company accounts for its interest in Cask Data under the equity method.

Cask Data was acquired by another entity in 2018.

The Company deployed an aggregate of $4.5 million into CloudMine, Inc.

The Company had previously deployed an aggregate of $5.5 million in CloudMine.

CloudMine is a leading HIPAA-compliance Enterprise Health Cloud platform.

CloudMine empowers healthcare organizations to rapidly and confidently develop connected digital health experiences by reducing complexity, enabling data mobility, and ensuring compliance.

The Company accounts for its interest in CloudMine under the equity method.

The Company fully impaired its investment in this partner company in 2018.

The Company deployed an aggregate of $3.1 million into Full Measure Education, Inc.

The Company had previously deployed an aggregate of $8.6 million in Full Measure.

Full Measure designs next-generation, mobile-first technologies for colleges throughout the United States.

The Company accounted for its interest in Full Measure under the equity method.

The Company deployed $2.5 million into meQuilibrium.

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The Company accounts for its interest in QuanticMind under the equity method.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company funded an aggregate of $2.0 million of convertible bridge loans to WebLinc, Inc.

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The Company accounted for its interest in Aventura under the equity method.

2016 Transactions

The Company funded $1.9 million of a convertible bridge loan to Trice Medical, Inc.

The Company had previously deployed an aggregate of $6.1 million in Trice Medical.

Trice Medical is a diagnostics company focused on micro invasive technologies.

The Company accounts for its interest in Trice Medical under the equity method.

The Company funded $1.5 million of a convertible bridge loan to meQuilibrium.

The Company had previously deployed $6.5 million in meQuilibrium.

meQuilibrium is a digital coaching platform that delivers clinically validated and highly personalized resilience solutions to employers, health plans, wellness providers, and consumers increasing engagement, productivity and performance, as well as improving outcomes in managing stress, health and well-being.

The Company accounts for its interest in meQuilibrium under the equity method.

The Company funded an aggregate of $5.2 million of convertible bridge loans to Good Start Genetics, Inc.

The Company had previously deployed an aggregate of $12.0 million in Good Start Genetics.

The Company accounted for its interest in Good Start Genetics under the equity method.

The Company deployed an aggregate of $5.4 million into WebLinc, Inc.

The Company had previously deployed an aggregate of $6.6 million in WebLinc.

WebLinc is a commerce platform provider for fast growing online retailers.

The Company accounts for its interest in WebLinc under the equity method.

The Company deployed an aggregate of $4.6 million into Full Measure Education, Inc.

The Company had previously deployed $4.0 million in Full Measure.

Full Measure designed next-generation, mobile-first technologies for community colleges throughout the United States.

The Company accounted for its interest in Full Measure under the equity method.

The Company funded an aggregate of $0.7 million of convertible loans to Lumesis, Inc.

The Company had previously deployed an aggregate of $5.6 million in Lumesis.

Lumesis is a financial technology company focused on providing business efficiency, regulatory and data solutions to the municipal bond marketplace.

The Company accounts for its interest in Lumesis under the equity method.

The Company acquired a 23.6% interest in T-REX Group, Inc.

for $6.0 million .

T-REX Group is a financial services software technology company that specializes in valuation, risk analysis, and structuring tools to unlock investment opportunities for various asset classes.

The Company accounts for its interest in T-REX Group under the equity method.

The Company funded $0.6 million of a convertible bridge loan to CloudMine, Inc.

The Company had previously deployed an aggregate of $4.9 million in CloudMine.

CloudMine empowers payers, providers, and pharmaceutical organizations to mobilize patient information by building robust applications and driving actionable insights.

The Company accounts for its interest in CloudMine under the equity method.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company funded $0.3 million of a convertible bridge loan to Aventura, Inc.

The Company had previously deployed $6.0 million in Aventura.

The Company impaired all of the carrying value of Aventura in the fourth quarter of 2016.

The Company accounted for its interest in Aventura under the equity method.

The Company acquired a 20.3% interest in Brickwork for $4.2 million .

Brickwork helps retailers inform, target, convert, and prepare for store shoppers online as the first scalable software-as-a-service platform powering a seamless customer path between online and in-store shopping.

The Company accounts for its interest in Brickwork under the equity method.

The Company deployed an additional $5.0 million in Propeller Health, Inc.

The Company had previously deployed $9.0 million in Propeller Health.

Propeller Health provides digital solutions to measurably improve respiratory health.

The Company accounts for its interest in Propeller Health under the equity method.

The Company funded $2.8 million of a convertible bridge loan to QuanticMind, Inc.

The Company had previously deployed $7.0 million in QuanticMind.

QuanticMind is a software-as-a-service company that provides enterprise-level predictive advertising management software for paid search, social and mobile.

The Company accounts for its interest in QuanticMind under the equity method.

The Company deployed $2.7 million into Aktana, Inc.

The Company had previously acquired a 23.4% interest in Aktana for $5.5 million in June 2016.

Aktana leverages big data and machine learning to enable pharmaceutical brands to dynamically optimize their strategy and enhance sales execution.

The Company accounts for its interest in Aktana under the equity method.

The Company acquired a 32.6% interest in Moxe Health Corporation for $4.5 million .

Moxe Health connects payers to their provider networks, facilitating real-time data exchange through its electronic integration platform.

The Company accounts for its interest in Moxe Health under the equity method.

