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Safeguard Scientifics Inc (SFE) SEC Filing 10-K Annual report for the fiscal year ending Sunday, December 31, 2017

Safeguard Scientifics Inc

CIK: 86115 Ticker: SFE
 
Exhibit 99.1
 

Safeguard Scientifics Announces Fourth Quarter And Full-Year 2017 Financial Results



Executing new strategy focused on managing and financially supporting existing Partner Companies to exit events and delivering net proceeds to shareholders

2018 Partner Company aggregate revenue projected to grow 16% to 22%

Conference call and webcast today at 9:00 a.m. ET

RADNOR, Pa., March 1, 2018 /PRNewswire/ -- Safeguard Scientifics, Inc. (NYSE: SFE) ("Safeguard" or the "Company") today announced financial results for the three months and 12 months ended December 31, 2017 and provided a business update regarding the achievement of developmental milestones for its 25 Partner Companies. For the three months ended December 31, 2017, Safeguard's net loss was $18.7 million, or $0.91 per share, compared with net loss of $21.7 million, or $1.07 per share, for the same period in 2016. For the year ended December 31, 2017, the Company's net loss was $88.6 million, or $4.34 per share, compared with net loss of $22.3 million, or $1.09 per share, in 2016.

"In the fourth quarter and throughout fiscal 2017, Safeguard's portfolio of growth-stage, technology-driven businesses demonstrated positive momentum as they achieved critical operational and strategic milestones," said Stephen T. Zarrilli, Safeguard's President and CEO. "With revenue growth of 23% over the prior year, our Partner Companies continued to drive strong momentum. As these companies near maturation, we are well-positioned to capitalize on exit opportunities that will enhance value for our shareholders."

2017 HIGHLIGHTS

  • Realized $15.5 million from the sale of Safeguard's interest in Nexxt, Inc., formerly known as Beyond.com. Subsequent to the close of 2017, Spongecell agreed to merge into privately held Flashtalking, a global platform for digital advertising management and analysis. Safeguard now holds a 10% equity position in Flashtalking.
  • Deployed $36.8 million in follow-on funding to support 18 existing Partner Companies.
  • Repurchased $14 million principal amount of Safeguard's 5.25% convertible senior debentures due May 2018, reducing the outstanding balance to $41.0 million.
  • Entered into a new $75 million secured, revolving credit facility with HPS Investment Partners, LLC. At closing, Safeguard drew $50 million under the credit facility.

AGGREGATE PARTNER COMPANY REVENUE
Aggregate Partner Company revenue for 2018 is projected to be between $475 million and $500 million, which includes revenue for all Partner Companies in which Safeguard had an interest at January 1, 2018. Aggregate revenue for the same Partner Companies was $410 million and $344 million for 2017 and 2016, respectively. Figures for all years reflect the pro forma combined revenue of Flashtalking and Spongecell due to their recent merger. Aggregate revenue for all years reflects revenue on a net basis. Safeguard reports the revenue of its equity and cost-method Partner Companies on a one-quarter lag basis.

CORPORATE EXPENSES AND COST SAVINGS PLAN
As announced in January 2018, the Company has initiatives underway that are expected to generate annualized cost savings of $5 million to $6 million, reflecting changes in personnel and operating requirements under its new strategy, discussed below. Corporate expenses, excluding interest, depreciation, severance and stock-based compensation were approximately $15.1 million in 2017.

CHANGE IN STRATEGY AND OPERATIONS
On January 17, 2018, Safeguard announced a change in its business strategy and operations. Under the new strategy, Safeguard will not deploy any capital into new Partner Company opportunities. It will focus on managing and financially supporting its existing Partner Companies to exit events and deliver net proceeds to shareholders. The Company will consider initiatives including, among others: the sale of individual Partner Companies, the sale of certain Partner Company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value.

"We began 2018 by implementing changes to our business strategy and operations with a focus on managing and supporting our existing Partner Company interests towards exits that maximize our risk-adjusted return on those interests, generating substantial cost savings, and returning net proceeds to shareholders," added Mr. Zarrilli. "While we will no longer deploy capital into new opportunities, we remain committed to supporting the needs of our existing Partner Companies and continue to maintain a deep belief in their underlying value proposition. Since announcing our shift in strategy in January, we have been encouraged by the positive feedback and increased market interest we have received. We are confident that these actions are in the best interest of Safeguard and will maximize value for all its shareholders."

PARTNER COMPANY HIGHLIGHTS
This section summarizes significant accomplishments by Safeguard's partner companies during 2017. For more details on milestones achieved during this period, please visit www.safeguard.com/PartnerNews.

~ Product Launches / Regulatory Approvals ~

AdvantEdge Healthcare Solutions was recertified in HIPAA and HITECH data privacy and security requirements by 360 Advanced for the fifth consecutive year. In addition, AdvantEdge received SOC 1 Type 2 and SOC 2 Type 1 certifications, validating the company's commitment to deliver high-quality services and informational security to its clients by operating at the highest level of transparency and standards.

Apprenda and IBM are partnering to streamline the transfer, development and modification of data and .NET applications in the cloud. Integration of Apprenda and IBM Bluemix capabilities offers developers broad .NET support and access to Watson, Blockchain and IoT services.

Cask Data introduced the Cask Data Application Platform (CDAP) Cloud Sandbox for Amazon Web Services (AWS). Subsequent updates and upgrades have enabled developers, data scientists and citizen integrators to quickly build and deploy applications, data pipelines, plug-ins, and use case recipes on Hadoop and Spark.

CloudMine released its support platform for Apple's CareKit 1.2, an enhanced HIPAA-compliant software framework for apps that enable patients to better understand and manage their medical conditions. In addition, the company earned important certifications that illustrate its commitment to security and privacy -- Service Organization Control 2 certification for security and HITRUST CSF certification for HIPAA privacy compliance.

Lumesis launched an updated DIVER platform for Municipal Issuers and those who service them including Dissemination Agents, Bond Counsel and Municipal Advisors. The new DIVER platform serves Municipal Advisors by supporting their compliance with the MA Rule (MSRB Rule G-42).

MediaMath launched its Curated Market, a product that unites advertisers' need to gain access to their best customers and prospects at scale with the requirement that those audiences are reached in premium, high quality media. The Curated Market leverages MediaMath's global audience platform and unparalleled cross-device footprint to bring programmatic marketing to the next stage of its evolution. Today, more than 7,000 advertisers (70% of MediaMath's client base) and 500 publishers are participating in the Curated Market.

meQuilibrium released a series of enhancements to its meQ Engage product, improving the company's position in comprehensive cognitive behavioral-based digital solutions. The new Engage modules focus on developing skills to improve sleep, deal with trauma and grief and communicate more effectively at work.

Prognos launched Prognos DxCloud, a HIPAA-compliant, cloud-based platform that serves as a single source for lab data results on all health plan members. DxCloud drives a suite of analytic solutions that identifies risk, improves clinical outcomes and reduces medical costs while allowing health plans to have a better understanding of member lab data.

Propeller Health released the first app to provide local asthma conditions to anyone in the U.S. The Air by Propeller app is free and based on millions of days of anonymous data on where and when people experience asthma symptoms. The new app complements existing patient apps Daily Asthma Forecast, Find My Inhaler and Propeller for Apple Watch. During the year, Propeller also earned HITRUST CSF certified status for protecting and securing sensitive private healthcare information.

QuanticMind introduced its new Shopping product to help e-commerce and retail merchant increase conversions, sales and profit margins by eliminating data errors and wasted advertising expense.

~ Major Customer Wins / Strategic Partnerships ~

Aktana launched its Analytics Partner Program with Prognos and SHYFT Analytics to provide high-quality data sources and advance analytics to pharmaceutical sales and marketing teams. Each partnership is designed to speed implementation and generate faster revenue improvement, as well as streamline vendor management tasks.

CloudMine partnered with Medical Web Experts, a web and mobile design and development house specializing in tailored healthcare solutions, providing developer tools including HIPAA-compliant data storage, a logic engine to deploy backend code, and support of Apple's ResearchKit. The company's partnership with digital innovation studio Modus is expected to help clients improve patient experiences, clinical applications, internal workflows, telemedicine and systems integration. Earlier in 2017, CloudMine and Infor teamed to offer healthcare providers improved access to electronic health records by integrating their platforms for real-time capture and display of patient information on mobile and other devices.

MediaMath and a consortium of six of its digital advertising competitors have formed an alliance to enable more precise marketing campaigns using enhanced "cookie-less" consumer-identity resolution technology to deliver improved monetization for publishers and more engaging content for consumers. Adding identity resolution to programmatic advertising is expected to help translate consumer identity across buyers and sellers and devices. The company also teamed with IBM to develop a cognitive-bidding system for digital, programmatic marketing. MediaMath's launched an exclusive partnership with Zirca Digital Solutions in India and now operates in 42 countries.

meQuilibrium and WebMD Health Services partnered on a new well-being service to help consumers gain the skills and tools to manage stress and respond to other life challenges. The meQuilibrium solution features a personalized resilience assessment and plan to change habits that can exacerbate stress. The program is integrated into the WebMD Health Services platform and telephonic coaching that is accessed via a suite of desktop and mobile apps.

Propeller Health is now working with Tile to integrate Tile wireless technology into its sensors to improve monitoring of asthma and chronic obstructive pulmonary disease. Propeller and Express Scripts have partnered to provide Propeller's FDA-cleared digital solution to Express Scripts members who use inhaler sensors and a mobile app to manage their asthma or COPD. This collaboration is believed to be the largest respiratory digital health deployment with a pharmacy benefit manager to date. Early users reported an 80% reduction in average rescue events per day and improved adherence to asthma controller medication. During 2017, Propeller expanded its 2015 collaboration with GSK, enabling both companies to develop commercial activities using the Propeller clip-on sensor and software platform with GSK's ELLIPTA Inhaler.

QuanticMind added 3 Day Blinds, Excel, Peddle, ClearOne Advantage and Patriot Gold Group to its roster of digital advertising clients.

Sonobi has integrated Facebook's Audience network with its header-based digital advertising technology to offer publishers greater yield without sacrificing user experience. Sonobi, GroupM and LinkedIn are now collaborating with other members of the IAB Tech Lab to develop new standard metrics for evaluating display and video ad viewability.

Syapse and Roche are now working together to develop and deploy software and analytics products focused on four areas of oncology precision medicine. The company also has teamed up with Aurora Cancer Care to launch a new oncology precision medicine platform that will help physicians and researchers provide more care options for patients whose cancer is resistant to conventional treatment options like radiation and chemotherapy. Syapse and Sylvester Comprehensive Cancer Center, part of the Miami Health System, have launched a new precision medicine initiative at Sylvester to help physicians to more efficiently deliver personalized care that matches patients with targeted, cutting-edge therapies based on the clinical and molecular profile of the patient, leading to improved survival rates and better health outcomes.

Transactis formed a strategic partnership with Walletron to expand the mobile bill-to-wallet features of BillerIQ, the Transactis electronic billing and payment offering. Without downloading an app, businesses can present notifications, bill statements and a streamlined payment experience through customer smartphones. The mobile features operate on Apple Wallet on iOS and Android Pay on Android phones, covering more than 97% of U.S. consumers. Citizens Bank, with 1,200 branches in 11 states, selected Transactis to expand its Treasury Solutions offering to allow commercial clients to distribute bills electronically and accept payments online.

WebLinc announced that 16 retailers have been added to its customer roster for Workarea, the company's software-as-a-service commerce platform for medium to large businesses to build efficient, cloud-based web sites that allow merchandisers to focus on selling.

Zipnosis added Essentia Health and Methodist Family Health Centers to its telemedicine client roster. Essentia facilities include 15 hospitals, 75 clinics and six long-term care centers in Minnesota, Wisconsin, North Dakota and Idaho. The Methodist system operates 10 hospitals and more than two dozen health centers throughout north Texas. During 2017, Zipnosis formed a coalition with seven other U.S. healthcare organizations to establish guidelines for high-quality standards of care in the virtual-care industry. Initial members of the new Clinical Quality Advisory Council are from John Muir Health, Inspira Health Network, Bryan Health, MultiCare Health System, Mission Health, Fairview Health Services and CentraCare. In addition, Zipnosis and Vanguard Medical Group are working to deliver service to Vanguard's seven clinics in northern and central New Jersey.

~ Industry Awards / Certifications ~

Aktana earned Veeva CRM MyInsights certification, which enhances enterprise-customer access to data and how it can be visualized.

Cask Data was included in the fifth annual list of the 100 companies "that matter most in data," compiled by Database Trends and Applications magazine. Cask also received "Best in Show" recognition for big data analytics from Software Development Times. Cask was also certified as a Great Place to Work® based on analysis of anonymous employee surveys.

CloudMine was named among the most innovative Start-Up Companies of 2017 by PM360, a leading marketing trade magazine. Earlier, CloudMine was cited as a leader in The Forrester Wave™ for its work in enterprise health clouds and included as a representative vendor in Gartner's Market Guide for Mobile Back-End services.

