What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-02-28 compared with 2019-03-01 · 345 added, 480 removed, 469 unchanged (64% of the section changed)

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Consolidated Statements of Operations for the years ended December 31, 2019 and 2018

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018 and 2017

Consolidated Statements of Changes in Equity for the years ended December 31, 2018 and 2017

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019 and 2018

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018

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Opinion on Internal Control Over Financial Reporting

We have audited Safeguard Scientific, Inc.

We have audited Safeguard Scientifics, Inc.

and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, 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, 2019, 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, 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.

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, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A.(b)).

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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Philadelphia, Pennsylvania

March 1, 2019

February 28, 2020

Report of Independent Registered Public Accounting Firm

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

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.

and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ 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, 2019 and 2018, and the results of its operations and its cash flows for each of 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.

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, 2019, 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 February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No.

2016-02, Leases .

Basis for Opinion

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Philadelphia, Pennsylvania

March 1, 2019

February 28, 2020

SAFEGUARD SCIENTIFICS, INC.

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Marketable securities

Trading securities

Prepaid expenses and other current assets

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Property and equipment, net

Ownership interests in and advances to partner companies

Long-term restricted cash equivalents

Ownership interests and advances

LIABILITIES AND EQUITY

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Credit facility repayment feature

Convertible senior debentures

Lease liability - current

Total current liabilities

Other long-term liabilities

Lease liability - non-current

Credit facility - non-current

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Operating loss

Other loss, net

Other income (loss), net

Interest income

Interest expense

Equity income (loss)

Net loss before income taxes

Equity income (loss), net

Net income (loss) before income taxes

Income tax benefit (expense)

Net loss per share:

Weighted average shares used in computing net loss per share:

Net income (loss)

Net income (loss) per share:

Weighted average shares used in computing net income (loss) per share:

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

Year Ended December 31,

Other comprehensive income:

Share of other comprehensive income of equity method investments

Total comprehensive loss

Net income (loss)

Other comprehensive (loss) income:

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

Reclassification adjustment for sale of equity method investments

Total comprehensive income (loss)

See Notes to Consolidated Financial Statements.

SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(In thousands)

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Stock options exercised, net of tax withholdings

Issuance of restricted stock, net of tax withholdings

Stock-based compensation expense

Repurchase of convertible senior debentures

Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net

Stock-based compensation

Other comprehensive income

Balance — December 31, 2018

Stock options exercised, net of tax withholdings

Issuance of restricted stock, net of tax withholdings

Stock-based compensation expense

Other comprehensive income

Restricted stock awards, forfeitures and shares repurchased for tax withholdings, net

Stock-based compensation

Other comprehensive loss

Dividends paid

Balance — December 31, 2019

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Cash Flows from Operating Activities:

Net income (loss)

Adjustments to reconcile to net cash used in operating activities:

Amortization of debt discount

Equity (income) loss

Loss from increase in fair value of derivative

Amortization of right of use asset

Equity income, net

(Income) loss from change in fair value of derivative

Gain from observable price changes

Loss on sale of property and equipment

Stock-based compensation expense

Stock-based compensation, including liability classified awards

Changes in assets and liabilities:

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Cash Flows from Investing Activities:

Acquisitions of ownership interests in companies

Proceeds from sales of and distributions from companies

Advances and loans to companies

Repayment of advances and loans to companies

Acquisitions of ownership interests

Proceeds from sales and distributions

Advances and loans

Repayment of advances and loans

Purchase of marketable securities

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Proceeds from sales of property and equipment

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash Flows from Financing Activities:

Payment of dividend

Proceeds from credit facility

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Tax withholdings related to equity-based awards

Issuance of Company common stock, net

Net cash provided by (used in) financing activities

Net cash used in financing activities

Net change in cash, cash equivalents and restricted cash equivalents

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Liquidity And Capital Resources

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

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 to return value to shareholders.

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

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

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

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 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.

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

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

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

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

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

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

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

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.

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

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

In that context, the Company has, are and will consider initiatives including, among others:

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

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

Significant Accounting Policies

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Principles of Accounting for Ownership Interests in Companies

The Company accounts for its interests in its partner companies using one of the following methods:

The Company accounts for its ownership interests using one of the following methods:

Equity or Other.

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

In addition to holding voting and non-voting equity and debt securities, the Company also periodically makes advances to its 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.

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

Equity Method.

The Company accounts for partner companies whose results are not consolidated, but over which it exercises significant influence, under the equity method of accounting.

Whether or not the Company exercises significant influence with respect to a partner company depends on an evaluation of several factors including, among others, representation of the Company on the partner company’s board of directors and the Company’s ownership level, which is generally a 20% to 50% interest in the voting securities of a partner company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company.

Under the equity method of accounting, the Company does not reflect a partner company’s financial statements within the Company’s Consolidated Financial Statements;

however, the Company’s share of the income or loss of such partner company is reflected in Equity income (loss) in the Consolidated Statements of Operations.