The Company deployed an aggregate of $5.0 million into InfoBionic, Inc.

The Company had previously deployed an aggregate of $9.5 million in InfoBionic.

InfoBionic is an emerging digital health company focused on creating patient monitoring solutions for chronic disease management with an initial market focus on cardiac arrhythmias.

The Company accounts for its interest in InfoBionic under the equity method.

The Company deployed an aggregate of $4.0 million into Clutch Holdings, Inc.

The Company had previously deployed an aggregate of $12.3 million in Clutch.

Clutch provides customer intelligence and personalized engagements that empower consumer-focused businesses to identify, understand and motivate each segment of their customer base.

The Company accounts for its interest in Clutch under the equity method.

The Company funded an aggregate of $4.0 million of convertible loans to Spongecell, Inc.

The Company had previously deployed an aggregate of $14.0 million in Spongecell.

Spongecell helps advertisers enhance the power of digital brand creative by leveraging customer data and brand content to personalize ads for maximum relevance.

The Company accounts for its interest in Spongecell under the equity method.

The Company funded an aggregate of $1.2 million of convertible bridge loans to AppFirst, Inc.

The Company had previously deployed an aggregate of $11.6 million in AppFirst.

The Company impaired its ownership interest in AppFirst in June 2016 due to the shutdown of AppFirst's operations and sale of its assets in June 2016, which generated cash proceeds to the Company of $0.9 million .

The Company accounted for its interest in AppFirst under the equity method.

The Company funded an aggregate of $1.0 million of convertible loans to NovaSom, Inc.

The Company had previously deployed an aggregate of $21.0 million in NovaSom.

NovaSom is a medical device company focused on obstructive sleep apnea, specifically home testing with its FDA-cleared wireless device called AccuSom ® Home Sleep Test.

The Company accounts for its interest in NovaSom under the equity method.

The Company deployed an additional $5.0 million into Transactis, Inc.

The Company had previously deployed $9.5 million in Transactis.

Transactis provides electronic billing and payment solutions.

The Company accounts for its interest in Transactis under the equity method.

The Company funded $1.0 million of a convertible bridge loan to Hoopla Software, Inc.

The Company had previously deployed an aggregate of $3.8 million in Hoopla.

Hoopla provides cloud-based software that helps sales organizations inspire and motivate sales team performance.

The Company accounts for its interest in Hoopla under the equity method.

The Company deployed an additional $7.5 million into Syapse, Inc.

The Company had previously deployed $5.8 million in Syapse.

Syapse drives healthcare transformation through precision medicine, enabling provider systems to improve clinical outcomes, streamline operations, and shift to new payment models.

The Company accounts for its interest in Syapse under the equity method.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2015 Transactions

The Company acquired a 26.3% interest in Zipnosis, Inc.

for $7.0 million .

Zipnosis provides health systems with a white-labeled, fully integrated virtual care platform.

The Company accounts for its interest in Zipnosis under the equity method.

The Company acquired a 34.2% interest in Cask Data, Inc.

for $11.0 million .

Cask Data accelerates the development and deployment of production Hadoop applications.

The Company accounts for its interest in Cask under the equity method.

The Company deployed an additional $10.0 million into Apprenda, Inc.

The Company had previously deployed $12.1 million in Apprenda.

Apprenda is an enterprise platform-as-a-service company powering the next generation of enterprise software development in public, private and hybrid clouds.

The Company accounts for its interest in Apprenda under the equity method.

The Company funded an aggregate of $2.8 million of convertible bridge loans to Quantia, Inc.

The Company had previously deployed an aggregate of $12.5 million in Quantia.

The Company accounted for its interest in Quantia under the equity method.

In July 2015, Quantia was acquired by Physicians Interactive.

The Company deployed an additional $3.5 million into Pneuron Corporation.

The Company had previously deployed $5.0 million in Pneuron.

Pneuron enables organizations to rapidly solve business problems through a distributed approach that cuts across data, applications and processes.

The Company accounts for its interest in Pneuron under the equity method.

The Company acquired a 22.6% interest in Sonobi, Inc.

for $5.4 million .

Sonobi is an advertising technology developer that creates data-driven tools and solutions to meet the evolving needs of demand- and sell-side organizations within the digital media marketplace.

The Company accounts for its interest in Sonobi under the equity method.

The Company funded an aggregate $1.0 million convertible bridge loan to AdvantEdge Healthcare Solutions, Inc.

The Company had previously deployed an aggregate of $15.3 million in AdvantEdge.

AdvantEdge is a technology-enabled provider of healthcare revenue cycle and business management solutions that improve decision-making, maximize financial performance, streamline operations and mitigate compliance risks for healthcare providers.

The Company accounts for its interest in AdvantEdge under the equity method.

The Company deployed an additional $0.3 million into Dabo Health, Inc.

The Company had previously deployed $2.0 million in Dabo Health.

The Company impaired all of the carrying value of Dabo Health in the first quarter of 2015.

The Company accounted for its interest in Dabo Health under the cost method.