Clutch Holdings was profiled by The Forrester Wave™ as a promising B2C vendor in cross-channel campaign management. The company's Essential SuiteApp, an integrated gift and loyalty program for small- and medium-sized businesses (SMBs), achieved "Built for NetSuite" status. The Clutch Essential SuiteApp is an affordable platform that offers SMBs unified customer data analytics and gift and loyalty programming across sales channels in a single interface. Clutch Essential allows users to launch up to 10 different automated campaigns.

MediaMath was recognized by Forrester Research as the top provider in omnichannel media-buying with the highest possible score in product and service strategy criteria.

Prognos was awarded the Frost & Sullivan 2017 Visionary Innovation Leadership Award. Prognos and its artificial intelligence-based platform allow U.S. diagnostic laboratories to analyze more than 12 billion clinical results for 175 million patients, generating improved insight in to disease patterns, effective treatments and health outcomes. The addressable market for Prognos products is estimated to grow at a compound annual rate of 40% to $6.7 billion by 2021.

QuanticMind earned Microsoft's Rising Star Technology Partner of the Year award at the inaugural Global Bing Partner Awards ceremony, recognized for driving growth for Bing Ads advertisers and great customer service.

Syapse was recognized by Amazon Web Services as a "hot start-up" for advancing precision medicine to deliver targeted cancer therapies.

Weblinc's Workarea Commerce Platform was listed in the Gartner 2017 Digital Commerce Vendor Guide.

~ Other Milestones ~

CloudMine appointed life sciences veteran Stephen Wray as Chief Executive Officer. Previously, Mr. Wray was CEO of a life sciences software firm, CEO of the global life sciences practice at a digital marketing agency, and was North American President at Ogilvy Healthworld.

InfoBionic announced that more than 7,000 patients have used its MoMe® Kardia system for remote monitoring of cardiac arrhythmia. Month-to-month subscription growth is in excess of 35%.

MediaMath announced a new $175 million senior secured credit facility to refinance existing debt facilities and fund continued growth. Goldman Sachs and Santander Bank led the transaction. In June 2014, MediaMath raised $73.5 million in equity capital in a Series C financing from Spring Lake Equity Partners and Safeguard Scientifics, among other investors; and $105 million in a debt facility through Silicon Valley Bank.

Prognos raised $20.5 million in a Series C financing to support increased penetration of its life sciences and payer markets. Investors included Safeguard, Cigna, Merck Global Health Innovation Fund and the venture capital arm of Guardian Life Insurance Company.

QuanticMind raised $20 million in a Series B financing round led by Foundation Capital with participation by Safeguard and Cervin Ventures. Proceeds will be used for strategic growth and product development, including artificial intelligence, predictive advertising and machine learning.

Sonobi announced that its cookie-less addressable marketplace has grown to over 150 million logged-in, plannable users, a number the company expects to double by year-end 2017. With more than 50% of the comScore 250 integrated into its platform, Sonobi's addressable solution now reaches more of the U.S. population than either Snapchat or Twitter.

Syapse said proceeds from its $30 million Series D financing will be used to expand operations, enabling more healthcare providers to use precision medicine to improve care for cancer patients. A syndicate of 10 existing and new investors participated in the financing, including Safeguard, GE Ventures, Merck Global Health Innovation Fund and Roche Venture Fund.

Trice Medical closed a $19.3 million Series C financing and will use the proceeds to accelerate and expand U.S. market penetration for mi-eye2, R&D sales, marketing and key international regulatory approvals. Global medical technology company Smith & Nephew took a minority stake in Trice Medical, joining a consortium of current investors including Safeguard Scientifics, HealthQuest Capital, BioStar Ventures and others. Trice's mi-eye2 received FDA 510(K) clearance in 2016 and is now used by medical professionals in 25 states, enabling physicians to diagnose joint injuries from their offices without resorting to MRI procedures. Mi-eye is a disposable needle with a wide-angle camera lens. R&D for the device's third generation is underway.

PARTNER COMPANY HOLDINGS AT DECEMBER 31, 2017

Partner Company Revenue Stages

Development Stage

  • Pre-revenue
  • Proving out technology
  • Developing prototype
  • Beta stage customers

Initial Revenue Stage

  • Up to $5M in revenue
  • Initial customers
  • Early market penetration
  • Management team forming
  • Infrastructure being built

Expansion Stage

  • $5M to $20M in revenue
  • Commercial grade solution
  • Growing market penetration
  • Management team built out
  • Infrastructure in place

High Traction Stage

  • $20M+ in revenue
  • Significant commercial traction

Partner Companies

Stage

Category

Acquisition Year

Primary Ownership%

Carrying
Value

(in millions)

Cost

(in millions)

AdvantEdge Healthcare Solutions

High Traction

Healthcare

2006

40%

$4.7

$16.3

Aktana

Expansion

Healthcare

2016

25%

4.1

9.7

Apprenda

Expansion

Other

2013

29%

7.8

22.1

Brickwork

Initial Revenue

Digital Media

2016

20%

3.5

4.2

Cask Data

Initial Revenue

Other

2015

31%

7.3

13.0

CloudMine

Initial Revenue

Healthcare

2015

47%

5.7

10.0

Clutch Holdings

Expansion

Digital Media

2013

43%

8.5

16.3

Hoopla Software

Initial Revenue

Digital Media

2011

26%

-

5.1

InfoBionic

Initial Revenue

Healthcare

2014

40%

1.1

19.7

Lumesis

Expansion

Financial Services

2012

44%

1.6

6.3

MediaMath

High Traction

Digital Media

2009

20.5%

3.0

25.5

meQuilibrium

Initial Revenue

Healthcare

2015

36%

5.5

10.5

Moxe Health

Initial Revenue

Healthcare

2016

32%

3.7

4.5

NovaSom

High` Traction

Healthcare

2011

32%

2.0

24.1

Prognos (fka Medivo)

Expansion

Healthcare

2011

29%

8.9

12.6

Propeller Health

Initial Revenue

Healthcare

2014

24%

6.4

14.0

QuanticMind

Expansion

Digital Media

2015

25%

7.3

11.5

Sonobi

Expansion

Digital Media

2015

22%

6.3

9.2

Spongecell

High Traction

Digital Media

2018

23%

6.0

18.6

Syapse

Expansion

Healthcare

2014

20%

7.4

15.6

T-REX

Initial Revenue

Financial Services

2016

21%

5.1

6.0

Transactis

Expansion

Financial Services

2014

24%

9.1

14.5

Trice Medical

Initial Revenue

Healthcare

2014

25%

3.9

10.2

WebLinc

Expansion

Digital Media

2014

38%

7.1

14.0

Zipnosis

Initial Revenue

Healthcare

2015

25%

3.8

7.0





TOTAL:

$129.8

$320.5

CONFERENCE CALL AND WEBCAST DETAILS
Please call 10-15 minutes prior to the call to register.

Date: Thursday, March 1, 2018

Time: 9:00 a.m. ET

Webcast: www.safeguard.com/results

Live Number: 866-393-4306 // (International) 734-385-2616

Replay Number: 855-859-2056 // (International) 404-537-3406

Access Code: 6390028

Speakers: President and Chief Executive Officer, Stephen T. Zarrilli; and Senior Vice President and Chief Financial Officer, Jeffrey B. McGroarty.

Format: Discussion of fourth quarter 2017 financial results followed by Q&A.

Replay will be available through April 1, 2018 at 11:59 p.m. ET. For more information please contact IR@safeguard.com.

About Safeguard Scientifics
Historically, Safeguard Scientifics (NYSE:SFE) has provided capital and relevant expertise to fuel the growth of technology-driven businesses. Safeguard has a distinguished track record of fostering innovation and building market leaders that spans more than six decades. For more information, please visit www.safeguard.com or follow us on Twitter @safeguard.

Forward-looking Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to risks and uncertainties. The risks and uncertainties that could cause actual results to differ materially include, among others, our ability to make good decisions about the monetization of our partner companies for maximum value or at all and distributions to our shareholders, the ongoing support of our existing partners companies, the fact that our partner companies may vary from period to period, challenges to achieving liquidity from our partner company holdings, fluctuations in the market prices of our publicly traded partner company holdings, competition, our ability to attract and retain qualified employees, market valuations in sectors in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our partner companies, including the fact that most of our partner companies have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which Safeguard's partner companies operate, and other uncertainties described in our filings with the Securities and Exchange Commission. Many of these factors are beyond the Company's ability to predict or control. As a result of these and other factors, the Company's past financial performance should not be relied on as an indication of future performance. The Company does not assume any obligation to update any forward-looking statements or other information contained in this press release.

SAFEGUARD CONTACT:
John E. Shave III
Senior Vice President, Investor Relations and Corporate Communications
610.975.4952
jshave(at)safeguard(dot)com

Safeguard Scientifics, Inc.

Condensed Consolidated Balance Sheets

(in thousands)










December 31, 2017


December 31, 2016










Assets





Cash, cash equivalents and marketable securities


$

25,203



$

30,442


Other current assets


8,405



2,109



Total current assets


33,608



32,551


Ownership interests in and advances to partner companies


134,691



183,470


Long-term marketable securities




7,302


Long-term restricted cash equivalents


6,336



6,336


Other assets


1,829



2,169


Total Assets


$

176,464



$

231,828







Liabilities and Equity





Convertible senior debentures - current


40,485



$


Other current liabilities


5,327



5,861



Total current liabilities


45,812



5,861


Other long-term liabilities


3,535



3,630


Credit facility


45,321




Convertible senior debentures




52,560


Total equity


81,796



169,777


Total Liabilities and Equity


$

176,464



$

231,828








Safeguard Scientifics, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)












Three Months Ended
 December 31,


Twelve Months Ended
 December 31,



2017


2016


2017


2016






Operating expenses


$

3,940



$

3,928



$

17,131



$

18,692


Operating loss


(3,940)



(3,928)



(17,131)



(18,692)











Other loss


(120)



64



(339)



(1,682)


Interest, net


(1,683)



(554)



(4,744)



(2,559)


Equity income (loss)


(12,985)



(17,283)



(66,358)



671











Net loss before income taxes


(18,728)



(21,701)



(88,572)



(22,262)


Income tax benefit (expense)









Net loss


$

(18,728)



$

(21,701)



$

(88,572)



$

(22,262)











Net loss per share:









Basic


$

(0.91)



$

(1.07)



$

(4.34)



$

(1.09)


Diluted


$

(0.91)



$

(1.07)



$

(4.34)



$

(1.09)











Weighted average shares used in computing
loss per share:









Basic


20,472



20,357



20,430



20,343


Diluted


20,472



20,357



20,430



20,343











Safeguard Scientifics, Inc.


Partner Company Financial Data


(in thousands)















Additional Financial Information


To assist investors in understanding Safeguard and our 25 partner companies as of December 31, 2017, we are providing additional financial information on our partner companies, including the aggregate cost and carrying value for all of our partner companies and other holdings.  Carrying value of an equity method partner company represents the original acquisition cost and any follow-on funding, plus or minus our share of the earnings or losses of each company, reduced by any impairment charges.  The carrying value and cost data reflect our percentage holdings in the partner companies and reflect both equity ownership interests in and advances to those partner companies.






























December 31,
2017
























Carrying
Value


Cost (including transaction costs)



Safeguard Carrying Value and Cost







Equity method partner companies








$

129,827



$

320,682




Other holdings








4,864



37,705












$

134,691



$

358,387



















The following information was filed by Safeguard Scientifics Inc (SFE) on Thursday, March 1, 2018 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________

Commission File Number 1-5620
 Safeguard Scientifics, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania
 
23-1609753
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
170 North Radnor-Chester Road
Suite 200
Radnor, PA
 
19087
(Address of principal executive offices)
 
(Zip Code)
(610) 293-0600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($.10 par value)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  £
Accelerated filer  þ
 
Smaller reporting company £

Non-accelerated filer   £

(Do not check if a smaller reporting company)
Emerging growth company £
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $237,111,560 based on the closing sale price as reported on the New York Stock Exchange.
The number of shares outstanding of the registrant’s common stock as of March 2, 2018 was 20,566,680.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission for the Company’s 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.



SAFEGUARD SCIENTIFICS, INC.
FORM 10-K
December 31, 2017
 
 
Page
 
 
 
 


2


PART I
Cautionary Note Concerning Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc. (“Safeguard” or “we”), the industries in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts.  These statements include, in particular, statements about our plans, strategies and prospects.  For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our forward-looking statements are subject to risks and uncertainties.  Factors that could cause actual results to differ materially include, among others, our ability to make good decisions about the deployment of capital, the fact that our partner companies may vary from period to period, our substantial capital requirements and absence of liquidity from our partner company holdings, our ability to service the indebtedness under and remain in compliance with the terms of our credit facility, a fluctuations in the market prices of our publicly traded partner company holdings, competition, our inability to obtain maximum value for our partner company holdings, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our partner companies and their performance, including the fact that most of our partner companies have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which our partner companies operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. “Risk Factors.” Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.
Item 1. Business
Business Overview
Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses in healthcare, financial services and digital media. Throughout this document, we use the term “partner company” to generally refer to those companies in which we have an equity interest and in which we are actively involved, influencing development through board representation and management support, in addition to the influence we exert through our equity ownership. From time to time, in addition to these partner companies, we also hold relatively small equity interests in other enterprises where we do not exert significant influence and do not participate in management activities. In some cases, these interests relate to former partner companies.