The Company includes the carrying value of equity method partner companies in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.

Any excess of the Company’s cost over its underlying interest in the net assets of equity method partner companies that is allocated to intangible assets is amortized over the estimated useful lives of the related intangible assets.

The Company reflects its share of the income or loss of the equity method partner companies on a one quarter lag.

This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these partner companies.

When the Company’s carrying value in an equity method partner company is reduced to zero, the Company records no further losses in its Consolidated Statements of Operations unless the Company has an outstanding guarantee obligation or has committed additional funding to such equity method partner company.

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 ownership interests whose results are not consolidated, but over which it exercises significant influence, under the equity method of accounting.

Whether or not the Company exercises significant influence with respect to an ownership interest depends on an evaluation of several factors including, among others, representation on the board of directors and our ownership level, which is generally a 20% to 50% interest in the voting securities of a company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company.

Under the equity method of accounting, the Company does not reflect a company’s financial statements within our Consolidated Financial Statements;

however, our share of the income or loss of such company is reflected in Equity income (loss) in the Consolidated Statements of Operations.

The Company includes the carrying value of equity method companies in Ownership interests and advances on the Consolidated Balance Sheets.

Any excess of the Company’s cost over its underlying interest in the net assets of equity method companies that is allocated to intangible assets is amortized over the estimated useful lives of the related intangible assets.

The Company reflects its share of the income or loss of the equity method companies on a one quarter lag.

This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these companies.

When the Company’s carrying value in an equity method company is reduced to zero, the Company records no further losses in its Consolidated Statements of Operations unless the Company has an outstanding guarantee obligation or has committed additional funding to such equity method company.

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

Other Method.

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

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

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Accounting Estimates

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Actual results may differ from these estimates.

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.

These estimates include the evaluation of the recoverability of the Company’s ownership interests and advances, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests in and advances to partner companies could change in the near term and that the effect of such changes on the financial statements could be material.

At December 31, 2018 , the Company believes the carrying value of the Company’s ownership interests in and advances to partner companies is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future or that a significant loss will not be recorded in the future upon the sale of a company.

Certain amounts recorded to reflect the Company’s share of income or losses for 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.

It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests and advances could change in the near term and that the effect of such changes on the financial statements could be material.

At December 31, 2019 , the Company believes the carrying value of the Company’s ownership interests and advances is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future or that a significant loss will not be recorded in the future upon the sale of a company.

Cash and Cash Equivalents and Marketable Securities

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The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.

Held-to-maturity securities are carried at amortized cost, which approximates fair value.

Marketable securities consist of held-to-maturity securities, primarily consisting of government agency bonds, commercial paper and certificates of deposits.

Marketable securities with a maturity date greater than one year from the balance sheet date are considered long-term.

Held-to-maturity securities were carried at amortized cost, which approximated fair value.

Marketable securities consisted of held-to-maturity securities, primarily consisting of government agency bonds, commercial paper and certificates of deposits.

Marketable securities with a maturity date greater than one year from the balance sheet date would be considered long-term.

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 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:

Restricted Cash

Restricted cash equivalents represents cash required to be set aside by a contractual agreement as a shareholder representative.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets:

December 31, 2019

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Restricted cash

Long-term restricted cash equivalents

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

Total cash, cash equivalents and restricted cash

Financial Instruments

The Company’s financial instruments (principally cash and cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable and accrued expenses) are carried at cost, which approximates fair value due to the short-term maturity of these instruments.

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

The Company’s long-term debt was 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

Property and equipment represents right-of-use assets resulting from the adoption of Accounting Standards Update ("ASU") No.

2016-02, Leases , and other previously existing leasehold improvements.

The leasehold improvements were amortized over the shorter of the estimated useful lives or the expected remaining term of the lease.

The right-of-use assets are reduced over the remaining term of the applicable lease (principally April 2026) in a manner that results in a straight-line lease expense, when combined with the interest factor on the lease liability.

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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.

Lease liability

The initial lease liability represents the present value of the fixed escalating lease payments through April 2026 associated with the Company's prior corporate headquarters operating office lease.

The discount rate used to calculate the lease liability was based on the Company's incremental borrowing rate, approximately 12% , at the transition to the guidance of ASU No.

2016-02, Leases .

Subsequent values of the lease liability reflect the reduction in the lease liability for operating lease payments less an amount representing interest, which is included in the straight-line lease expense.

There is no residual value guarantee associated with this operating lease arrangement.

The Company has incurred operating lease expenses and operating cash outflows of $0.5 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively, and $0.6 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively.

In March 2019, the Company entered into a sublease of its prior corporate headquarters office space.

The term of the sublease is through April 2026, the same as the Company's underlying lease.

Fixed sublease payments to the Company are escalating over the term of the sublease and are reported as a component of general and administrative expenses.

In April 2019, the Company entered into a sublease for replacement office space with a related party, an equity method ownership interest, beginning in June 2019.