Fair Value Measurements

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Financial assets recorded at fair value on the Company’s Consolidated Balance Sheets are categorized as follows:

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

2 unchanged sentences

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following table provides the carrying value and fair value of certain financial assets of the Company measured at fair value on a recurring basis as of December 31, 2017 and 2016 :

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides the carrying value and fair value of certain financial assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2018 and 2017 :

Fair Value Measurement at December 31, 2018

1 unchanged sentence

Cash and cash equivalents

Long-term restricted cash equivalents

Trading securities

Restricted cash equivalents

Marketable securities—held-to-maturity:

Certificates of deposit

Government agency bond

Treasury Bills

Total marketable securities

Credit facility repayment feature liability

Fair Value Measurement at December 31, 2017

2 unchanged sentences

Long-term restricted cash equivalents

Trading securities

Marketable securities—held-to-maturity:

Certificates of deposit

As of December 31, 2017 , $4.5 million of marketable securities had contractual maturities which were less than one year and $0.0 million of marketable securities had contractual maturities greater than one year.

As of December 31, 2018 , $38.0 million of marketable securities had contractual maturities which were less than one year.

Held-to-maturity securities are carried at amortized cost, which, due to the short-term maturity of these instruments, approximates fair value using quoted prices in active markets for identical assets or liabilities defined as Level 1 inputs under the fair value hierarchy.

Trading securities consist of shares of Invitae Corporation obtained in connection with Invitae's acquisition of Good Start Genetics, Inc.

As of December 31, 2017, trading securities consist of shares of Invitae Corporation obtained in connection with Invitae's acquisition of Good Start Genetics, Inc.

in August 2017.

The trading securities are recorded at fair value based on Invitae's closing stock price at December 31, 2017.

Subsequent to year end, the Company sold the shares of Invitae common stock on the open market for net proceeds of $2.6 million .

The trading securities were recorded at fair value based on Invitae's closing stock price at December 31, 2017.

During 2018, the Company sold the shares of Invitae common stock for net proceeds of $3.7 million .

The Company recorded $5.1 million for the fair value of the credit facility repayment feature liability as of December 31, 2018, an increase of $4.5 million from its initial value established during the second quarter of 2018.

The prepayment feature is an embedded derivative that is accounted for as a liability separate from the Amended Credit Facility.

The liability is adjusted to the fair value of required projected future debt prepayments.

The liability may change materially based upon management's probability weighted cash forecast at each balance sheet date.

Management's cash forecasts are defined as Level 3 inputs under the fair value hierarchy.

Credit Facility and Convertible Debentures

7 unchanged sentences

Prime Rate, payable monthly in arrears.

The Credit Facility is not amortized and interest payable under the Credit Facility will reflect at least $50 million as being drawn and outstanding at all times during the term.

The Credit Facility also includes an unused line fee equal to 0.75% per annum of the average unused portion of the Credit Facility and a loan service fee, both paid quarterly.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Facility is not amortized and interest payable under the Credit Facility will reflect at least $50 million as being drawn and outstanding at all times during the term.

The Credit Facility also included an unused line fee equal to 0.75% per annum of the average unused portion of the Credit Facility and a loan service fee, both paid quarterly.

The Credit Facility is secured by all of the Company's assets in accordance with the terms of the Credit Facility.

The Credit Facility requires the Company 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 1.75 x the amount then outstanding under the Credit Facility;

(iii) a minimum aggregate appraised value of the Company’s 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 the Company’s capital deployments to its partner companies.

Subject to customary exclusions, the Lender has the right to have one observer representative attend meetings of the Company's Board of Directors.

The Credit Facility provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest;

The maturity date and interest rate remained unchanged.

The Amended Credit Facility consists of a term loan in the principal amount of $85.0 million , (the "Term Loan"), $50.0 million of which was outstanding prior to entering into the amendment and $35.0 million of which was drawn in connection with the consummation of the amendment, and a revolving loan in the principal amount of up to $15.0 million (the “Revolving Loan”).

The Company was able to borrow and repay under the Revolving Loan at any time until its expiration on December 30, 2018.

Any amounts outstanding under the Revolving Loan on December 30, 2018 would be subject to the same repayment terms as amounts borrowed under the Term Loan.

Under the Amended Credit Facility, if the aggregate amount of the Company’s qualified cash at any quarter end date exceeds $50.0 million , the Company will be required to prepay outstanding principal amounts under the Amended Credit Facility, plus any applicable interest and prepayment fees, in an amount equal to 100% of such excess.

Based on this requirement, the Company has classified $22.1 million as the current portion of the credit facility based on the Company's projected qualified cash at March 31, 2019.

Certain debt covenants were revised in connection with the Amended Credit Facility.

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

(ii) maintain a minimum aggregate appraised value of the Company’s 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 and all prepayments of the Revolving Loan made after December 30, 2018;

and (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;

and (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).

The Company is no longer required to maintain a specific net worth or any diversification requirements or concentration limits with respect to the Company’s capital deployments to its partner companies.

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

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

The $35.0 million of additional principal that the Company borrowed with the consummation of the Amended Credit Facility resulted in net proceeds of $32.7 million , after closing fees to the Lender and other third parties, that were used towards the repayment of $41.0 million of principal outstanding on its 2018 Debentures, which the Company repaid in full on the maturity date of May 15, 2018.

There were no convertible debentures outstanding as of December 31, 2018.

The Amended Credit Facility provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest;

non-compliance with debt covenants;

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certain events of bankruptcy or insolvency.

and a material adverse change to the business.

Generally, if an event of default occurs and is not cured within the time periods specified (if any), the Lender may declare the outstanding amount under the Credit Facility to be immediately due and payable.