In January 2018, Safeguard announced that, from that date forward, we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities for partner company interests to enable distributions of net proceeds to shareholders. In that context, we will consider initiatives including, among others: the sale of individual partner companies, the sale of certain partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We anticipate distributing to shareholders net proceeds from the sale of partner companies or partner company interests, as applicable, after satisfying our debt obligations and working capital needs.

Safeguard's existing group of partner companies consist of technology-driven businesses in healthcare, financial services and digital media that are capitalizing on the next wave of enabling technologies with a particular focus on the Internet of Everything, enhanced security and predictive analytics. We strive to create long-term value for our shareholders by helping our partner companies to increase their market penetration, grow revenue and improve cash flow. Safeguard typically deploys up to $25 million in a company.
In 2017, our management team focused on the following objectives:
Deploy follow-on capital to support our existing partner companies;
Build value in partner companies by developing strong management teams, growing the companies organically and through acquisitions, and positioning the companies for liquidity at premium valuations;
Realize the value of partner companies through selective, well-timed exits to maximize risk-adjusted value; and

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Provide the tools needed for investors to fully recognize the shareholder value that has been created by our efforts.

To meet our strategic objectives during 2018, Safeguard will continue to focus on:
Deploying follow-on capital to support only our existing partner companies;
Helping partner companies achieve additional market penetration, revenue growth, cash flow improvement and growth in long-term value; and
Maximizing monetization opportunities for our partner company interests.
We incorporated in the Commonwealth of Pennsylvania in 1953. Our corporate headquarters are located at 170 North Radnor-Chester Road, Suite 200, Radnor, Pennsylvania 19087.
Our Strategy
Founded in 1953, Safeguard has a distinguished track record of building market leaders by providing capital and operational support to entrepreneurs across an evolving and innovative spectrum of industries. Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses in healthcare, financial services and digital media. Safeguard's existing group of partner companies consist of companies that are capitalizing on the next wave of enabling technologies with a particular focus on the Internet of Everything, enhanced security and predictive analytics. In January 2018, Safeguard announced that we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities for our partner company interests to enable distributions of net proceeds to shareholders.
Helping Our Partner Companies Build Value
We offer operational and management support to each of our partner companies through our deep domain expertise from our management team's careers as entrepreneurs, board members, financiers and operators. Our employees have expertise in business strategy, sales and marketing, operations, finance, legal and transactional support. We provide hands-on assistance to the management teams of our partner companies to support their growth. We believe our strengths include:
applying our expertise to support a partner company’s introduction of new products and services;
leveraging our market knowledge to generate additional growth opportunities;
leveraging our business contacts and relationships; and
identifying and evaluating potential acquisitions and providing capital to pursue potential acquisitions to accelerate growth.
Strategic Support. By helping our partner companies’ management teams remain focused on critical objectives through the provision of human, financial and strategic resources, we believe we are able to accelerate their development and success. We play an active role in developing the strategic direction of our partner companies, which include:
defining short and long-term strategic goals;
identifying and planning for the critical success factors to reach these goals;
identifying and addressing the challenges and operational improvements required to achieve the critical success factors and, ultimately, the strategic goals;
identifying and implementing the business measurements that we and others will apply to measure a company’s success; and
providing capital to drive growth.
Management and Operational Support. We provide management and operational support, as well as ongoing planning and development assessment. Our executives serve on the boards of directors of our partner companies, working with them to develop and implement strategic and operating plans. We measure and monitor achievement of these plans through regular review of operational and financial performance measurements. We believe these services provide our partner companies with significant competitive advantages within their respective markets.
Realizing Value
In January 2018, Safeguard announced that we will focus on maximizing monetization opportunities for partner company interests to enable distributions of net proceeds to shareholders. We will consider initiatives including, among others: the sale of individual partner companies, the sale of certain partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We anticipate distributing to shareholders net proceeds from the sale of partner companies or partner company interests, as applicable, after satisfying our debt obligations and working capital needs.
In general, we will hold our position in a partner company as long as we believe the risk-adjusted value of that position is maximized by our continued ownership and effort. From time to time, we engage in discussions with other companies

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interested in our partner companies, either in response to inquiries or as part of a process we initiate. To the extent we believe that a partner company’s further growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we may seek to sell some or all of our position in the partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers and acquisitions, public offerings of the partner company’s securities and, in the case of publicly traded partner companies, sales of their securities in the open market. In the past, we have taken partner companies public through rights offerings and directed share subscription programs. We will continue to consider these (or similar) programs and the sale of certain partner company interests in secondary market transactions to maximize partner company value for our shareholders.
Given our recent change in strategy, the value of Safeguard is now virtually wholly dependent upon the value of our existing partner companies and our ability to translate that value into cash as efficiently as possible and to deliver that cash, net of our obligations and operating cash needs, to our shareholders. As we have in the past, we will utilize the service of professional advisers from time to time to explore the various alternatives for returning capital to our balance sheet and ultimately to our shareholders.
Our Partner Companies
An understanding of our partner companies is important to understanding Safeguard and its value-building strategy. Following are descriptions of our partner companies in which we own interests at March 7, 2018.
We categorize our partner companies into four stages based upon revenue generation—Development Stage, Initial Revenue Stage, Expansion Stage, and High Traction Stage. The Development Stage is made up of those companies that are pre-revenue businesses. The Initial Revenue Stage is made up of businesses that have revenues of $5 million or less. The Expansion Stage is made up of companies that have revenue in the range of $5 million to $20 million. The High Traction Stage is made up of companies that have revenue in excess of $20 million per year.
The ownership percentages indicated below are presented as of December 31, 2017 for partner companies in which we owned interests at March 7, 2018 and reflects the percentage of the vote we were entitled to cast at that date based on issued and outstanding voting securities (on a common stock equivalent basis), excluding the effect of options, warrants and convertible debt (primary ownership).
AdvantEdge Healthcare Solutions, Inc.
High Traction
(Safeguard Ownership: 40.1%)
Headquartered in Salem, New Hampshire, AdvantEdge Healthcare Solutions is a technology-enabled provider of healthcare revenue cycle and business management solutions that improve decision-making, maximize financial performance, streamline operations and mitigate compliance risks for healthcare providers. www.ahsrcm.com

Aktana, Inc.
Expansion
(Safeguard Ownership: 24.5%)
Headquartered in San Francisco, California, Aktana is a pioneer in decision support for global life science sales teams. Aktana helps its customers improve their commercial effectiveness by delivering data-driven insights and suggestions directly to sales reps, coordinating multi-channel actions and providing insight regarding which strategies work best for which customers under which conditions. www.aktana.com

Apprenda, Inc.
Expansion
(Safeguard Ownership: 29.3%)
Headquartered in Troy, New York, Apprenda powers the next generation of enterprise software development in public, private and hybrid clouds. As a foundational software layer and application run-time environment, Apprenda abstracts away the complexities of building and delivering modern software applications, enabling enterprises to turn ideas into innovations more quickly. With Apprenda, enterprises can securely deliver an entire ecosystem of data, services, applications and application programming interfaces to both internal and external customers across any infrastructure. www.apprenda.com

Brickwork
Initial Revenue
(Safeguard Ownership: 20.3%)
Headquartered in New York, New York, Brickwork helps retailers inform, target, convert and prepare for store shoppers online as the first scalable software-as-a-service platform powering a seamless customer path between online and in-store shopping. www.brickworksoftware.com




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Cask Data, Inc.
Initial Revenue
(Safeguard Ownership: 31.2%)
Headquartered in Palo Alto, California, Cask Data is an open source software company that helps developers deliver enterprise-class Apache Hadoop™ solutions more quickly and effectively. Cask’s flagship offering, the Cask Data Application Platform, provides an open source layer on top of the Hadoop ecosystem that adds enterprise-class governance, portability, security, scalability and transactional consistency. www.cask.com

CloudMine, Inc.
Initial Revenue
(Safeguard Ownership: 47.3%)
Headquartered in Philadelphia, Pennsylvania, CloudMine is a leading HIPAA-compliance Enterprise Health Cloud platform. CloudMine empowers healthcare organizations to rapidly and confidently develop connected digital health experiences by reducing complexity, enabling data mobility, and ensuring compliance. www.cloudmineinc.com

Clutch Holdings, Inc.
Expansion
(Safeguard Ownership: 42.7%)
Headquartered in Ambler, Pennsylvania, Clutch has revolutionized how marketing teams for premier brands develop and foster relationships with their customers. Clutch’s advanced marketing platform serves as a customer hub, delivering deep intelligence derived from real-time behaviors and transactions across in-store, online, mobile and social channels. www.clutch.com
  
Flashtalking
High Traction
(Safeguard Ownership: 10.3%)
Headquartered in New York, New York, Flashtalking is a data-driven ad management and analytics technology company that uses data to personalize advertising in real-time, analyze its effectiveness and enable optimization that drives better engagement and ROI for sophisticated global brands. Our former partner company, Spongecell, Inc. merged into Flashtalking in January 2018. www.flashtalking.com

Hoopla Software, Inc.
Initial Revenue
(Safeguard Ownership: 25.5%)
Headquartered in San Jose, California, Hoopla provides cloud-based software that helps sales organizations inspire and motivate sales team performance. Hoopla's Sales Motivation Platform combines modern game mechanics, data analytics and broadcast-quality video in a cloud application that makes it easy for managers to motivate team performance and score more wins. www.hoopla.net

InfoBionic, Inc.
Initial Revenue
(Safeguard Ownership: 39.5%)
Headquartered in Lowell, Massachusetts, 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. InfoBionic’s MoMe® Kardia cloud-based, remote patient monitoring platform delivers on-demand, actionable monitoring data and analytics directly to the physicians themselves. www.infobionic.com

Lumesis, Inc.
Expansion
(Safeguard Ownership: 43.8%)
Headquartered in Stamford, Connecticut, Lumesis is a financial technology company focused on providing business efficiency, data and regulatory solutions to the municipal bond marketplace. Lumesis’ DIVER platform helps more than 500 firms with more than 43,000 users efficiently meet credit, regulatory and risk needs. www.lumesis.com

MediaMath, Inc.
High Traction
(Safeguard Ownership: 20.5%)
Headquartered in New York, New York, MediaMath is a global technology company that is leading the movement to revolutionize traditional marketing and drive transformative results for marketers through its TerminalOne Marketing Operating System®. MediaMath empowers marketers with an extensible, open platform that activates data, automates execution and optimizes interactions across all addressable media, delivering superior performance, transparency and control to all marketers and better, more individualized experiences for consumers. www.mediamath.com




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meQuilibrium
Initial Revenue
(Safeguard Ownership: 36.2%)
Headquartered in Boston, Massachusetts, 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. www.mequilibrium.com

Moxe Health Corporation
Initial Revenue
(Safeguard Ownership: 32.4%)
Headquartered in Madison, Wisconsin, Moxe Health was founded with a vision to enable bi-directional data exchange through its key products, Substrate and Convergence, directly linking payers and their provider networks. By integrating insurer data using industry standard processes, Moxe Health allows providers to incorporate claims, risk and other payer data into their own analytic efforts, allowing clinicians to better understand patient risks and deliver value-based care. www.moxehealth.com

NovaSom, Inc.
High Traction
(Safeguard Ownership: 31.7%)
Headquartered in Glen Burnie, Maryland, NovaSom is a medical device company that markets an FDA-cleared wireless home sleep test for Obstructive Sleep Apnea (“OSA”) called AccuSom® Home Sleep Test. The NovaSom home sleep test provides in-home, clinically equivalent diagnosis of OSA at a significantly reduced cost compared to in-facility testing for uncomplicated adult OSA. www.novasom.com

Prognos
Expansion
(Safeguard Ownership: 28.7%)
Headquartered in New York, New York, 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. Prognos’ innovations enhance the value of laboratory results and clinical diagnostic data through advanced analytics and artificial intelligence techniques. www.prognos.ai

Propeller Health, Inc.
Initial Revenue
(Safeguard Ownership: 24.0%)
Headquartered in Madison, Wisconsin, Propeller Health provides digital solutions to measurably improve respiratory health by combining sensors, mobile apps and predictive analytics to monitor and engage patients, increase adherence and encourage effective self-management. www.propellerhealth.com

QuanticMind, Inc.
Expansion
(Safeguard Ownership: 24.7%)
Headquartered in Redwood City, California, QuanticMind provides enterprise-level, predictive advertising management software for paid search, social and mobile. QuanticMind brings together machine learning, distributed cloud and in-memory processing technologies to provide the most intelligent, most scalable and fastest platform available. www.quanticmind.com