The term of this sublease is 18 months with three conditional six months renewals based on mutual agreement with the sublessor.

The aggregate payments expected under this sublease are not material.

A summary of the Company's operating lease cash flows at December 31, 2019 follows:

Operating lease payments

Expected sublease receipts

(In thousands)

Total future minimum lease payments

Less imputed interest

Total operating lease liabilities

Valuation of Credit Facility repayment feature

The fair value of the Credit Facility repayment feature (a Level 3 measurement) was determined quarterly based on the present value of make-whole interest payments that were expected to be paid based on cash flow estimates that included a probability weighted estimate of exit transactions, estimated follow-on deployments, estimated quarterly operating cash flows and other cash commitments that would have resulted in qualified cash exceeding the $50 million threshold specified in the Credit Facility.

This fair value of the Credit Facility repayment feature was eliminated in July 2019 upon the repayment of the Credit Facility.

Impairment of Ownership Interests and Advances

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

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Management then determines whether there has been an other than temporary decline in the value of its ownership interest in the company.

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

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 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.

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

The estimated fair value of privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies or based on other valuation methods, including discounted cash flows, valuation of comparable public companies and the valuation of acquisitions of similar companies.

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

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

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

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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The Company includes in diluted net income (loss) per share common stock equivalents (unless anti-dilutive) which would arise from the exercise of stock options and conversion of other convertible securities and adjusted, if applicable, for the effect on net income (loss) of such transactions.

Diluted net income (loss) per share calculations adjust net income (loss) for the dilutive effect of common stock equivalents and convertible securities issued by the Company’s consolidated or equity method partner companies.

Segment Information

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.

The Company operates as one operating segment based upon the similar nature of its technology-driven companies, the functional alignment of the organizational structure, and the reports that are regularly reviewed by the chief operating decision maker for the purpose of assessing performance and allocating resources.

Reclassifications

Certain prior period amounts within Prepaid expenses and other current assets aggregating $2.1 million have been reclassified to Other assets to conform with current year presentation.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

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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.

As the new standard will supersede most existing revenue guidance, it could impact revenue and cost recognition for partner companies.

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

As the new standard will supersede most existing revenue guidance, it could impact revenue and cost recognition for companies in which we hold an ownership interest.

Any change in revenue or cost recognition for companies in which we hold an ownership interest could affect the Company's recognition of its share of the results of its equity method companies.

As a result, the Company's private, calendar year companies will adopt the new revenue standard for the year ending

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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 .

The guidance in ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.

In February 2016, the FASB issued ASU No.

2016-02, Leases (ASC 842) .

The guidance in ASU No.

2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.

For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.

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Lease assets and liabilities arising from both finance and operating leases will be recognized in the statement of financial position.

The transitional guidance for adopting the requirements of ASU 2016-02 calls for a modified retrospective approach that includes a number of optional practical expedients that entities may elect to apply.

The guidance in ASU 2016-02 will become effective for the Company on January 1, 2019.

The Company anticipates making the accounting policy election not to recognize lease assets and lease liabilities for leases with a term of 12 months or less.

As of December 31, 2018, the Company's only material long-term lease was for its corporate headquarters in Radnor, PA under a lease expiring in 2026.

The transitional guidance for adopting the requirements of ASU No.

2016-02 calls for a modified retrospective approach that includes a number of optional practical expedients that entities may elect to apply.

The guidance in ASU No.

2016-02 became effective for the Company on January 1, 2019.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the Company to carry forward its historical lease classification.

In addition, the Company has elected to exempt short term leases that qualify from recognizing right of use assets or lease liabilities, and has elected to not separate lease and non-lease components for all leases where it is the lessee.

The Company’s non-lease components are primarily related to utility and maintenance costs, which are typically variable in nature and are expensed in the period incurred.

As of January 1, 2019, the Company's only material long-term lease was for its former corporate headquarters in Radnor, PA under a lease expiring in 2026.

The Company also has immaterial office equipment leases expiring at various dates through 2020.

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

The following summarizes the carrying value of the Company’s ownership interests in and advances to partner companies.

The Company recorded an initial lease liability of $2.9 million , a right-of-use asset of $2.2 million included in property and equipment and eliminated the deferred rent liability of $0.7 million that was previously included in other long-term liabilities.

Ownership Interests and Advances

The following summarizes the carrying value of the Company’s ownership interests and advances.

December 31, 2019

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Equity Method:

Partner companies

Private equity funds

Other Method:

Partner companies

Private equity funds

Advances to partner companies

Advances to companies

During 2019, the Company recognized an impairment of $3.0 million related to NovaSom, which is reflected in Equity income (loss) in the Consolidated Statements of Operations.

The impairment was the result of NovaSom Inc.'s August 2019 bankruptcy filing.

In January 2019, Propeller was acquired by another entity for cash.

The Company received $41.5 million in cash proceeds in connection with the transaction, and $0.7 million in 2020 for amounts held in escrow.