At December 31, 2017 , the principal amount outstanding under the Credit Facility was $50.0 million , the unamortized discount and debt issuance costs were $4.7 million and the net carrying value of the credit facility was $45.3 million .

Generally, if an event of default occurs and is not cured within the time periods specified (if any), the Lender may declare the outstanding amount under the Amended Credit Facility to be immediately due and payable.

At December 31, 2018 , the principal amount outstanding under the Amended Credit Facility was $68.6 million , the unamortized discount and debt issuance costs were $3.5 million and the net carrying value of the Credit Facility was $65.1 million .

The Company accounted for the amendment to the Credit Facility as an insubstantial modification and is amortizing the excess of the principal amount of the Amended Credit Facility over its carrying value over the remaining term as additional interest expense using a revised effective interest rate prospectively based on the revised cash flows.

The Amended Credit Facility requires prepayments of outstanding principal amounts when the Company’s qualified cash at any quarter end date exceeds $50.0 million .

This provision in the Amended Credit Facility is an embedded derivative that is accounted for separately.

An initial fair value (liability) of $0.5 million was recorded on the amendment date for the fair value of potential future prepayments based upon management's probability weighted cash forecast.

This amount is also included in debt issuance costs and will be amortized over the remaining term of the Amended Credit Facility.

The liability is being adjusted to fair value at each balance sheet date based upon management's updated probability weighted cash forecast.

The Company recorded losses of $4.5 million for the year ended December 31, 2018 which is included in Other loss on the Consolidated Statements of Operations.

The increase in the fair value of the credit facility repayment feature liability is due to an increase in the probability of debt prepayments based on the Company's current cash position and expected uses of cash during 2019.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Company is amortizing the excess of the principal amount of the Credit Facility over its carrying value over the three -year term as additional interest expense using the effective interest method and recorded $1.0 million of such expense for the year ended December 31, 2017.

The effective interest rate on the Credit Facility is 14.6% .

Company recorded interest expense of $14.6 million and $4.4 million for the years ended December 31, 2018 and 2017, respectively, under the Amended Credit Facility.

The effective interest rate on the Amended Credit Facility is 15.2% .

The Company made interest payments of $10.0 million and $2.5 million for the years ended December 31, 2018 and 2017, respectively.

Convertible Senior Debentures

In November 2012, the Company issued $55.0 million principal amount of its 5.25% convertible senior debentures due on May 15, 2018 (the “2018 Debentures”).

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

In November 2012, the Company issued $55.0 million principal amount of its 5.25% convertible senior debentures which was due on May 15, 2018 (the “2018 Debentures”).

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

In connection with the repurchase of these 2018 Debentures, the Company 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 loss in the Consolidated Statements of Operations for the year ended December 31, 2017.

At December 31, 2017, the Company had $41.0 million of outstanding 2018 Debentures.

Interest on the 2018 Debentures is payable semi-annually on May 15 and November 15.

At December 31, 2017, the Company had $41.0 million of outstanding 2018 Debentures which was repaid in full in May 2018.

Interest on the 2018 Debentures was payable semi-annually on May 15 and November 15.

Holders of the 2018 Debentures had the right to convert their notes prior to November 15, 2017 at their option only under the following circumstances:

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upon the occurrence of specified corporate events.

On or after November 15, 2017 until the close of business on the second business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the foregoing conditions have been met.

On or after November 15, 2017 until the close of business on the second business day immediately preceding the maturity date, holders would convert their notes at any time, regardless of whether any of the foregoing conditions had been met.

Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election.

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 conversion rate of the 2018 Debentures was 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 of the Company’s common stock at December 31, 2017 was $11.20 .

Since their issuance in 2012, none of the 2018 Debentures have been converted to shares of common stock.

On or after November 15, 2016, the Company may redeem for cash any of the 2018 Debentures if the last reported sale price of the Company’s common stock exceeds 140% of the conversion price for at least 20 trading days during the period of 30 consecutive trading days ending on the trading day before the date that notice of redemption is given, including the last trading day of such period.

On or after November 15, 2016, the Company could redeem for cash any of the 2018 Debentures if the last reported sale price of the Company’s common stock exceeds 140% of the conversion price for at least 20 trading days during the period of 30 consecutive trading days ending on the trading day before the date that notice of redemption is given, including the last trading day of such period.

Upon any redemption of the 2018 Debentures, the Company will pay a redemption price of 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, and additional interest, if any.

The 2018 Debentures holders have the right to require the Company to repurchase the 2018 Debentures if the Company undergoes a fundamental change, which includes the sale of all or substantially all of the Company’s common stock or assets;

The 2018 Debentures holders had the right to require the Company to repurchase the 2018 Debentures if the Company undergoes a fundamental change, which includes the sale of all or substantially all of the Company’s common stock or assets;

a greater than 50% change in control;

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or a substantial change in the composition of the Company’s board of directors as defined in the governing agreement.

Holders may require that the Company repurchase for cash all or part of their debentures at a fundamental change repurchase price equal to 100% of the principal amount of the debentures to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Because the 2018 Debentures may be settled in cash or partially in cash upon conversion, the Company separately accounts for the liability and equity components of the 2018 Debentures.

The carrying amount of the liability component was determined at the transaction date by measuring the fair value of a similar liability that does not have an associated equity component.