Sonobi, Inc.
Expansion
(Safeguard Ownership: 21.6%)
Headquartered in New York, New York, 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. Sonobi helps its clients and strategic partners to forecast new market opportunities, enhance value delivery to clients, and create more profitable businesses through integration of progressive data procurement and user-centric sales management technologies. www.sonobi.com

Syapse, Inc.
Expansion
(Safeguard Ownership: 20.1%)
Headquartered in Palo Alto, California, 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. www.syapse.com


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T-REX Group, Inc.
Initial Revenue
(Safeguard Ownership: 21.1%)
Headquartered in New York, New York, T-REX is a software solutions provider for the complex financing of esoteric asset backed securities (“ABS”) and energy project finance. T-REX’s SaaS platform supplants manually-generated financial models, driving transparency, standardization, collaboration, efficiency and access in energy project finance and asset backed securitization. www.trexgroup.com

Transactis, Inc.
Expansion
(Safeguard Ownership: 23.8%)
Headquartered in New York, New York, Transactis transforms traditional paper billing and payment processing by enabling businesses of all sizes to replace paper bills, statements, invoices, payments and documents with efficient and cost effective digital alternatives. Transactis goes to market exclusively with resellers - financial institutions, technology companies, printers and business process outsourcers - to provide their customers with secure, configurable, white-label, industry-leading SaaS solutions. www.transactis.com

Trice Medical, Inc.
Initial Revenue
(Safeguard Ownership: 24.8%)
Headquartered in King of Prussia, Pennsylvania, Trice Medical was founded to fundamentally improve orthopedic diagnostics for the patient, physician and payor by providing instant, eyes-on, answers. Trice has pioneered fully integrated camera-enabled technologies that provide a clinical solution that is optimized for the physician's office. Trice's mission is to provide more immediate and definitive patient care, eliminating the false reads associated with current indirect modalities and significantly reduce the overall cost to the healthcare system. www.tricemedical.com

WebLinc, Inc.
Expansion
(Safeguard Ownership: 38.0%)
Headquartered in Philadelphia, Pennsylvania, WebLinc is a commerce platform and services provider for fast growing online retailers. WebLinc's modern, agile technologies and strategic expertise empower companies running global, omnichannel commerce operations, and enable retailers to consistently outpace the competition. www.weblinc.com

Zipnosis, Inc.
Initial Revenue
(Safeguard Ownership: 25.4%)
Headquartered in Minneapolis, Minnesota, Zipnosis provides health systems with a white-labeled, fully integrated virtual care platform. Through Zipnosis’ tech-enabled treatment and triage tools, clients can offer convenient access to care while improving clinician efficiency. Currently, patients may be treated for more than 90 conditions via such treatment and triage tools. www.zipnosis.com

FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
We operate as one operating segment based upon the similar nature of our technology-driven partner companies, the functional alignment of the organizational structure and the reports that are regularly reviewed by the chief operating decision maker for the purpose of assessing performance and allocating resources.
OTHER INFORMATION
The operations of Safeguard and its partner companies are subject to environmental laws and regulations. Safeguard does not believe that expenditures relating to those laws and regulations will have a material adverse effect on the business, financial condition or results of operations of Safeguard.
AVAILABLE INFORMATION
Safeguard is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. Therefore, we file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements and other information with, and furnish other reports to, the Securities and Exchange Commission (“SEC”). You can read and copy such documents at the SEC’s public reference facilities in Washington, D.C., New York, New York and Chicago, Illinois. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. Such material may also be accessed electronically by means of the SEC’s home page on the Internet at www.sec.gov or through

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Safeguard’s website at www.safeguard.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) also may be obtained free of charge, upon written request to: Investor Relations, Safeguard Scientifics, Inc., 170 North Radnor-Chester Road, Suite 200, Radnor, Pennsylvania 19087.
The Internet website addresses for Safeguard and its partner companies are included in this report for identification purposes. The information contained therein or connected thereto is not intended to be incorporated into this Annual Report on Form 10-K.
The following corporate governance documents are available free of charge on Safeguard’s website: the charters of our Audit, Compensation and Nominating & Corporate Governance Committees, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics. We also will post on our website any amendments to or waivers of our Code of Business Conduct and Ethics that relate to our directors and executive officers.

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Item 1A. Risk Factors
You should carefully consider the information set forth below. The following risk factors describe situations in which our business, financial condition and/or results of operations could be materially harmed, and the value of our securities may be adversely affected. You should also refer to other information included or incorporated by reference in this report.

The intended monetization of our partner company interests and distribution of net proceeds to shareholders are subject to factors beyond our control.
In January 2018, we announced that we will not deploy any capital into new partner companies.  We will instead focus on supporting, and maximizing monetization opportunities for our existing partner company interests to enable distributions of net proceeds to shareholders.  However, this strategic plan may require providing significant additional capital and operational support to such existing partner companies and we may not be able to sell our partner company interests during any specific time frame or otherwise on desirable terms, if at all, and there can be no assurance as to how long this process will take or the results that this process will yield.  There can be no assurance as to whether we will realize the value of escrowed proceeds, holdbacks or other contingent consideration, if any, associated with the sale of partner company interests.  Additionally, there can be no assurance that we will be able to satisfy our liabilities during this process.  Further, the method, timing and amount of any distributions resulting from the monetization of existing partner companies will be at the discretion of our Board of Directors and will depend on market and business conditions and our overall liabilities, capital structure and liquidity position.

The continuing costs and burdens associated with being a public company will constitute a much larger percentage of our expenses and we may in the future delist our Common Stock with the New York Stock Exchange and seek to deregister our Common Stock with the SEC.
We will remain a public company and will continue to be subject to the listing standards of the New York Stock Exchange and SEC rules and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002.  The costs and burdens of being a public company will be a significant and continually increasing portion of our expenses if we are able to monetize partner company interests.  As part of such monetization efforts, we will likely in the future, once the majority of our partner company interests have been monetized and proceeds therefrom distributed, delist our Common Stock from the New York Stock Exchange and seek to deregister our Common Stock with the SEC.  However, there can be no assurance as to the timing of such transactions, or whether such transactions will be completed at all, and we will continue to face the costs and burdens of being a public company until such time as our Common Stock is delisted with the New York Stock Exchange and deregistered with the SEC.
Our principal business strategy depends upon our ability to make good decisions regarding the deployment of capital into, and subsequent disposition of, existing partner company interests and, ultimately, the performance of our partner companies, which is uncertain.
If we make poor decisions regarding the deployment of capital into, and subsequent disposition of, existing partner companies, our business strategy will not succeed. If our partner companies do not succeed, the value of our assets could be significantly reduced and require substantial impairments or write-offs and our results of operations and the price of our common stock would be adversely affected. The risks relating to our partner companies include:
most of our partner companies have a history of operating losses and/or limited operating history;
the intense competition affecting the products and services our partner companies offer could adversely affect their businesses, financial condition, results of operations and prospects for growth;
the inability to adapt to changing marketplaces;
the inability to manage growth;
the need for additional capital to fund their operations, which we may not be able to fund or which may not be available from third parties on acceptable terms, if at all;
the inability to protect their proprietary rights and/or infringing on the proprietary rights of others;
that our partner companies could face legal liabilities from claims made against them based upon their operations, products or work;
the impact of economic downturns on their operations, results and growth prospects;
the inability to attract and retain qualified personnel;
the existence of government regulations and legal uncertainties may place financial burdens on the businesses of our partner companies; and
the inability to plan for and manage catastrophic events.
These and other risks are discussed in detail under the caption “Risks Related to Our Partner Companies” below.


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Our Credit Facility subjects us to interest rate risk.
In May 2017, we entered into a $75.0 million secured, revolving credit facility (“Credit Facility”) with HPS Investment Partners, LLC (“Lender”). Debt service costs under the Credit Facility are subject to interest rate changes. Interest rates could rise from time to time and significantly increase our cost of borrowing. If that were to occur, replacing the Credit Facility with alternative credit arrangements having a lower cost of borrowing would likely not be possible and no assurance can be given that we would be able to refinance the Credit Facility on attractive terms or at all.

Servicing the indebtedness under the Credit Facility will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on the indebtedness under the Credit Facility will depend on our ability to generate cash in the future. We generate cash from proceeds we receive in connection with the sales of our interests in our partner companies. Due to the nature of the mergers and acquisitions market, and the developmental cycle of companies like our partner companies, our ability to generate specific amounts of liquidity from sales of our partner company interests in any given period of time cannot be assured. Our ability to generate cash is also, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. The risk exists that our business will be unable to generate sufficient cash flow to service our indebtedness under the Credit Facility.

Covenants in the agreements governing the Credit Facility could adversely affect our business and/or result in the operation of our business in a way other than as desired by management; our ability to comply with such covenants may be affected by events beyond our control; and a breach of any of these covenants could result in a default under the agreements governing the Credit Facility, which, if not cured or waived, could result in the acceleration of the indebtedness under the Credit Facility.
The Credit Facility contains various covenants that prohibit or limit, subject to certain exceptions, our ability to, among other things:
Sell, transfer, lease, convey or otherwise dispose of all or any part of our business or property;
Exceed concentration limits with respect to the amount of capital deployed to any single partner company;
Exceed concentration limits with respect to the amount of capital deployed to one or more partner companies operating in the same or similar industries;
Deploy capital to partner companies operating outside of certain specified industries;
Incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;
Pay any dividends or make any distribution (in cash or in kind) or payment in respect of, or redeem, retire or purchase any capital stock;
Enter into, or permit any of our subsidiaries to enter into, any sale and leaseback transaction;
Wind-up, liquidate or dissolve, or merge, consolidate or amalgamate with any person, or permit any of our subsidiaries to do (or agree to do) so;
Enter into certain transactions with affiliates; and
Amend, modify or otherwise change any of our governing documents.
In addition, the Credit Facility requires us to among other things, maintain (i) a liquidity threshold of at least $20 million of unrestricted cash; (ii) a tangible net worth, plus unrestricted cash, of at least 1.75x the amount then outstanding under the Credit Facility; and (iii) a minimum aggregate appraised value of the Company’s ownership interests in its partner companies, plus unrestricted cash in excess of the liquidity threshold, of at least $350 million.
The foregoing covenants could adversely affect our ability to finance our operations, engage in business activities that may be in our interest and plan for or react to market conditions or otherwise execute our business strategies.
Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions.
Our failure to comply with any of these covenants could result in a default under the Credit Facility. If that were to occur, the Lender could choose to accelerate the maturity of the indebtedness. If the Lender were to accelerate the maturity of the indebtedness, we may not have sufficient liquidity to repay the entire balance of the outstanding borrowings and other obligations under the Credit Facility.

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A significant amount of our deployed capital may be concentrated in partner companies operating in the same or similar industries, limiting the diversification of our capital deployments.
Except as may be agreed to with our debt providers, we do not have fixed guidelines for diversification of capital deployments, and our capital deployments could be concentrated in several partner companies that operate in the same or similar industries. This may cause us to be more susceptible to any single economic, regulatory or other occurrence affecting those particular industries than we would otherwise be if our partner companies operated in more diversified industries.
Our business model does not rely upon, or plan for, the receipt of operating cash flows from our partner companies. Our partner companies generally provide us with no cash flow from their operations. We rely on cash on hand, liquidity events and our ability to generate cash from capital raising activities to finance our operations.
We need capital to fund the capital needs of our existing partner companies. We also need cash to service and repay our outstanding debt, finance our corporate overhead and meet our existing funding commitments. As a result, we have substantial cash requirements. Our partner companies generally provide us with no cash flow from their operations. To the extent our partner companies generate any cash from operations, they generally retain the funds to develop their own businesses. As a result, we must rely on cash on hand, partner company liquidity events and new capital raising activities to meet our cash needs. If we are unable to find ways of monetizing our holdings or raising additional capital on attractive terms, we may face liquidity issues that will require us to constrain our ability to execute our business strategy and limit our ability to provide financial support to our existing partner companies.
Fluctuations in the price of the common stock of our publicly traded holdings may affect the price of our common stock.
From time to time, we may hold equity interests in companies that are publicly traded. Fluctuations in the market prices of the common stock of publicly traded holdings may affect the price of our common stock. Historically, the market prices of our publicly traded holdings have been highly volatile and subject to fluctuations unrelated or disproportionate to operating performance.