The Company recognized a gain of $35.1 million , which is included in Equity income (loss) in the Consolidated Statements of Operations.

In January 2019, Brickwork merged into another privately-held company.

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.

The Company did not recognize a gain or loss in 2019 as a result of this transaction.

In May 2019, Transactis was acquired by another entity for cash.

To date, the Company received $57.5 million in cash proceeds in connection with the transaction, excluding certain amounts that continue to be held in escrow that may be released

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

on various dates on or before May 2020.

The Company has recognized gains of $50.7 million , which are included in Equity income (loss) in the Consolidated Statements of Operations.

During 2019, the Company ceased accounting for T-REX Group, Inc.

and Hoopla Software, Inc.

under the equity method as a result of losing our ability to exercise significant influence.

During 2019, the Company recorded $4.5 million of non-cash gains in Other income (loss) related to the increase in the value of certain equity securities based upon observable price changes.

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.

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

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

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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 recorded its ownership interest at 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) in the Consolidated Statements of Operations, and has a carrying value for its interest of approximately $11.0 million at December 31, 2018 and 2019, respectively.

In January 2018, the Company received $0.6 million of proceeds from the sale of the assets of Aventura, Inc., a 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 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.

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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 obtained shares of Invitae in 2017 when Invitae, a public company, acquired 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.

During 2019, the Company sold an aggregate of 27,264 shares of Invitae common stock on the open market for proceeds of $0.7 million after transaction fees as a result of their release from escrow.

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.

The Company received $11.5 million in cash proceeds in connection with the transaction, excluding holdbacks and escrows.

The Company recognized a gain of $4.2 million on the transaction during 2018, which was included in Equity income (loss) in the Consolidated Statements of Operations.

During 2019, the Company received an aggregate of $3.8 million of additional proceeds resulting from escrows and holdbacks that is included as 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.

MediaMath did not exercise its option to repurchase these shares.

The Company recognized a gain of $45.0 million on the initial transaction, which is 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.

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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 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.

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Summarized Financial Information

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

Results of operations 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 company.

As of December 31,

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Total liabilities and shareholders’ equity

Number of partner companies

Number of equity method ownership interests

Year Ended December 31,

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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 .

As of December 31, 2019 , the Company’s carrying value in equity method companies, in the aggregate, exceeded the Company’s share of the net assets of such companies by approximately $24.3 million .

Of this excess, $19.0 million was allocated to goodwill and $5.3 million was allocated to intangible assets.

Acquisitions of Ownership Interests in Partner Companies

Acquisitions of Ownership Interests

2019 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 deployed an additional $5.0 million to Syapse, Inc.

The Company had previously deployed an aggregate of $15.6 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 deployed an additional $2.0 million to Moxe Health Corporation, including $0.3 million that was funded initially as a convertible loan.

The Company had previously deployed $5.5 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.

The Company deployed an additional $1.5 million to Aktana, Inc.

The Company had previously deployed an aggregate of $10.2 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.

The Company deployed an additional $1.5 million to meQuilibrium.

The Company had previously deployed $11.5 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.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 deployed an additional $1.5 million to Zipnosis, Inc.

The Company had previously deployed $8.5 million in Zipnosis.

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

The Company deployed an aggregate of $0.4 million to Clutch Holdings.

The Company had previously deployed an aggregate of $16.3 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 funded an additional $2.0 million of convertible loans to Sonobi, Inc.

The Company had previously deployed $11.4 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 funded an aggregate of $1.1 million of convertible loans to WebLinc, Inc.

The Company had previously deployed an aggregate of $15.0 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.

WebLinc is an e-commerce platform for online retailers.

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

The Company had previously deployed an aggregate of $26.4 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.

See Note 2 for impairment recorded during the second quarter of 2019.

The Company funded an additional $0.6 million of convertible loans to QuanticMind.

The Company had previously deployed an aggregate of $12.9 million in QuanticMind.

QuanticMind delivers an intelligent, scalable and fast platform for maximizing digital marketing performance, including paid search and social, for enterprises.

2018 Transactions

The Company deployed $1.0 million into Prognos.

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

Prognos is a healthcare AI company that’s striving to improve health by tracking and predicting disease earlier in partnership with Life Sciences brands, payers, and clinical diagnostics organizations.

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

The Company deployed $2.3 million into Syapse, Inc.

The Company had previously deployed an aggregate of $13.3 million in Syapse.

Syapse is on a mission to deliver the best care for every cancer patient through precision medicine.

Syapse’s software platform, data sharing network, and industry partnerships enable healthcare providers to bring precision cancer care to every patient who needs it.

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

The Company funded an aggregate of $0.6 million of convertible bridge loans to Spongecell, Inc.

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

During 2018, Spongecell merged into Flashtalking.

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

The Company funded an aggregate of $5.3 million of convertible bridge loans to InfoBionic, Inc.

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

The Company deployed an additional $1.0 million in meQuilibrium.