The carrying amount of the equity component represented by the embedded conversion option was determined by

Holders could have required that the Company repurchase for cash all or part of their debentures at a fundamental change repurchase price equal to 100% of the principal amount of the debentures to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

deducting the fair value of the liability component from the initial proceeds of the 2018 Debentures as a whole.

Because the 2018 Debentures could be settled in cash or partially in cash upon conversion, the Company separately accounted for the liability and equity components.

The carrying amount of the liability component was determined at the transaction date by measuring the fair value of a similar liability that does not have an associated equity component.

The carrying amount of the equity component represented by the embedded conversion option was determined by deducting the fair value of the liability component from the initial proceeds of the 2018 Debentures as a whole.

At December 31, 2017, the fair value of the $41.0 million outstanding 2018 Debentures was approximately $41.6 million , based on the midpoint of the bid and ask prices as of such date.

At December 31, 2017, the carrying amount of the equity component was $5.6 million , the principal amount of the liability component was $41.0 million , the unamortized discount and debt issuance costs were $0.5 million , and the net carrying value of the liability component was $40.5 million .

The Company is amortizing the excess of the face value of the 2018 Debentures over their carrying value over their term as additional interest expense using the effective interest method and recorded $1.5 million , $1.6 million and $1.5 million of such expense for the years ended December 31, 2017 , 2016 and 2015 , respectively.

The effective interest rate on the 2018 Debentures is 8.7% .

The Company anticipates refinancing all or a portion of the outstanding 2018 Debentures before the maturity date of May 15, 2018.

The Company amortized the excess of the face value of the 2018 Debentures over their carrying value over their term as additional interest expense using the effective interest method and recorded $0.5 million and $1.5 million of such expense for the years ended December 31, 2018 and 2017 , respectively.

The effective interest rate on the 2018 Debentures was 8.7% .

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

During the years ended December 31, 2016 and 2015, the Company 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 February 2018, the Company's Board of Directors adopted a tax benefits preservation plan (the "Plan") designed to protect and preserve the Company's ability to utilize its net operating loss carryforwards ("NOLs").

The Company intends to submit the Plan for shareholder ratification at its 2018 Annual Meeting of Shareholders.

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

The purpose of the Plan is to preserve the Company's ability to use its NOLs, which would be substantially limited if the Company experienced an "ownership change" as defined under Section 382 of the Internal Revenue Code.

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The 2014 Equity Compensation Plan has 4.1 million shares authorized for issuance.

During 2017 and 2016, the Company issued zero and 46 thousand stock-based awards, respectively, outside of existing plans as inducement awards in accordance with New York Stock Exchange rules.

During 2018 and 2017, the Company issued zero stock-based awards outside of existing plans.

To the extent allowable, service-based options are incentive stock options.

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Year Ended December 31,

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General and administrative expense

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At December 31, 2018 , the Company had outstanding options that vest based on two different types of vesting schedules:

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No performance-based options were issued during the years ended December 31, 2018 or 2017.

During the years ended December 31, 2017, 2016 and 2015, 1 thousand , 4 thousand and 0 performance-based options vested.

During the years ended December 31, 2017 , 2016 and 2015 , respectively, 8 thousand , 106 thousand and 9 thousand performance-based options were canceled or forfeited.

The Company recorded a reduction of compensation expense related to performance-based options of $0.2 million for the year ended December 31, 2017.

During the years ending December 31, 2016 and 2015, the Company recorded compensation expense related to performance-based options of $0.2 million and $0.0 million , respectively.

During the years ended December 31, 2018 and 2017, 1 thousand and 1 thousand performance-based options vested each year.

During the years ended December 31, 2018 and 2017 , respectively, 76 thousand and 8 thousand performance-based options were canceled or forfeited.

The Company recorded a reduction of compensation expense related to performance-based options of $0.7 million and $0.2 million for the years ended December 31, 2018 and 2017 respectively.

The maximum number of unvested options at December 31, 2018 attainable under these grants was 258 thousand shares.

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The requisite service period for service-based awards is the period over which the award vests.

During the years ended December 31, 2017 , 2016 and 2015 , respectively, the Company issued 8 thousand , 27 thousand and 31 thousand service-based options to employees.

During the years ended December 31, 2017 , 2016 and 2015 , respectively, 80 thousand , 22 thousand and 8 thousand service-based options were canceled or forfeited.

The Company recorded compensation expense related to these options of $0.1 million , $0.2 million and $0.3 million during the years ended December 31, 2017 , 2016 and 2015 , respectively.

Market-based awards entitled participants to vest in a number of options determined by achievement by the Company of certain target market capitalization increases (measured by reference to stock price increases on a specified number of outstanding shares) over an eight -year period.

During the years ended December 31, 2017 , 2016 and 2015 , the Company did not issue any market-based awards to employees.

No market-based options vested during the years ended December 31, 2017 , 2016 or 2015.

During the years ended December 31, 2017 , 2016 and 2015 , respectively, 0 , 136 thousand and 91 thousand market-based options were canceled or forfeited.

The Company did not record compensation expense related to market-based options during the years ended December 31, 2017 , 2016 and 2015 .

There is no further expense to be recognized related to market-based options and there are no further unvested options attainable under these grants at December 31, 2017.

During the years ended December 31, 2018 and 2017 , respectively, the Company issued zero thousand and 8 thousand service-based options to employees.