We may be unable to obtain maximum value for our holdings or to sell our holdings on a timely basis.
We hold significant positions in our partner companies. Consequently, if we were to divest all or part of our holdings in a partner company, we may have to sell our interests at a relative discount to a price which may be received by a seller of a smaller portion. For partner companies with publicly traded stock, we may be unable to sell our holdings at then-quoted market prices. The trading volume and public float in the common stock of a publicly traded partner company may be small relative to our holdings. As a result, any significant open-market divestiture by us of our holdings in such a partner company, if possible at all, would likely have a material adverse effect on the market price of its common stock and on our proceeds from such a divestiture. Additionally, we may not be able to take our partner companies public as a means of monetizing our position or creating shareholder value.
Registration and other requirements under applicable securities laws and contractual restrictions also may adversely affect our ability to dispose of our partner company holdings on a timely basis.
Our success is dependent on our senior management.
Our success is dependent on our senior management team’s ability to execute our strategy. In January 2018, we announced our intent to reduce overhead costs, which included a reduction in certain members of senior management. A loss of one or more of the remaining members of our senior management team without adequate replacement could have a material adverse effect on us.
Our business strategy may not be successful if valuations in the market sectors in which our partner companies participate decline.
Our strategy involves creating value for our shareholders by helping our partner companies build value and, if appropriate, accessing the public and private capital markets. Therefore, our success is dependent on the value of our partner companies as determined by the public and private capital markets. Many factors, including reduced market interest, may cause the market value of our partner companies to decline. If valuations in the market sectors in which our partner companies participate decline, their access to the public and private capital markets on terms acceptable to them may be limited.



12


Our partner companies could make business decisions that are not in our best interests or with which we do not agree, which could impair the value of our holdings.
Although we currently own a significant, influential interest in some of our partner companies, we do not maintain a controlling interest in any of our partner companies. Acquisitions of interests in partner companies in which we share or have no control, and the dilution of our interests in or loss of control of partner companies, will involve additional risks that could cause the performance of our interests and our operating results to suffer, including:
the management of a partner company having economic or business interests or objectives that are different from ours; and
the partner companies not taking our advice with respect to the financial or operating issues they may encounter.
Our inability to control our partner companies also could prevent us from assisting them, financially or otherwise, or could prevent us from liquidating our interests in them at a time or at a price that is favorable to us. Additionally, our partner companies may not act in ways that are consistent with our business strategy. These factors could hamper our ability to maximize returns on our interests and cause us to incur losses on our interests in these partner companies.
We may have to buy, sell or retain assets when we would otherwise not wish to do so in order to avoid registration under the Investment Company Act.
The Investment Company Act of 1940 regulates companies which are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. Under the Investment Company Act, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. We refer to this test as the “40% Test.” Securities issued by companies other than consolidated partner companies are generally considered “investment securities” for purposes of the Investment Company Act, unless other circumstances exist which actively involve the company holding such interests in the management of the underlying company. We are a company that partners with growth-stage companies to build value; we are not engaged primarily in the business of investing, reinvesting or trading in securities. We are in compliance with the 40% Test. Consequently, we do not believe that we are an investment company under the Investment Company Act.
We monitor our compliance with the 40% Test and seek to conduct our business activities to comply with this test. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively helping our partner companies in their efforts to build value. In order to continue to comply with the 40% Test, we may need to take various actions which we would otherwise not pursue. For example, we may need to retain a controlling interest in a partner company that we no longer consider strategic, we may not be able to acquire an interest in a company unless we are able to obtain a controlling ownership interest in the company, or we may be limited in the manner or timing in which we sell our interests in a partner company. Our ownership levels also may be affected if our partner companies are acquired by third parties or if our partner companies issue stock which dilutes our ownership interest. The actions we may need to take to address these issues while maintaining compliance with the 40% Test could adversely affect our ability to create and realize value at our partner companies.

Economic disruptions and downturns may have negative repercussions for us.
Events in the United States and international capital markets, debt markets and economies may negatively impact our stock price and our ability to pursue certain tactical and strategic initiatives, such as accessing additional public or private equity or debt financing for us or for our partner companies and selling our interests in partner companies on terms acceptable to us and in time frames consistent with our expectations.
We cannot provide assurance that material weaknesses in our internal control over financial reporting will not be identified in the future.
We cannot assure you that material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in a material weakness, or could result in material misstatements in our Consolidated Financial Statements. These misstatements could result in a restatement of our Consolidated Financial Statements, cause us to fail to meet our reporting obligations and/or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.


13


Risks Related to Our Partner Companies
Most of our partner companies have a history of operating losses and/or limited operating history and may never be profitable.
Most of our partner companies have a history of operating losses and/or limited operating history, have significant historical losses and may never be profitable. Many have incurred substantial costs to develop and market their products, have incurred net losses and cannot fund their cash needs from operations. We expect that the operating expenses of certain of our partner companies will increase substantially in the foreseeable future as they continue to develop products and services, increase sales and marketing efforts, and expand operations.
Our partner companies face intense competition, which could adversely affect their business, financial condition, results of operations and prospects for growth.
There is intense competition in the technology marketplaces, and we expect competition to intensify in the future. Our business, financial condition, and results of operations will be materially adversely affected if our partner companies are not able to compete successfully. Many of the present and potential competitors may have greater financial, technical, marketing and other resources than those of our partner companies. This may place our partner companies at a disadvantage in responding to the offerings of their competitors, technological changes or changes in client requirements. Also, our partner companies may be at a competitive disadvantage because many of their competitors have greater name recognition, more extensive client bases and a broader range of product offerings. In addition, our partner companies may compete against one another.
The success or failure of many of our partner companies is dependent upon the ultimate effectiveness of newly-created technologies, medical devices, financial services, healthcare diagnostics, etc.
Our partner companies’ business strategies are often highly dependent upon the successful launch and commercialization of an innovative technology or device, including, without limitation, technologies or devices used in healthcare, financial services or digital media.  Despite all of our efforts to understand the research and development underlying the innovation or creation of such technologies and devices before we deploy capital into a partner company, sometimes the performance of the technology or device does not match our expectations or those of our partner company. In those situations, it is likely that we will incur a partial or total loss of the capital which we deployed in such partner company.
Our partner companies may fail if they do not adapt to changing marketplaces.
If our partner companies fail to adapt to changes in technology and customer and supplier demands, they may not become or remain profitable. There is no assurance that the products and services of our partner companies will achieve or maintain market penetration or commercial success, or that the businesses of our partner companies will be successful.

The technology marketplaces are characterized by:
rapidly changing technology;
evolving industry standards;
frequent introduction of new products and services;
shifting distribution channels;
evolving government regulation;
frequently changing intellectual property landscapes; and
changing customer demands.
Our future success will depend on our partner companies’ ability to adapt to these evolving marketplaces. They may not be able to adequately or economically adapt their products and services, develop new products and services or establish and maintain effective distribution channels for their products and services. If our partner companies are unable to offer competitive products and services or maintain effective distribution channels, they will sell fewer products and services and forego potential revenue, possibly causing them to lose money. In addition, we and our partner companies may not be able to respond to the marketplace changes in an economically efficient manner, and our partner companies may become or remain unprofitable.
Our partner companies may grow rapidly and may be unable to manage their growth.
We expect some of our partner companies to grow rapidly. Rapid growth often places considerable operational, managerial and financial strain on a business. To successfully manage rapid growth, our partner companies must, among other things:
improve, upgrade and expand their business infrastructures;
scale up production operations;
develop appropriate financial reporting controls;

14


attract and retain qualified personnel; and
maintain appropriate levels of liquidity.
If our partner companies are unable to manage their growth successfully, their ability to respond effectively to competition and to achieve or maintain profitability will be adversely affected.
Based on our business model, some or all of our partner companies will need to raise additional capital to fund their operations at any given time. We may not be able to fund some or all of such amounts and such amounts may not be available from third parties on acceptable terms, if at all. Further, if our partner companies do raise additional capital, either debt or equity, such capital may rank senior to our interests in such companies.
We cannot be certain that our partner companies will be able to obtain additional financing on favorable terms when needed, if at all. Because our resources and our ability to raise capital are not unlimited, we may not be able to provide partner companies with sufficient capital resources to enable them to reach a cash-flow positive position or a sale of the company, even if we wish to do so. General economic disruptions and downturns may also negatively affect the ability of some of our partner companies to fund their operations from other stockholders and capital sources. We also may fail to accurately project the capital needs of partner companies. If partner companies need capital but are not able to raise capital from us or other outside sources, then they may need to cease or scale back operations. In such event, our interest in any such partner company will become less valuable. If our partner companies raise additional capital, either debt or equity, that ranks senior to the capital we have deployed, such capital may entitle its holders to receive returns of capital before the dates on which we are entitled to receive any return of our deployed capital. Also, in the event of any insolvency, liquidation, dissolution, reorganization or bankruptcy of a partner company, holders of such partner company’s instruments that rank senior to our deployed capital will typically be entitled to receive payment in full before we receive any return of our deployed capital. After returning such senior capital, such partner company may not have any remaining assets to use for returning capital to us, causing us to lose some or all of our deployed capital in such partner company.
Economic disruptions and downturns may negatively affect our partner companies’ plans and their results of operations.
Many of our partner companies are largely dependent upon outside sources of capital to fund their operations. Disruptions in the availability of capital from such sources will negatively affect the ability of such partner companies to pursue their business models and will force such companies to revise their growth and development plans accordingly. Any such changes will, in turn, negatively affect our ability to realize the value of our capital deployments in such partner companies.

In addition, downturns in the economy as well as possible governmental responses to such downturns and/or to specific situations in the economy could affect the business prospects of certain of our partner companies, including, but not limited to, in the following ways: weaknesses in the financial services industries; reduced business and/or consumer spending; and/or systemic changes in the ways the healthcare system operates in the United States.
Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.
Our partner companies assert various forms of intellectual property protection. Intellectual property may constitute an important part of partner company assets and competitive strengths. Federal law, most typically copyright, patent, trademark and trade secret laws, generally protects intellectual property rights. Although we expect that our partner companies will take reasonable efforts to protect the rights to their intellectual property, third parties may develop similar intellectual property independently. Moreover, the complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of our partner companies and the demands of quick delivery of products and services to market, create a risk that partner company efforts to prevent misappropriation of their technology will prove inadequate.
Some of our partner companies also license intellectual property from third parties and it is possible that they could become subject to infringement actions based upon their use of the intellectual property licensed from those third parties. Our partner companies generally obtain representations as to the origin and ownership of such licensed intellectual property. However, this may not adequately protect them. Any claims against our partner companies’ proprietary rights, with or without merit, could subject the companies to costly litigation and divert their technical and management personnel from other business concerns. If our partner companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase and their profits, if any, will decrease.
Third parties have and may assert infringement or other intellectual property claims against our partner companies based on their patents or other intellectual property claims. Even though we believe our partner companies’ products do not infringe any third party’s patents, they may have to pay substantial damages, possibly including treble damages, if it is ultimately determined that they do. They may have to obtain a license to sell their products if it is determined that their products infringe

15


on another person’s intellectual property. Our partner companies might be prohibited from selling their products before they obtain a license, which, if available at all, may require them to pay substantial royalties. Even if infringement claims against our partner companies are without merit, defending these types of lawsuits takes significant time, is expensive and may divert management attention from other business concerns.
Certain of our partner companies could face legal liabilities from claims made against their operations, products or work.
Because manufacture and sale of certain partner company products entail an inherent risk of product liability, certain partner companies maintain product liability insurance. Although none of our current partner companies have experienced any material losses in this regard, there can be no assurance that they will be able to maintain or acquire adequate product liability insurance in the future and any product liability claim could have a material adverse effect on a partner company’s financial stability, revenues and results of operations. In addition, many of the engagements of our partner companies involve projects that are critical to the operation of their clients’ businesses. If our partner companies fail to meet their contractual obligations, they could be subject to legal liability, which could adversely affect their business, operating results and financial condition. Partner company contracts typically include provisions designed to limit their exposure to legal claims relating to their services and products. However, these provisions may not protect our partner companies or may not be enforceable. Also, some of our partner companies depend on their relationships with their clients and their reputation for high-quality services and integrity to retain and attract clients. As a result, claims made against our partner companies’ work may damage their reputation, which in turn could impact their ability to compete for new work and negatively impact their revenue and profitability.
Our partner companies’ success depends on their ability to attract and retain qualified personnel.
Our partner companies depend upon their ability to attract and retain senior management and key personnel, including trained technical and marketing personnel. Our partner companies also will need to continue to hire additional personnel as they expand. Although our current partner companies have not been the subject of a work stoppage, any future work stoppage could have a material adverse effect on their respective operations. A shortage in the availability of the requisite qualified personnel or work stoppage would limit the ability of our partner companies to grow, to increase sales of their existing products and services, and to launch new products and services.