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 aggregate of $2.2 million of convertible bridge loans to Sonobi, Inc.

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

See Note 2 for impairment recorded during the second quarter of 2019.

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

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

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

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.

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

The Company funded an aggregate of $3.8 million of convertible bridge loans to Sonobi, Inc.

The Company had previously deployed $5.4 million in Sonobi.

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.

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.

The Company had previously deployed an aggregate of $22.1 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 $0.7 million of convertible bridge loans to Brickwork.

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

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

See Note 2 for discussion of the sale of this company in 2019.

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

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 $0.4 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 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.

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.

The Company deployed $2.5 million into meQuilibrium.

The Company had previously deployed an aggregate of $8.0 million in meQuilibrium.

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

The Company funded $0.3 million of convertible bridge loans to Hoopla Software, Inc.

The Company had previously deployed an aggregate of $4.8 million in Hoopla Software.

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

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

The Company deployed $1.8 million into QuanticMind, Inc.

The Company had previously deployed an aggregate of $9.7 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 funded an aggregate of $2.0 million of convertible bridge loans to WebLinc, Inc.

The Company had previously deployed an aggregate of $12.0 million in WebLinc.

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

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

The Company funded $1.8 million of a convertible bridge loan to Good Start Genetics, Inc.

The Company had previously deployed an aggregate of $17.2 million in Good Start Genetics.

Good Start Genetics was acquired by Invitae Corporation in August 2017.

The Company deployed $2.1 million into Trice Medical, Inc.

The Company had previously deployed an aggregate of $8.0 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 deployed $1.5 million into Aktana, Inc.

The Company had previously deployed an aggregate of $8.2 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.

The Company funded $0.2 million of a bridge loan to Lumesis, Inc.

The Company had previously deployed an aggregate of $6.2 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 funded $0.3 million of a convertible bridge loan to Aventura, Inc.

to fund wind-down activities.

The Company had previously deployed an aggregate of $6.2 million in Aventura.

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

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

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 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 accounted for its interest in Propeller under the equity method.

See Note 2 discussion of the sale of this company in 2019.

Fair Value Measurements

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

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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.

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Restricted cash equivalents

Fair Value Measurement at December 31, 2018

(In thousands)

Cash and cash equivalents

Restricted cash equivalents

Marketable securities—held-to-maturity:

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Credit facility repayment feature liability

Fair Value Measurement at December 31, 2017

(In thousands)

Cash and cash equivalents

Long-term restricted cash equivalents

Trading securities

Marketable securities—held-to-maturity:

Certificates of deposit

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.

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 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.

As of December 31, 2018, $5.1 million was recorded as a credit facility repayment feature liability due to the provision in the Credit Facility that required prepayments of outstanding principal amounts when the Company's qualified cash at any quarter end date exceeded $50.0 million .

This represented an increase of $4.5 million from its initial value established during the second quarter of 2018.

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

The liability was adjusted to zero upon repayment of the Credit Facility, which occurred in July 2019.

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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit Facility and Convertible Debentures

Credit Facility

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

At closing, the Company borrowed $50.0 million , which resulted in net proceeds of $44.3 million after closing fees to the Lender and other third parties.

The Credit Facility has a three -year term with a scheduled maturity of May 11, 2020 and bears interest at a rate of either:

The Company's credit facility was with HPS Investment Partners, LLC (“Lender”), and was amended in May 2018 ("Credit Facility").

The Credit Facility had a scheduled maturity of May 11, 2020 and interest at a rate of either:

(A) LIBOR plus 8.5% (subject to a LIBOR floor of 1% ), payable on the last day of the one, two or three month interest period applicable to the LIBOR rate advance, or (B) 7.5% plus the greater of:

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Prime Rate, payable monthly in arrears.

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 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;

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

The terms of the Credit Facility included a requirement that if the aggregate amount of the Company’s qualified cash at any quarter end date exceeded $50.0 million , the Company would be required to prepay outstanding principal amounts under the Credit Facility, plus any applicable interest and prepayment fees, in an amount equal to such excess.

Based on this requirement, the Company made a principal payment of $24.0 million and a make-whole interest payment of $2.9 million on April 15, 2019 based on the Company's qualified cash at March 31, 2019.

Additionally, the Company repaid the remaining principal of $44.5 million and make-whole interest of $4.1 million in July 2019.

The Company was subject to certain debt covenants under the Credit Facility which required 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, plus unrestricted cash in excess of the liquidity threshold, of at least $350 million , less the aggregate amount of all prepayments;

(iii) limit deployments to only existing companies and such deployments may not exceed, when combined with deployments after January 1, 2018, $40.0 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;

defaults in, or failure to pay, certain other indebtedness;

the rendering of judgments to pay certain amounts of money;

certain events of bankruptcy or insolvency.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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

The Company was in compliance with all applicable covenants.

The Credit Facility required prepayments of outstanding principal and interest amounts when the Company’s qualified cash at any quarter end date exceeded $50.0 million .