During the years ended December 31, 2018 and 2017 , respectively, 17 thousand and 80 thousand service-based options were canceled or forfeited.

The Company recorded compensation expense related to these options of $0.0 million and $0.1 million during the year ended December 31, 2018 and 2017, respectively.

The fair value of the Company’s option awards to employees was estimated at the date of grant using the Black-Scholes option-pricing model.

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Expected volatility was based on historical volatility measured using weekly price observations of the Company’s common stock for a period equal to the stock option’s expected term.

Assumptions used in the valuation of options granted in each period were as follows:

There were no options granted during 2018.

Assumptions used in the valuation of options granted in 2017 were as follows:

Year Ended December 31,

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Risk-free interest rate

The weighted-average grant date fair value of options issued by the Company during the years ended December 31, 2017 , 2016 and 2015 was $2.36 , $3.29 and $4.25 per share, respectively.

The weighted-average grant date fair value of options issued by the Company during the year ended December 31, 2017 was $2.36 per share.

SAFEGUARD SCIENTIFICS, INC.

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Outstanding at December 31, 2018

Options granted

Options exercised

Options canceled/forfeited

Outstanding at December 31, 2017

Options exercisable at December 31, 2018

Shares available for future grant

The total intrinsic value of options exercised for the years ended December 31, 2017 , 2016 and 2015 was $0.1 million , $0.9 million and $0.9 million , respectively.

At December 31, 2017 , total unrecognized compensation cost related to non-vested service-based options was $0.1 million .

That cost is expected to be recognized over a weighted-average period of 2.1 years.

At December 31, 2017 , total unrecognized compensation cost related to non-vested performance-based options was $0.1 million .

That cost is expected to be recognized over a weighted-average period of 1.9 years but would be accelerated if performance targets are achieved earlier than estimated.

The total intrinsic value of options exercised for the years ended December 31, 2018 was immaterial.

The total intrinsic value of options exercised for the years ended December 31, 2017 was $0.1 million .

At December 31, 2018 , total unrecognized compensation cost related to non-vested service-based options was immaterial.

At December 31, 2018 , total unrecognized compensation cost related to non-vested performance-based options was immaterial.

Performance-based stock units vest based on achievement by the Company of target capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified partner companies, as described above related to performance-based awards.

Performance-based stock units represent the right to receive shares of the Company’s common stock, on a one-for-one basis.

The Company did not issue any performance-based units during the year ended December 31, 2017.

During the years ended December 31, 2016 and 2015, respectively, the Company issued 226 thousand and 153 thousand performance-based stock units to employees.

During the years ended December 31, 2017, 2016 and 2015, respectively, 1 thousand , 1 thousand and 7 thousand performance-based stock units vested.

During the years ended December 31, 2017, 2016 and 2015, respectively, 6 thousand , 49 thousand and 5 thousand performance-based stock units were canceled or forfeited.

The Company did not issue any performance-based units during the years ended December 31, 2018 or 2017.

During the years ended December 31, 2018 and 2017, 1 thousand performance-based stock units vested each year.

During the years ended December 31, 2018 and 2017, respectively, 117 thousand and 6 thousand performance-based stock units were canceled or forfeited.

Under the terms of the 2016 and 2015 performance-based awards, once performance-based stock units are fully vested, participants are entitled to receive cash payments based on their initial performance grant values as target capital returns described above are exceeded.

At December 31, 2018 , the liability associated with such potential cash payments was $0.0 million .

During the years ended December 31, 2017 , 2016 and 2015 , respectively, the Company issued 163 thousand , 130 thousand and 81 thousand restricted shares to employees.

Restricted shares generally vest over a period of approximately four years.

During the years ended December 31, 2017, 2016 an 2015, respectively, 3 thousand , 12 thousand and 2 thousand restricted shares were canceled or forfeited.

During the years ended December 31, 2017 , 2016 , and 2015 , respectively, the Company issued 54 thousand , 47 thousand and 44 thousand deferred stock units to non-employee directors for annual service grants or fees earned during the preceding quarter.

During the years ended December 31, 2018 and 2017 , respectively, the Company issued 48 thousand and 163 thousand restricted shares to employees and directors.

Restricted shares generally vest over a period of approximately two to four years, or are vested at issuance for directors 65 or older.

During the years ended December 31, 2018 and 2017, respectively, 44 thousand and 3 thousand restricted shares were canceled or forfeited.

During the years ended December 31, 2018 and 2017 , respectively, the Company issued 6 thousand , and 54 thousand restricted stock or deferred stock units to non-employee directors for annual service grants or fees earned during the preceding quarter.

Deferred stock units issued to directors in lieu of directors fees are 100% vested at the grant date;

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Deferred stock units are payable in stock on a one-for-one basis.

Payments related to the deferred stock units are generally distributable following termination of employment or service, death or permanent disability.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the years ended December 31, 2017 , 2016 and 2015 , the Company granted 22 thousand , 10 thousand and 9 thousand shares, respectively, to members of its advisory board.

Payments related to the deferred stock units are generally distributable following termination of service, death or permanent disability.

During the year ended December 31, 2017 , the Company granted 22 thousand shares to members of its advisory board.

The advisory board was disbanded in February 2018.

The Company recorded compensation expense of $0.3 million , $0.1 million and $0.1 million in each year related to these awards.