Government regulations and legal uncertainties may place financial burdens on the businesses of our partner companies.
Failure to comply with applicable requirements of the FDA or comparable regulation in foreign countries can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Manufacturers of pharmaceuticals and medical diagnostic devices and operators of laboratory facilities are subject to strict federal and state regulation regarding validation and the quality of manufacturing and laboratory facilities. Failure to comply with these quality regulation systems requirements could result in civil or criminal penalties or enforcement proceedings, including the recall of a product or a “cease distribution” order. The enactment of any additional laws or regulations that affect healthcare insurance policy and reimbursement (including Medicare reimbursement) could negatively affect some of our partner companies. If Medicare or private payers change the rates at which our partner companies or their customers are reimbursed by insurance providers for their products, such changes could adversely impact our partner companies.
Some of our partner companies may be subject to significant environmental, health and safety regulation.
Some of our partner companies may be subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well as to the safety and health of manufacturing and laboratory employees. In addition, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety. Compliance with such regulations could increase operating costs at certain of our partner companies, and the failure to comply could negatively affect the operations and results of some of our partner companies.
Catastrophic events may disrupt our partner companies’ businesses.
Some of our partner companies are highly automated businesses and rely on their network infrastructure, various software applications and many internal technology systems and data networks for their customer support, development, sales and marketing and accounting and finance functions. Further, some of our partner companies provide services to their customers from data center facilities in multiple locations. Some of these data centers are operated by third parties, and the partner companies have limited control over those facilities. A disruption or failure of these systems or data centers in the event of a natural disaster, telecommunications failure, power outage, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, delays in product development, breaches of data security and loss of

16


critical data. Such an event could also prevent the partner companies from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of their SaaS offerings. While certain of our partner companies have developed certain disaster recovery plans and maintain backup systems to reduce the potentially adverse effect of such events, a catastrophic event that resulted in the destruction or disruption of any of their data centers or their critical business or information technology systems could severely affect their ability to conduct normal business operations and, as a result, their business, operating results and financial condition could be adversely affected.
We cannot provide assurance that our partner companies’ disaster recovery plans will address all of the issues they may encounter in the event of a disaster or other unanticipated issue, and their business interruption insurance may not adequately compensate them for losses that may occur from any of the foregoing. In the event that a natural disaster, terrorist attack or other catastrophic event were to destroy any part of their facilities or interrupt their operations for any extended period of time, or if harsh weather or health conditions prevent them from delivering products in a timely manner, their business, financial condition and operating results could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters and administrative offices in Radnor, Pennsylvania contain approximately 15,600 square feet of office space in one building. We currently lease our corporate headquarters under a lease expiring in April 2026.
Item 3. Legal Proceedings
We, as well as our partner companies, are involved in various claims and legal actions arising in the ordinary course of business. While in the current opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position or results of operations, no assurance can be given as to the outcome of these lawsuits, and one or more adverse dispositions could have a material adverse effect on our consolidated financial position and results of operations, or that of our partner companies. See Note 12 to the Consolidated Financial Statements for a discussion of ongoing claims and legal actions.

Item 4. Mine Safety Disclosures
Not applicable.
ANNEX TO PART I — EXECUTIVE OFFICERS OF THE REGISTRANT
 
Name
Age
 
Position
 
Executive Officer Since
Stephen T. Zarrilli
56
 
President, Chief Executive Officer and Director
 
2008
Jeffrey B. McGroarty
48
 
Senior Vice President and Chief Financial Officer
 
2012
Brian J. Sisko
57
 
Chief Operating Officer, Executive Vice President and Managing Director
 
2007
Mr. Zarrilli joined Safeguard as Senior Vice President and Chief Financial Officer in June 2008 and became President and Chief Executive Officer in November 2012. Prior to joining Safeguard, Mr. Zarrilli co-founded, in 2004, the Penn Valley Group, a middle-market management advisory and private equity firm, and served as a Managing Director there until June 2008. Mr. Zarrilli also served as Acting Senior Vice President, Acting Chief Administrative Officer and Acting Chief Financial Officer of Safeguard from December 2006 to June 2007. Mr. Zarrilli also served as the Chief Financial Officer, from 2001 to 2004, of Fiberlink Communications Corporation, a provider of mobile access solutions for large enterprises; as the Chief Executive Officer, from 2000 to 2001, of Concellera Software, Inc., a developer of content management software; as the Chief Executive Officer, from 1999 to 2000, and Chief Financial Officer, from 1994 to 1998, of US Interactive, Inc. (at the time a public company), a provider of Internet strategy consulting, marketing and technology services; and, previously, with Deloitte & Touche from 1983 to 1994. Mr. Zarrilli is a director of Virtus Investment Partners, Inc. and currently serves as Chair of the Audit Committee and, until June 2015, was a director and Chairman of the Audit Committee of NutriSystem, Inc.
Mr. McGroarty joined Safeguard as Vice President and Corporate Controller in December 2005, subsequently became Vice President - Finance and Corporate Controller, and served as Senior Vice President - Finance from November 2012 until

17


his promotion to Senior Vice President and Chief Financial Officer in April 2013. Prior to joining Safeguard, Mr. McGroarty served as Interim Controller of Cephalon, Inc. from October 2005 to December 2005; Vice President-Financial Planning & Analysis and previously Assistant Controller at Exide Technologies from March 2002 to September 2005; and, previously, with PricewaterhouseCoopers from 1991 to 2001.
Mr. Sisko joined Safeguard as Senior Vice President and General Counsel in August 2007 and served as Executive Vice President and Managing Director from November 2012 until his promotion to Chief Operating Officer, Executive Vice President and Managing Director in January 2014. Prior to joining Safeguard, Mr. Sisko served as Chief Legal Officer, Senior Vice President and General Counsel of Traffic.com (at the time, a public company), a former partner company of Safeguard, from February 2006 until June 2007 (following its acquisition by NAVTEQ Corporation in March 2007); Chief Operating Officer from February 2005 to January 2006 of Halo Technology Holdings, Inc., a public holding company for enterprise software businesses (Halo Technology Holdings filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in August 2007); ran B/T Business and Technology, an advisor and strategic management consultant to a variety of public and private companies, from January 2002 to February 2005; and was a Managing Director from April 2000 to January 2002, of Katalyst, LLC, a venture capital and consulting firm. Mr. Sisko also previously served as Senior Vice President-Corporate Development and General Counsel of National Media Corporation, at the time a New York Stock Exchange-listed multi-media marketing company with operations in 70 countries, and as a partner in the corporate finance, mergers and acquisitions practice group of the Philadelphia-based law firm, Klehr, Harrison, Harvey, Branzburg LLP.

18


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange (Symbol: SFE). The high and low sale prices reported within each quarter of 2017 and 2016 were as follows: 
 
High
 
Low
Fiscal year 2017:
 
 
 
First quarter
$
13.97

 
$
11.80

Second quarter
12.95

 
10.65

Third quarter
13.70

 
11.35

Fourth quarter
14.40

 
10.75

Fiscal year 2016:
 
 
 
First quarter
$
14.23

 
$
11.40

Second quarter
14.75

 
11.55

Third quarter
14.38

 
12.01

Fourth quarter
14.10

 
10.60

The high and low sale prices reported in the first quarter of 2018 through March 2, 2018 were $12.85 and $10.83 respectively, and the last sale price reported on March 2, 2018, was $12.60. No cash dividends have been declared in any of the years presented. As of February 21, 2018, there were approximately 13,518 beneficial holders of our common stock.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of equity securities during the quarter ended December 31, 2016 registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"):
Period
Total Number
of Shares
Purchased (a)
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plan (b)
 
Maximum Number (or Approximate Dollar Value) of
Shares that May Yet Be
Purchased Under the
Plan (b)
October 1, 2017 - October 31, 2017
1,247

 
$
14.1500

 

 
$
14,636,135

November 1, 2017 - November 30, 2017
163

 
$
12.2250

 

 
$
14,636,135

December 1, 2017 - December 31, 2017
2,132

 
$
11.4000

 

 
$
14,636,135

Total
3,542

 
$
12.4061

 

 
 
(a) During the fourth quarter of 2017, we repurchased an aggregate of approximately 4 thousand shares of our common stock initially issued as restricted stock awards to employees and subsequently withheld from employees to satisfy the statutory withholding tax liability upon the vesting of such restricted stock awards.
(b) In July 2015, our Board of Directors authorized us to repurchase shares of our outstanding common stock with an aggregate value of up to $25.0 million.  These repurchases may be made in open market or privately negotiated transactions, including under plans complying with Rule 10b5-1 of the Exchange Act, based on market conditions, stock price, and other factors.  The share repurchase program does not obligate us to acquire any specific number of shares.








19


The following graph compares the cumulative total return on $100 invested in our common stock for the period from December 31, 2012 through December 31, 2017 with the cumulative total return on $100 invested for the same period in the Russell 2000 Index and the Wilshire 4500 Index. In light of the diverse nature of Safeguard’s business and based on our assessment of available published industry or line-of-business indexes, we determined that no single industry or line-of-business index would provide a meaningful comparison to Safeguard. Further, we did not believe that we could readily identify an appropriate group of industry peer companies for this comparison. Accordingly, under SEC rules, we selected the Wilshire 4500 Index, a published market index in which the median market capitalization of the included companies is similar to our own. Safeguard’s common stock is included as a component of the Russell 2000 and Wilshire 4500 indexes.
chart-b01c82f6b10c5ead934.jpg
Assumes reinvestment of dividends. We have not distributed cash dividends during this period.
Assumes an investment of $100 on December 31, 2012.

20


Item 6. Selected Consolidated Financial Data
The following table sets forth our selected consolidated financial data for the five-year period ended December 31, 2017. The selected consolidated financial data presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data included in this report. The historical results presented herein may not be indicative of future results.  
 
December 31,
 
2017

2016

2015

2014

2013
 
(In thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
20,751

 
$
22,058

 
$
32,838

 
$
111,897

 
$
139,318

Short-term marketable securities
4,452

 
8,384

 
31,020

 
25,263

 
38,250

Long-term marketable securities

 
7,302

 
9,743

 
19,365

 
6,088

Long-term restricted cash equivalents
6,336

 
6,336

 

 

 

Working capital (deficit)
(12,204
)
 
26,690

 
63,251

 
132,287

 
170,956

Total assets
176,464

 
231,828

 
256,843

 
317,375

 
344,653

Convertible senior debentures - current
40,485

 

 

 

 

Convertible senior debentures - non-current

 
52,560

 
50,956

 
49,484

 
48,135

Credit facility - non-current
45,321

 

 

 

 

Other long-term liabilities
3,535

 
3,630

 
3,965

 
3,507

 
3,683

Total equity
81,796

 
169,777

 
195,505

 
257,827

 
284,661

 
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share amounts)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
General and administrative expense
$
17,131

 
$
18,692

 
$
17,554

 
$
18,970

 
$
21,644

Operating loss
(17,131
)
 
(18,692
)
 
(17,554
)
 
(18,970
)
 
(21,644
)
Other income (loss), net
(339
)
 
(1,682
)
 
217

 
31,657

 
383

Interest income
3,876

 
2,075

 
1,935

 
1,901

 
2,646

Interest expense
(8,620
)
 
(4,634
)
 
(4,523
)
 
(4,402
)
 
(4,303
)
Equity income (loss)
(66,358
)
 
671

 
(39,599
)
 
(15,335
)
 
(12,607
)
Net loss before income taxes
(88,572
)
 
(22,262
)
 
(59,524
)
 
(5,149
)
 
(35,525
)
Income tax benefit (expense)

 

 

 

 

Net loss
$
(88,572
)
 
$
(22,262
)
 
$
(59,524
)
 
$
(5,149
)
 
$
(35,525
)
 
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
 
Basic
$
(4.34
)
 
$
(1.09
)
 
$
(2.85
)
 
$
(0.25
)
 
$
(1.66
)
Diluted
$
(4.34
)
 
$
(1.09
)
 
$
(2.85
)
 
$
(0.25
)
 
$
(1.66
)
Weighted average shares used in computing net loss per share:
 
 
 
 
 
 
 
 
 
Basic
20,430

 
20,343

 
20,874

 
20,975

 
21,362

Diluted
20,430

 
20,343

 
20,874

 
20,975

 
21,362


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Concerning Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about Safeguard Scientifics, Inc. (“Safeguard” or “we”), the industries in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts.  These statements include, in particular, statements about our plans, strategies and prospects.  For example, when we use words such as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,” “potential” or “may,” variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our forward-looking statements are subject to risks and uncertainties.  Factors that could cause actual results to differ materially include, among others, our ability to make good decisions about the deployment of capital, the fact that our partner companies may vary from period to period, our substantial capital requirements and absence of liquidity from our partner company holdings, our ability to service the indebtedness under and remain in compliance with the terms of our credit facility, a fluctuations in the market prices of our publicly traded partner company holdings, competition, our inability to obtain maximum value for our partner company holdings, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our partner companies operate, our inability to control our partner companies, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our partner companies and their performance, including the fact that most of our partner companies have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which our partner companies operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. “Risk Factors.” Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

Overview
Over the recent past, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses in healthcare, financial services and digital media. Throughout this document, we use the term “partner company” to generally refer to those companies in which we have an equity interest and in which we are actively involved, influencing development through board representation and management support, in addition to the influence we exert through our equity ownership. From time to time, in addition to these partner companies, we also hold relatively small equity interests in other enterprises where we do not exert significant influence and do not participate in management activities. In some cases, these interests relate to former partner companies.