This provision in the Credit Facility was an embedded derivative that was accounted for separately from the Credit Facility.

A liability of $0.5 million was recorded on the 2018 amendment date for the fair value of potential future prepayments based upon management's probability weighted cash forecast.

This amount was also included in debt issuance costs and had been amortized over the remaining term of the Credit Facility.

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

During 2019, the Company recorded a decrease in the liability of $5.1 million , which is included in Other income (loss) on the Consolidated Statements of Operations.

The Company recorded interest expense under the Credit Facility of $14.0 million and $14.6 million for the years ended December 31, 2019 and 2018, respectively.

The effective interest rate on the Credit Facility was 15.1% .

The Company made interest payments under the Credit Facility of $11.5 million and $10.0 million for the years ended December 31, 2019 and 2018, respectively.

Convertible Senior Debentures

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 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:

during any calendar quarter commencing after the calendar quarter ending on December 31, 2012, if the last reported sale price of the common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day;

if the notes have been called for redemption;

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 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 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 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 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;

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

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

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)

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 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% .

At December 31, 2017, the Company had $41.0 million of outstanding 5.25% convertible senior debentures which were repaid in full in May 2018.

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.

3 unchanged sentences

In general, an ownership change would occur if the Company's shareholders who are treated as owning five percent or more of the outstanding shares of Safeguard for purposes of Section 382 ("five-percent shareholders") collectively increase their aggregate ownership in the Company's overall shares outstanding by more than 50 percentage points.

Whether this change has occurred would be measured by comparing each five-percent shareholder's current ownership as of the measurement date to such shareholders' lowest ownership percentage during the three-year period preceding the measurement date.

Whether this change has occurred would be measured by comparing each five-percent shareholder's current ownership as of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

measurement date to such shareholders' lowest ownership percentage during the three-year period preceding the measurement date.

To protect the Company's NOLs from being limited or permanently lost under Section 382, the Plan is intended to deter any person or group from acquiring beneficial ownership of 4.99% or more of the Company's outstanding common stock without the approval of the Board, reducing the likelihood of an unintended ownership change.

4 unchanged sentences

There can be no assurance that the Plan will prevent the Company from experiencing an ownership change.

On November 7, 2019, the Board of Directors declared a special cash dividend of $1.00 per share, payable on December 30, 2019 to shareholders of record as of the close of business on December 23, 2019, resulting in total dividends paid of $20.7 million.

Stock-Based Compensation

1 unchanged sentence

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

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

During 2019 and 2018, the Company issued no stock-based awards outside of existing plans.

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

4 unchanged sentences

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Year Ended December 31,

4 unchanged sentences

2) service-based.

Performance-based awards entitle participants to vest in a number of awards determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company upon the sale, merger or other exit transaction of certain identified partner companies.

Vesting may occur, if at all, once per year.

10 unchanged sentences

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

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.

The risk-free rate is based on the U.S.

Treasury yield curve in effect at the end of the quarter in which the grant occurred.

The expected term of stock options granted was estimated using the historical exercise behavior of employees.

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.

There were no options granted during 2018.

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

Year Ended December 31,

Service-Based Options

Dividend yield

Expected volatility

Average expected option life

Risk-free interest rate

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.

During the years ended December 31, 2019 and 2018 ,

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

respectively, the Company issued no service-based options to employees and recorded no compensation expense from the vesting of previously issued awards.

During the years ended December 31, 2019 and 2018 , respectively, 57 thousand and 17 thousand service-based options were canceled or forfeited.

There were no options granted during 2019 and 2018.

Stock-based compensation expense of $0.1 million was recognized during the year ended December 31, 2019 related to Board fees earned in 2019 that were subsequently settled in stock.

Compensation expense of $0.1 million was also recognized during the year ended December 31, 2019 related to the dividend payments made to holders of unvested restricted stock awards pursuant to the terms of those instruments.

Option activity of the Company is summarized below:

4 unchanged sentences

(In thousands)

Outstanding at December 31, 2016

Outstanding at January 1, 2018

Options granted

8 unchanged sentences

Shares available for future grant

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, 2019 , total unrecognized compensation cost related to non-vested service-based options was immaterial.

At December 31, 2019 , 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 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 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 years ended December 31, 2019 or 2018.

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

During the years ended December 31, 2019 and 2018, respectively, and 0 thousand and 1 thousand performance-based stock units vested each year.

During the years ended December 31, 2019 and 2018, respectively, 339 thousand and 117 thousand performance-based stock units were canceled or forfeited.

4 unchanged sentences

During the years ended December 31, 2019 and 2018, respectively, 75 thousand and 44 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.

During the years ended December 31, 2019 and 2018 , respectively, the Company issued 0 thousand , and 6 thousand 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;

2 unchanged sentences

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 in 2017 related to these awards.

Total compensation expense for deferred stock units, performance-based stock units and restricted stock was $1.2 million $1.0 million , for the years ended December 31, 2019 and 2018 , respectively.