Total compensation expense for deferred stock units, performance-based stock units and restricted stock was $1.3 million $1.9 million , $1.3 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.

The Company recorded compensation expense of $0.3 million in 2017 related to these awards.

Total compensation expense for deferred stock units, performance-based stock units and restricted stock was $1.0 million $1.3 million , for the years ended December 31, 2018 and 2017 , respectively.

Unrecognized compensation expense related to deferred stock units, performance stock units and restricted stock at December 31, 2018 was $2.4 million .

The total fair value of deferred stock units, performance stock units and restricted stock vested during the years ended December 31, 2017 , 2016 and 2015 was $1.6 million , $1.2 million and $1.1 million , respectively.

The total fair value of deferred stock units, performance stock units and restricted stock vested during the years ended December 31, 2018 and 2017 was $1.6 million and $1.6 million , respectively.

Deferred stock unit, performance-based stock unit and restricted stock activity are summarized below:

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Weighted Average

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Unvested at December 31, 2018

Other Income (Loss), Net

Year ended December 31, 2017:

Loss on mark-to-market of holdings in trading securities

Loss on impairment of legacy private equity fund

Gain on legacy Penn Mezzanine debt and equity participations

Loss on partial extinguishment of 2018 Debentures

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

Employee Benefit Pla n

The Company maintains a qualified 401(K) retirement plan for eligible employees.

The Plan’s matching formula is 100% of the first 5% of participants’ qualified compensation.

Compensation expense related to our matching contributions to the plan for the years ended December 31, 2018 and 2017, were $0.2 million and $0.4 million , respectively.

SAFEGUARD SCIENTIFICS, INC.

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The total income tax provision (benefit) differed from the amounts computed by applying the U.S.

federal income tax rate of 35.0% to net income (loss) before income taxes as a result of the following:

federal income tax rate of 21% and 35.0% for the years ended December 31, 2018 and 2017, respectively, to net loss before income taxes as a result of the following:

Year Ended December 31,

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Tax loss and credit carryforwards

Disallowed interest carryforwards

Credit facility repayment feature

Accrued expenses

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Net deferred tax asset

As of December 31, 2017 , the Company and its subsidiaries consolidated for tax purposes had federal net operating loss carryforwards of approximately $254.3 million .

As of December 31, 2018 , the Company and its subsidiaries consolidated for tax purposes had federal net operating and capital loss carryforwards of approximately $299.5 million , of which $17.1 million have an indefinite life.

These carryforwards expire as follows:

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(iii) creating a new limitation on deductible interest expense;

and (iv) changing rules related to uses and limitations of net operating carryforwards created in tax years beginning after December 31, 2017.

The most significant impact on the Company's consolidated financial statements is a reduction of approximately $82.5 million in deferred tax assets which is offset by changes to the Company’s valuation allowance.

In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company has determined that it is more likely than not that

and (iv) changing rules related to uses and limitations of net operating carryforwards created in tax years beginning

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

certain future tax benefits may not be realized as a result of current and future income.

after December 31, 2017.

The most significant impact on the Company's consolidated financial statements was a reduction of approximately $82.5 million in deferred tax assets which is offset by changes to the Company’s valuation allowance.

In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company has determined that it is more likely than not that certain future tax benefits may not be realized as a result of current and future income.

Accordingly, a valuation allowance has been recorded against substantially all of the Company’s deferred tax assets.

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Diluted loss per share for the years ended December 31, 2018 and 2017 do not reflect the following potential shares of common stock that would have an anti-dilutive effect or have unsatisfied performance or market conditions:

At December 31, 2017 , 2016 and 2015 , options to purchase 0.6 million , 0.7 million and 1.1 million shares of common stock, respectively, at prices ranging from $9.83 to $19.95 per share, $9.83 to $19.95 per share and $7.14 to $19.95 per share per share, respectively, were excluded from the calculation.

At December 31, 2018 and 2017, options to purchase 0.4 million , and 0.6 million shares of common stock, respectively, at prices ranging from $9.83 to $19.95 per share, and $9.83 to $19.95 per share per share, respectively, were excluded from the calculation.

At December 31, 2018 and 2017 , unvested restricted stock, performance-based stock units and DSUs convertible into 0.8 million million and 1.0 million shares of stock, respectively, were excluded from the calculations.

For the years ended December 31, 2017 , 2016 , and 2015 , 2.3 million , 3.0 million and 3.0 million shares of common stock, respectively, representing the effect of assumed conversion of the 2018 Debentures were excluded from the calculations.

Related Party Transactions

For the years ended December 31, 2018 and 2017 , 0.8 million and 2.3 million shares of common stock, respectively, representing the effect of assumed conversion of the 2018 Debentures were excluded from the calculations.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Related Party Transactions

In May 2001, the Company entered into a $26.5 million loan agreement with Warren V.

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The carrying value of the loan at December 31, 2018 was zero .

The Company received payments of $0.1 million on this loan agreement in the year ended December 31, 2016 and did not receive any payments on this loan agreement in the years ended December 31, 2017 or 2015.

The Company did not receive any payments on this loan agreement in the years ended December 31, 2018 or 2017.

In the normal course of business, the Company’s officers and employees hold board positions with partner and other companies in which the Company has a direct or indirect ownership interest.