In January 2018, Safeguard announced that, from that date forward, we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities for partner company interests to enable distributions of net proceeds to shareholders. In that context, we will consider initiatives including, among others: the sale of individual partner companies, the sale of certain partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We anticipate distributing to shareholders net proceeds from the sale of partner companies or partner company interests, as applicable, after satisfying our debt obligations and working capital needs.

Safeguard's existing group of partner companies consist of technology-driven businesses in healthcare, financial services and digital media that are capitalizing on the next wave of enabling technologies with a particular focus on the Internet of Everything, enhanced security and predictive analytics. We strive to create long-term value for our shareholders by helping our partner companies to increase their market penetration, grow revenue and improve cash flow. Safeguard typically deploys up to $25 million in a company.
Principles of Accounting for Ownership Interests in Partner Companies
We account for our interests in our partner companies using one of the following methods: consolidation, fair value, equity or cost. The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by our voting interest in the entity.

22


Consolidation Method. We account for partner companies in which we maintain a controlling financial interest, generally those in which we directly or indirectly own more than 50% of the outstanding voting securities, using the consolidation method of accounting. Upon consolidation of our partner companies, we reflect the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company as a non-controlling interest in the Consolidated Balance Sheet. The non-controlling interest is presented within equity, separately from the equity of the parent company. Losses attributable to the parent company and the non-controlling interest may exceed their interest in the subsidiary’s equity. As a result, the non-controlling interest shall continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance as of each balance sheet date. Revenue, expenses, gains, losses, net income or loss are reported in the Consolidated Statements of Operations at the consolidated amounts, which include the amounts attributable to the parent company’s common shareholders and the non-controlling interest. As of December 31, 2017, we did not hold a controlling interest in any of our partner companies.
Fair Value Method. Unrealized gains and losses on the mark-to-market of our holdings in fair value method companies and realized gains and losses on the sale of any holdings in fair value method companies are recognized in Other income (loss), net in the Consolidated Statements of Operations. As of December 31, 2017, we did not account for any of our partner companies under the fair value method.
Equity Method. We account for partner companies whose results are not consolidated, but over whom we exercise significant influence, using the equity method of accounting. We also account for our interests in some private equity funds under the equity method of accounting, based on our non-controlling general and limited partner interests. Under the equity method of accounting, our share of the income or loss of the partner company is reflected in Equity income (loss) in the Consolidated Statements of Operations. We report our share of the income or loss of the equity method partner companies on a one quarter lag. We include the carrying value of equity method partner companies in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.
When the carrying value of our holdings in an equity method partner company is reduced to zero, no further losses are recorded in our Consolidated Statements of Operations unless we have outstanding guarantee obligations or have committed additional funding to the equity method partner company. When the equity method partner company subsequently reports income, we will not record our share of such income until it equals the amount of our share of losses not previously recognized.
Cost Method. We account for partner companies which are not consolidated or accounted for under the equity method or fair value method under the cost method of accounting. Under the cost method, our share of the income or losses of such partner companies is not included in our Consolidated Statements of Operations. We include the carrying value of cost method partner companies in Ownership interests in and advances to partner companies on the Consolidated Balance Sheets.
Critical Accounting Policies and Estimates
Accounting policies, methods and estimates are an integral part of the Consolidated Financial Statements prepared by management and are based upon management’s current judgments. These judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements and because of the possibility that future events affecting them may differ from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements as described in Note 1 to our Consolidated Financial Statements, the most significant relate to impairment of ownership interests in and advances to partner companies.
Impairment of Ownership Interests In and Advances to Partner Companies
On a periodic basis, but no less frequently than at the end of each quarter, we evaluate the carrying value of our equity and cost method partner companies for possible impairment based on achievement of business plan objectives and milestones, the financial condition and prospects of the company, market conditions and other relevant factors. The business plan objectives and milestones we consider include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships. We then determine whether there has been an other than temporary decline in the value of our ownership interest in the company. For our equity and cost method partner companies, impairment to be recognized is measured as the amount by which the carrying value of an asset exceeds its fair value. The adjusted carrying value of a partner company is not increased if circumstances suggest the value of the partner company has subsequently recovered.


23


The fair value of privately held partner companies is generally determined based on the value at which independent third parties have invested or have committed to invest in these companies, or based on other valuation methods including discounted cash flows, valuations of comparable public companies and valuations of acquisitions of comparable companies.
Our partner companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests in and advances to partner companies could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and cost method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.
Total impairment charges related to ownership interests in and advances to our equity and cost method partner companies were as follows: 
 
 
Year Ended December 31,
Accounting Method
 
2017
 
2016
 
2015
 
 
(In thousands)
Equity
 
$
15,993

 
$
5,357

 
$
9,690

Cost
 
216

 
45

 
2,754

Total
 
$
16,209

 
$
5,402

 
$
12,444


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

In addition to ownership interests in our partner companies, we also maintain an interest in the management company and general partner of Penn Mezzanine, a mezzanine lender focused on lower middle-market, Mid-Atlantic companies. Through our relationship with Penn Mezzanine, we acquired participating interests in mezzanine loans and related equity interests of the borrowers. Penn Mezzanine is not making any new loans and we have no remaining loans in which we have participating interests. The carrying value of our remaining participating interests in debt and equity securities associated with Penn Mezzanine was zero as of December 31, 2017. During the years ended December 31, 2017 and 2016, we recognized a $0.4 million gain and a $2.4 million loss on impairment of our Penn Mezzanine debt and equity participations, which are included in Other income (loss), net in the Consolidated Statements of Operations.

Results of Operations
We operate as one operating segment based upon the similar nature of our technology-driven partner companies, the functional alignment of the organizational structure, and the reports that are regularly reviewed by the chief operating decision maker for the purpose of assessing performance and allocating resources.
There is intense competition in the markets in which our partner companies operate. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing market.
As previously stated, throughout this document, we use the term “partner company” to generally refer to those companies in which we have an economic interest and in which we are actively involved influencing their development, usually through board representation in addition to our equity ownership.
The following listing of our partner companies only include entities which were considered partner companies as of December 31, 2017. Certain entities which may have been partner companies in previous periods are omitted if, as of December 31, 2017, they had been sold or are no longer considered a partner company.

24


 
Safeguard Primary Ownership
as of December 31,
 
 
Partner Company
2017
 
2016
 
2015
 
Accounting Method
AdvantEdge Healthcare Solutions, Inc.
40.1%
 
40.1%
 
40.1%
 
Equity
Aktana, Inc.
24.5%
 
31.2%
 
NA
 
Equity
Apprenda, Inc.
29.3%
 
29.4%
 
29.5%
 
Equity
Brickwork
20.3%
 
20.3%
 
NA
 
Equity
Cask Data, Inc.
31.2%
 
31.3%
 
34.2%
 
Equity
CloudMine, Inc.
47.3%
 
30.1%
 
30.1%
 
Equity
Clutch Holdings, Inc.
42.7%
 
42.8%
 
39.3%
 
Equity
Hoopla Software, Inc.
25.5%
 
25.5%
 
25.6%
 
Equity
InfoBionic, Inc.
39.5%
 
39.7%
 
38.5%
 
Equity
Lumesis, Inc.
43.8%
 
44.1%
 
44.7%
 
Equity
MediaMath, Inc.
20.5%
 
20.5%
 
20.6%
 
Equity
meQuilibrium
36.2%
 
31.5%
 
31.5%
 
Equity
Moxe Health Corporation
32.4%
 
32.4%
 
NA
 
Equity
NovaSom, Inc.
31.7%
 
31.7%
 
31.7%
 
Equity
Prognos (formerly Medivo)
28.7%
 
35.2%
 
34.5%
 
Equity
Propeller Health, Inc.
24.0%
 
24.0%
 
24.6%
 
Equity
QuanticMind, Inc.
24.7%
 
23.2%
 
23.6%
 
Equity
Sonobi, Inc.
21.6%
 
21.6%
 
22.6%
 
Equity
Spongecell, Inc. *
23.0%
 
23.0%
 
23.0%
 
Equity
Syapse, Inc.
20.1%
 
26.2%
 
24.4%
 
Equity
T-REX Group, Inc.
21.1%
 
23.6%
 
NA
 
Equity
Transactis, Inc.
23.8%
 
24.2%
 
24.5%
 
Equity
Trice Medical, Inc.
24.8%
 
27.6%
 
27.7%
 
Equity
WebLinc, Inc.
38.0%
 
38.0%
 
29.2%
 
Equity
Zipnosis, Inc
25.4%
 
25.4%
 
26.3%
 
Equity
* Spongecell, Inc. merged into Flashtalking in January 2018.
Year ended December 31, 2017 versus year ended December 31, 2016 
 
Year Ended December 31,
 
2017
 
2016
 
Variance
 
(In thousands)
General and administrative expense
$
(17,131
)
 
$
(18,692
)
 
$
1,561

Other income (loss), net
(339
)
 
(1,682
)
 
1,343

Interest income
3,876

 
2,075

 
1,801

Interest expense
(8,620
)
 
(4,634
)
 
(3,986
)
Equity income (loss)
(66,358
)
 
671

 
(67,029
)
Net loss
$
(88,572
)
 
$
(22,262
)
 
$
(66,310
)
General and Administrative Expense. Our general and administrative expenses consist primarily of employee compensation, insurance, travel-related costs, depreciation, office rent and professional services such as consulting, legal, and accounting. General and administrative expense also includes stock-based compensation expense which consists primarily of expense related to grants of stock options, restricted stock and deferred stock units to our employees and directors. General and administrative expense decreased $1.6 million for the year ended December 31, 2017 compared to the prior year primarily due to a decrease of $1.2 million in stock-based compensation mostly related to performance-based awards and a $0.4 million decrease in professional fees.
Other Income (Loss), Net. Other income (loss), net decreased $1.3 million for the year ended December 31, 2017, compared to the prior year. The components of other income (loss) for the years ended December 31, 2017 and 2016 were as

25


follows:
Year ended December 31, 2017:
 
Decrease in fair value of shares of Invitae Corporation
$
(493
)
Impairment of interest in legacy private equity fund
(216
)
Gain on legacy Penn Mezzanine debt and equity participations
399

Loss on extinguishment of 2018 Debentures
(29
)
 
$
(339
)
Year ended December 31, 2016:
 
Loss on impairment of Penn Mezzanine debt and equity participations
$
(2,360
)
Gain on sale of Bridgevine
424

Other
254

 
$
(1,682
)
Interest Income. Interest income includes all interest earned on available cash and marketable security balances as well as interest earned on notes receivable from our partner companies. Interest income increased $1.8 million compared to the prior year due to higher average notes receivable from our partner companies.
Interest Expense. Interest expense is primarily related to our credit facility and convertible senior debentures. Interest expense increased $4.0 million compared to the prior year primarily due to $4.4 million of interest expense related to borrowings under the new credit facility we entered into in May 2017, partially offset by a $0.4 million decrease in interest expense due to the repurchase of $14.0 million face value of convertible senior debentures in June and July 2017.
Equity Income (Loss). Equity income (loss) fluctuates with the number of partner companies accounted for under the equity method, our voting ownership percentage in these partner companies and the net results of operations of these partner companies. We recognize our share of losses to the extent we have cost basis in the equity of the partner company or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our partner companies accounted for under the equity method are based on estimates and on unaudited results of operations of those partner companies and may require adjustments in the future when audits of these entities are made final. We report our share of the results of our equity method partner companies on a one quarter lag basis.
Equity income (loss) decreased $67.0 million for the year ended December 31, 2017 compared to the prior year. The components of equity income (loss) for the years ended December 31, 2017 and 2016 were as follows:
Year ended December 31, 2017:
 
Gain on sale of Good Start Genetics
$
4,250

Gain on proceeds received from escrow related to sale of Putney
704

Gain on proceeds received from escrow related to sale of Quantia
600

Gain on proceeds received from escrow related to the sale of AppFirst assets
141

Gain on sale of Nexxt (fka Beyond.com)
108

Unrealized dilution gain on the decrease of our percentage ownership in partner companies
5,877

Loss on impairment of Spongecell
(3,550
)
Loss on impairment of Pneuron
(5,189
)
Loss on impairment of Full Measure
(7,000
)
Share of loss of our equity method partner companies
(62,299
)
 
$
(66,358
)

26


Year ended December 31, 2016:
 
Gain on sale of Putney
$
55,638

Gain on performance milestone proceeds related to sale of Thingworx
3,264

Unrealized dilution gain on the decrease of our ownership percentage in partner companies
2,038

Gain on proceeds received from escrow related to sale of DriveFactor
1,100

Gain on proceeds received from escrow related to sale of Quantia
600

Loss on impairment of AppFirst
(1,731
)
Loss on impairment of Aventura
(3,626
)
Share of net loss of our equity method partner companies
(56,612
)
 
$
671

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

Year ended December 31, 2016 versus year ended December 31, 2015
 
Year Ended December 31,
 
2016
 
2015
 
Variance
 
(In thousands)
General and administrative expense
$
(18,692
)
 
$
(17,554
)
 
$
(1,138
)
Other income (loss), net
(1,682
)
 
217

 
(1,899
)
Interest income
2,075

 
1,935

 
140

Interest expense
(4,634
)
 
(4,523
)
 
(111
)
Equity loss
671

 
(39,599
)
 
40,270

Net loss
$
(22,262
)
 
$
(59,524
)
 
$
37,262

General and Administrative Expense. General and administrative expense increased $1.1 million for the year ended December 31, 2016, compared to the prior year primarily due to an increase of $0.8 million in stock-based compensation for performance-based awards and an increase of $0.3 million in employee costs.
Other Income (Loss), Net. Other income (loss), net decreased $1.9 million for the year ended December 31, 2016, compared to the prior year. The components of other income (loss) for the years ended December 31, 2016 and 2015 were as follows:
Year ended December 31, 2016:
 
Loss on impairment of Penn Mezzanine debt and equity participations
$
(2,360
)
Gain on sale of Bridgevine
424

Other
254

 
$
(1,682
)
Year ended December 31, 2015:
 
Gain on proceeds received from escrow related to sale of Crescendo
$
2,914

Loss on impairment of Dabo Health
(2,356
)
Loss on impairment of legacy private equity fund
(398
)
Other
57

 
$
217

Interest Income. Interest income remained relatively consistent compared to the prior year.
Interest Expense. Interest expense remained relatively consistent compared to the prior year.