Unrecognized compensation expense related to deferred stock units, performance stock units and restricted stock at December 31, 2019 was $1.1 million .

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:

The total fair value of

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

deferred stock units, performance stock units and restricted stock vested during the years ended December 31, 2019 and 2018 was $1.2 million and $1.6 million , respectively.

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

Weighted Average

1 unchanged sentence

(In thousands)

Unvested at December 31, 2016

Unvested at January 1, 2018

Unvested at December 31, 2018

8 unchanged sentences

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

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:

federal income tax rate of 21.0% for the years ended December 31, 2019 and 2018 to net income (loss) before income taxes as a result of the following:

Year Ended December 31,

1 unchanged sentence

Increase (decrease) in taxes resulting from:

Stock-based compensation

Nondeductible expenses

Tax Cuts and Jobs Act impact

Valuation allowance

3 unchanged sentences

Deferred tax asset:

Carrying values of partner companies and other holdings

Carrying values of ownership interests and other holdings

Tax loss and credit carryforwards

5 unchanged sentences

Net deferred tax asset

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.

As of December 31, 2019 , the Company and its subsidiaries had federal net operating and capital loss carryforwards for tax purposes of approximately $337 million , of which approximately $34 million have an indefinite life.

These carryforwards expire as follows:

1 unchanged sentence

2024 and thereafter

In December 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").

The Tax Act makes broad and complex changes to the U.S.

tax code, including, but not limited to:

(i) reducing the U.S.

federal corporate tax rate from 35 percent to 21 percent;

(ii) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized;

(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

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

3 unchanged sentences

All uncertain tax positions relate to unrecognized tax benefits that would impact the effective tax rate when recognized.

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company does not expect any material increase or decrease in its income tax expense, in the next twelve months, related to examinations or changes in uncertain tax positions.

5 unchanged sentences

The Company recognizes penalties and interest accrued related to income tax liabilities in income tax benefit (expense) in the Consolidated Statements of Operations.

Net Loss Per Share

The calculations of net loss per share were:

Net Income (Loss) Per Share

The calculations of net income (loss) per share were:

Year Ended December 31,

(In thousands, except per share data)

Net income (loss)

Weighted average common shares outstanding

Net loss per share

Net income (loss) per share

Net income (loss)

Weighted average common shares outstanding

Net loss per share

Net income (loss) per share

Basic and diluted average common shares outstanding for purposes of computing net income (loss) per share includes outstanding common shares and vested deferred stock units (DSUs).

If a consolidated or equity method partner company has dilutive stock options, unvested restricted stock, DSUs, or warrants, diluted net income (loss) per share is computed by first deducting from net income (loss) the income attributable to the potential exercise of the dilutive securities of the partner company from net income (loss).

If an equity method company has dilutive stock options, unvested restricted stock, DSUs, or warrants, diluted net income (loss) per share is computed by first deducting from net income (loss) the income attributable to the potential exercise of the dilutive securities of the company from net income (loss).

Any impact is shown as an adjustment to net income (loss) for purposes of calculating diluted net income (loss) per share.

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:

Diluted income (loss) per share for the years ended December 31, 2019 and 2018 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, 2019 and 2018, options to purchase 0.2 million and 0.4 million shares of common stock, respectively, at prices ranging from $10.37 to $18.45 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, 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)

At December 31, 2019 and 2018 , unvested restricted stock, performance-based stock units and DSUs convertible into 0.3 million and 0.8 million shares of stock, respectively, were excluded from the calculations.

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

Related Party Transactions

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

Musser, a former Chairman and Chief Executive Officer of the Company.

Through December 31, 2018 , the Company recognized impairment charges against the loan of $15.7 million .

Since 2001 and through December 31, 2018 , the Company has received a total of $17.1 million in payments on the loan.

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

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.

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

Commitments and Contingencies

The Company and its partner companies are involved in various claims and legal actions arising in the ordinary course of business.

In the current opinion of the Company, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations, however, no assurance can be given as to the outcome of these actions, and one or more adverse rulings could have a material adverse effect on the Company’s consolidated financial position and results of operations or that of its partner companies.

The Company and the companies in which it holds ownership interests are involved in various claims and legal actions arising in the ordinary course of business.

In the current opinion of the Company, the ultimate disposition of these matters will

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

not have a material adverse effect on the Company’s consolidated financial position or results of operations, however, no assurance can be given as to the outcome of these actions, and one or more adverse rulings could have a material adverse effect on the Company’s consolidated financial position and results of operations or that of its companies.

The Company records costs associated with legal fees as such services are rendered.

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 $0.6 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:

(In thousands)

2023 and thereafter

The Company had outstanding guarantees of $3.8 million at December 31, 2019 which related to one of the Company's private equity holdings.

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

The Company’s ownership in the fund is 19% .

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 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 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 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.

The former executive passed away in 2019.