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The Company leases its corporate headquarters under a lease expiring in 2026 and office equipment under leases expiring at various dates to 2020.

Total rental expense under operating leases was $0.5 million , $0.5 million and $0.5 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.

Total rental expense under operating leases was $0.6 million and $0.5 million for the years ended December 31, 2018 and 2017 , respectively.

At December 31, 2018 , future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows:

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

The Company believes its potential liability due to the possibility of default by other general partners is remote.

The Company was notified by the fund's manager that the fund is being dissolved and $1.0 million of the Company's 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, 2017 .

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

In October 2001, the Company entered into an agreement with a former Chairman and Chief Executive Officer of the Company, to provide for annual payments of $0.65 million per year and certain health care and other benefits for life.

The related current liability of $0.8 million was included in Accrued expenses and other current liabilities and the long-term portion of $1.8 million was included in Other long-term liabilities on the Consolidated Balance Sheet at December 31, 2017 .

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

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

The Company has agreements with certain

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

employees that provide for severance payments to the employee in the event the employee is terminated without cause or an employee terminates his employment for “good reason.” The maximum aggregate exposure under 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 .

The related current liability of $0.8 million is included in Accrued expenses and other current liabilities and the long-term portion of $1.3 million is included in Other long-term liabilities on the Consolidated Balance Sheet at December 31, 2018 .

In January 2018, the Company announced a change in strategy and implemented an initiative to generate annual cost savings.

The Company has incurred approximately $3.9 million of severance costs to terminated employees, of which $1.2 million remains to be paid during 2019.

The Company also has agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or an employee terminates his employment for “good reason.” The maximum aggregate exposure under severance agreements for remaining employees is approximately $4.8 million at December 31, 2018 .

In June 2011, the Company's former partner company, Advanced BioHealing, Inc.

(“ABH”) was acquired by Shire plc (“Shire”).

Prior to the expiration of the escrow period in March 2012, Shire filed a claim against all amounts held in escrow related to the sale based principally upon a United States Department of Justice (“DOJ”) false claims act investigation relating to ABH (the “Investigation”).

Prior to the expiration of the escrow period in March 2012, Shire filed a claim against all amounts held in escrow

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

related to the sale based principally upon a United States Department of Justice (“DOJ”) false claims act investigation relating to ABH (the “Investigation”).

In connection with the Investigation, in July 2015 the Company received a Civil Investigation Demand-Documentary Material (“CID”) from the DOJ regarding ABH and Safeguard’s relationship with ABH.

5 unchanged sentences

During the years ended December 31, 2018 and 2017 , the Company converted $12.4 million and $10.8 million , respectively, of advances to partner companies into ownership interests in partner companies.

Cash paid for interest for the years ended December 31, 2017 , 2016 and 2015 was $5.0 million , $2.9 million and $2.9 million , respectively.

Cash paid for interest for the years ended December 31, 2018 and 2017 was $11.1 million and $5.0 million , respectively.

Cash paid for taxes in each of the years ended December 31, 2018 and 2017 was $0.0 million .

1 unchanged sentence

The Company operates as one operating segment based upon the similar nature of its 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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2018 , the Company held interests in 21 non-consolidated partner companies.

3 unchanged sentences

Partner Company

Revenue Stage

Accounting Method

AdvantEdge Healthcare Solutions, Inc.

High Traction

Apprenda, Inc.

Initial Revenue

Cask Data, Inc.

Initial Revenue

CloudMine, Inc.

Initial Revenue

Brickwork ***

Clutch Holdings, Inc.

Flashtalking, Inc.*

Hoopla Software, Inc.

Initial Revenue

InfoBionic, Inc.

Initial Revenue

Lumesis, Inc.

MediaMath, Inc.

High Traction

Initial Revenue

Moxe Health Corporation

Initial Revenue

NovaSom, Inc.

High Traction

Prognos (formerly Medivo)

Propeller Health, Inc.

Initial Revenue

Prognos Health Inc.

Propeller ***

QuanticMind, Inc.

Spongecell, Inc.

T-REX Group, Inc.

Initial Revenue

Transactis, Inc.

Trice Medical, Inc.

Initial Revenue

WebLinc, Inc.

Zipnosis, Inc

Initial Revenue

* Spongecell, Inc.

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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

As of December 31, 2018 and 2017 , all of the Company’s assets were located in the United States.

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Subsequent Events

In January 2018, Spongecell, Inc.

merged into Flashtalking, a privately-held company.

The Company received Flashtalking ordinary shares equal to approximately 10% of Flashtalking’s issued share capital at the time of the closing.

The Company’s final number of Flashtalking shares will be subject to customary indemnification and working capital provisions and agreements.

During 2017, the Company sold its interest in Nexxt, Inc.

(formerly known as Beyond.com) for $26.0 million.

The Company received an initial $15.5 million for its equity interest and a three-year, $10.5 million term loan.

As of December 31, 2017, the note was fully reserved.

Subsequent to year-end, Nexxt repaid the term loan in full.

The Company will recognize a gain in the first quarter of 2018 on this transaction.

In January 2019, Brickwork was acquired in an all stock transaction resulting in no gain or loss.

The Company received a preferred equity interest in the acquiror and accounts for this interest as an equity interest without a readily determinable fair value.

In January 2019, Propeller was acquired for cash.

The Company received approximately $41.5 million in cash.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data