Accordingly, the Company recorded a $1.7 million gain in Other income (loss) which also eliminated the remaining projected benefits related to this agreement that were previously included in Accrued expenses and other current liabilities and Other long-term liabilities on the Consolidated Balance Sheets.

The Company 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 $4.0 million at December 31, 2019 .

In 2018, the Board of Directors (the “Board”) of the Company adopted a long-term incentive plan, which was amended in February 2019, the Amended and Restated Safeguard Scientifics Transaction Bonus Plan (the “LTIP”).

The purpose of the LTIP is to promote the interests of the Company and its shareholders by providing an additional incentive to employees to maximize the value of the Company in connection with the execution of the business strategy that the Company adopted and announced in January 2018.

Under the LTIP, participants have received awards that may result in cash payments in connection with sales of the Company’s ownership interests (“Sale Transaction(s)”).

The LTIP provides for a bonus pool corresponding to:

(i) specified vesting thresholds or (ii) specified events.

In the first case, the bonus pool will range from an amount equal to 1% of received proceeds at the first threshold to 1.333% at higher thresholds and no bonus pool will be created if the transaction consideration is less than certain minimum thresholds.

In the second case, a minimum pool will be created and paid under specified circumstances.

The bonus pool will be allocated and paid to participants in the LTIP based on the product of (i) the participant’s applicable bonus pool percentage and (ii) the bonus pool calculated as of the vesting date, minus any previously paid portion of the bonus pool.

Any portion of the bonus pool available as of the applicable vesting date that is reserved will be allocated in connection with each vesting date so that the entire bonus pool available as of such vesting date is allocated and payable to participants.

Subject to the terms of the LTIP, payments under the LTIP will be paid in cash not later than March 15th of the calendar year following the calendar year of the applicable vesting date.

All current officers and employees of the Company are eligible to participate in the LTIP.

The Board, in its sole discretion, will determine the participants to whom awards are granted under the LTIP.

The Company has accrued approximately $0.5 million under the LTIP as of December 31, 2019.

In June 2011, 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

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”).

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”).

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.

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In addition, in connection with the above matters, the Company and other former equity holders in ABH entered into a settlement and release with Shire, which resulted in the release to Shire of all amounts held in escrow related to the sale of ABH.

In November 2019, the Company engaged a consultant to assist with certain strategic, operational and financial projects through March 31, 2020.

In addition to certain cash compensation, the Company, at its sole discretion, may issue up to 8,000 unrestricted shares to the consultant as bonus compensation.

Supplemental Cash Flow Information

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.

During the years ended December 31, 2019 and 2018 , the Company converted $2.3 million and $12.4 million , respectively, of advances into ownership interests.

Cash paid for interest for the years ended December 31, 2019 and 2018 was $11.5 million and $11.1 million , respectively.

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Segment Reporting

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

The Company’s active partner companies as of December 31, 2018 were as follows for the years ended December 31, 2018 , and 2017 :

SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2019 , the Company held ownership interests accounted for using the equity method in 13 non-consolidated companies.

During 2019 we ceased using the equity method of accounting for Hoopla Software, Inc.

and T-REX Group, Inc.

as a result of other new investors diluting our interest.

We have retained our ownership interests in those companies under the Other accounting method.

Certain of the Company’s ownership interests as of December 31, 2019 and 2018 included the following:

Safeguard Primary Ownership

as of December 31,

Partner Company

Accounting Method

Brickwork ***

Clutch Holdings, Inc.

Flashtalking, Inc.*

Hoopla Software, Inc.

InfoBionic, Inc.

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Moxe Health Corporation

NovaSom, Inc.

Prognos Health Inc.

Propeller ***

QuanticMind, Inc.

T-REX Group, Inc.

Transactis, Inc.

Trice Medical, Inc.

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for $45 million of proceeds in July 2018.

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, 2019 and 2018 , all of the Company’s assets were located in the United States.

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Three Months Ended

September 30 (b)

December 31 (b)

(In thousands, except per share data)

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Interest expense

Equity income (loss)

Equity income (loss), net

Net loss before income taxes

Income tax benefit (expense)

Net loss per share (a)

Net income (loss)

Net income (loss) per share (a)

General and administrative expense

3 unchanged sentences

Interest expense

Equity income (loss)

Equity income (loss), net

Net income (loss) before income taxes

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Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each period.

Additionally, in regard to diluted per share amounts only, quarterly amounts may not add to the annual amounts because of the inclusion of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive, and because of the adjustments to net income (loss) for the dilutive effect of partner company common stock equivalents and convertible securities.

Subsequent Events

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.

Additionally, in regard to diluted per share amounts only, quarterly amounts may not add to the annual amounts because of the inclusion of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive, and because of the adjustments to net income (loss) for the dilutive effect of common stock equivalents and convertible securities at our ownership interests.

The three months ended December 31, 2019 includes equity income of $1.4 million related to an equity method investment that should have been recorded during the three months ended September 30, 2019.

There was no impact on the full year results.

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