27


Equity Income (Loss). Equity income (loss) increased $40.3 million for the year ended December 31, 2016 compared to the prior year. The components of equity income (loss) for the years ended December 31, 2016 and 2015 were as follows:
Year ended December 31, 2016:
 
Gain on sale of Putney
$
55,638

Gain on performance milestone proceeds related to sale of Thingworx
3,264

Unrealized dilution gain on the decrease of our ownership percentage in partner companies
2,038

Gain on proceeds received from escrow related to sale of DriveFactor
1,100

Gain on proceeds received from escrow related to sale of Quantia
600

Loss on impairment of AppFirst
(1,731
)
Loss on impairment of Aventura
(3,626
)
Share of net loss of our equity method partner companies
(56,612
)
 
$
671

Year ended December 31, 2015:
 
Gain on sale of DriveFactor
$
6,095

Gain on proceeds from escrow related to sale of Thingworx
4,080

Gain on performance milestone proceeds related to sale of Thingworx
3,264

Gain on proceeds received from escrow related to sale of Alverix
1,741

Unrealized dilution loss on the decrease of our percentage ownership in partner companies
(492
)
Loss on impairment of Quantia
(2,920
)
Loss on impairment of InfoBionic
(3,162
)
Loss on impairment of AppFirst
(3,608
)
Share of net loss of our equity method partner companies
(44,597
)
 
$
(39,599
)
The change in our share of net loss of our equity method partner companies for the year ended December 31, 2016 compared to the prior year was due to an increase in losses associated with our partner companies.
Income Tax Benefit (Expense)
Income tax benefit (expense) was $0.0 million for the three years ended December 31, 2017, 2016 and 2015. We have recorded a valuation allowance to reduce our net deferred tax asset to an amount that is more likely than not to be realized in future years. Accordingly, the benefit of the net operating loss that would have been recognized in each year was offset by changes in the valuation allowance.
Liquidity And Capital Resources
As of December 31, 2017, we had $20.7 million of cash and cash equivalents and $4.5 million of marketable securities for a total of $25.2 million. As of December 31, 2017, we had $41.0 million of principal outstanding on our 2018 Debentures, which we anticipate repaying or refinancing by the maturity date of May 15, 2018, and $50.0 million of principal outstanding on our Credit Facility due in May 2020. We currently have $25.0 million of availability under the Credit Facility.
In January 2018, Safeguard announced that, from that date forward, we will not deploy any capital into new partner company opportunities and will focus on supporting our existing partner companies and maximizing monetization opportunities for partner company interests to enable distributions of net proceeds to shareholders. In that context, we will consider initiatives including, among others: the sale of individual partner companies, the sale of certain partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. We anticipate distributing to shareholders net proceeds from the sale of partner companies or partner company interests, as applicable, after satisfying our debt obligations and working capital needs. In connection with our change in strategy, in January 2018, we implemented an initiative to generate annual cost savings of between $5 million and $6 million, which reflect changes in our personnel and operating cost requirements under the new strategy. We will recognize a charge of approximately $1.3 million in the first quarter of 2018 for severance payments to terminated employees that will be paid over approximately twelve months.

28


In May 2017, the Company entered into a $75.0 million secured, revolving credit facility (“Credit Facility”) with HPS Investment Partners, LLC (“Lender”). As of December 31, 2017, we had $50.0 million of principal outstanding on the Credit Facility due in May 2020. The Credit Facility requires us to maintain (i) a liquidity threshold of at least $20 million of unrestricted cash; (ii) a tangible net worth, plus unrestricted cash, of at least 1.75x the amount then outstanding under the Credit Facility; (iii) a minimum aggregate appraised value of ownership interests in its partner companies, plus unrestricted cash in excess of the liquidity threshold, of at least $350 million; and (iv) certain diversification requirements and concentration limits with respect to its capital deployments to its partner companies. As of the date these consolidated financial statements were issued, we were in compliance with all of these covenants.
We fund our operations with cash and marketable securities on hand as well as proceeds from the sales of its interests in its partner companies. Due to the nature of the mergers and acquisitions market, and the developmental cycle of companies like our partner companies, our ability to generate specific amounts of liquidity from sales of its partner company interests in any given period of time cannot be assured. Accordingly, the forecasts which we utilize for projecting future compliance with covenants related to our Credit Facility include significantly discounted probability-weighted proceeds from the sales of our interests in our partner companies. Based on these forecasts, it is probable that we will not be able to remain in compliance with certain of our debt covenants over the next twelve months. Non-compliance with any of the covenants would constitute an event of default under the Credit Facility, and the Lender could choose to accelerate the maturity of the indebtedness. If the Lender chose not to provide a waiver and were to accelerate the maturity of the indebtedness, we would not have sufficient liquidity to repay the entire balance of our outstanding borrowings and other obligations under the Credit Facility. The uncertainty associated with our ability to repay our outstanding debt obligations in such a scenario raises substantial doubt about our ability to continue as a going concern for one year after the issuance date of the financial statements.
In order for us to maintain compliance with these covenants, our plan includes selling certain of our partner company interests in the ordinary course of our business, limiting capital deployments to existing partner companies, and refinancing all or a portion of our 2018 Debentures that mature on May 15, 2018. Should we not be in compliance with any of our debt covenants and be unable to obtain waivers for such events of default, management would pursue one of a number of potential alternatives to satisfy the obligations, including completing an equity offering or obtaining a new debt facility to refinance our existing debt.
In November 2012, we issued $55.0 million in face amount of our 5.25% convertible senior debentures due on May 15, 2018 (the "2018 Debentures"). Interest on the 2018 Debentures is payable semi-annually. At the debentures holders’ option, the 2018 Debentures are convertible into our common stock prior to November 15, 2017 subject to certain conditions, and at any time after November 15, 2017. The conversion rate of the 2018 Debentures is 55.17 shares of common stock per $1,000 principal amount of debentures, equivalent to a conversion price of approximately $18.13 per share of common stock. The closing price per share of our common stock at December 31, 2017 was $11.20. The 2018 Debentures holders have the right to require us to repurchase the 2018 Debentures if we undergo a fundamental change as defined in the debenture agreement, including the sale of all or substantially all of our common stock or assets, liquidation, or dissolution; a change in control; the delisting of our common stock from the New York Stock Exchange or the NASDAQ Global Market (or any of their respective successors); or a substantial change in the composition of our board of directors as defined in the agreement. On or after November 15, 2016, we may redeem for cash some or all of the debentures, subject to certain conditions. Upon any such redemption of the 2018 Debentures, we will pay a redemption price of 100% of their principal amount, plus accrued and unpaid interest. Upon the conversion of the 2018 Debentures we have the right to settle the conversion in stock, cash or a combination thereof.
In July and June 2017, we repurchased on the open market, and retired, an aggregate of $14.0 million face value of 2018 Debentures at a cost of $14.5 million, including transaction fees. In connection with the repurchase of these 2018 Debentures, we recognized a $0.8 million reduction in equity which is included in Accumulated Paid-In Capital in the Consolidated Balance Sheet as of December 31, 2017 and a $29 thousand loss on extinguishment of the liability which is included in Other income (loss), net in the Consolidated Statements of Operations for the twelve months ended December 31, 2017. We had $41.0 million face value of 2018 Debentures outstanding at December 31, 2017 due on May 15, 2018.
We have provided a $6.3 million letter of credit that is scheduled to expire on March 31, 2019 to the landlord of CompuCom Systems, Inc.’s Dallas headquarters which was required in connection with the sale of CompuCom Systems in 2004. The letter of credit is secured by cash which is classified as Long-term restricted cash equivalents on the Consolidated Balance Sheet. The restriction on the cash will lapse when the related letter of credit is terminated or expires on March 31, 2019.
In July 2015, the Company's Board of Directors authorized us, from time to time and depending on market conditions, to repurchase up to $25.0 million of the Company's outstanding common stock. During the years ended December 31, 2016 and 2015, we repurchased an aggregate of 0.7 million shares at an aggregate cost of $10.4 million with $14.6 million remaining for repurchase under the existing authorization.

29


We are required to return a portion or all the distributions we received as a general partner of a private equity fund for further distribution to such fund's limited partners (“clawback”). Our ownership in the fund is 19%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. We believe our potential liability due to the possibility of default by other general partners is remote. We were notified by the fund's manager that the fund is being dissolved and $1.0 million of our clawback liability was paid in the first quarter of 2017. The maximum additional clawback liability is $0.3 million which was reflected in Other long-term liabilities on the Consolidated Balance Sheet at December 31, 2017.
Our ability to generate liquidity from sales of partner companies, sales of marketable securities and from equity and debt issuances has been adversely affected from time to time by adverse circumstances in the U.S. capital markets and other factors. The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time. As we seek to provide additional funding to existing partner companies or commit capital to other initiatives, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in partner companies from time to time, we may receive proceeds from such sales, which could increase our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly.
Analysis of Consolidated Cash Flows
Cash flow activity was as follows: 
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Net cash used in operating activities
$
(20,805
)
 
$
(18,661
)
 
$
(17,749
)
Net cash provided by (used in) investing activities
(10,127
)
 
20,061

 
(56,989
)
Net cash provided by (used in) financing activities
29,625

 
(5,844
)
 
(4,321
)
 
$
(1,307
)
 
$
(4,444
)
 
$
(79,059
)
Net Cash Used In Operating Activities
Year ended December 31, 2017 versus year ended December 31, 2016. Net cash used in operating activities increased by $2.1 million for the year ended December 31, 2017 compared to the prior year. The increase was primarily due to $2.5 million of cash interest payments related to our credit facility we entered into in May 2017, partially offset by a $0.4 million decrease in cash used in professional fees.
Year ended December 31, 2016 versus year ended December 31, 2015. Net cash used in operating activities increased $0.9 million in 2016 compared to the prior year. The increase was primarily related to an increase of $0.4 million in employee costs, an increase of $0.2 million in cash used for professional fees, and an increase of $0.1 million in cash paid for office rent.

Net Cash Provided by (Used In) Investing Activities
Year ended December 31, 2017 versus year ended December 31, 2016. Net cash provided by (used in) investing activities decreased by $30.2 million for the year ended December 31, 2017 compared to the prior year. The decrease primarily related to a $57.4 million decrease in proceeds from the sales of and distributions from companies and a $13.9 million decrease in cash proceeds from the net change in marketable securities, partially offset by a $37.3 million decrease in acquisitions of ownership interests in companies and a $3.4 million decrease in advances and loans to companies.
Cash proceeds from the sales of and distributions from companies were $16.6 million for the year ended December 31, 2017 which related primarily to:
In March 2017, we sold our interest in partner company Nexxt, Inc., formerly Beyond.com, back to Nexxt, Inc. for $26.0 million. We received $15.5 million in cash and a three-year, $10.5 million note for the balance due. In February 2018, Nexxt,Inc. repaid the $10.5 million note in full.
In April 2017, we received $0.7 million in connection with the expiration of the final escrow period related to the 2016 sale of Putney, Inc.
In March 2017, we received $0.6 million of proceeds from the sale of our participating interests in Penn Mezzanine.

30


In January 2017, we received $0.6 million in connection with the expiration of the final escrow period related to the 2015 sale of Quantia.
These cash proceeds were partially offset by payment of a $1.0 million clawback liability in the first quarter of 2017.
Year ended December 31, 2016 versus year ended December 31, 2015. Net cash provided by (used in) investing activities increased by $77.1 million for the year ended December 31, 2016 compared to the prior year. The increase primarily related to a $48.9 million increase in proceeds from the sales of and distributions from companies. Cash proceeds from the sale of and distributions from companies was $74.0 million for the year ended December 31, 2016 which related to the sale of our interests in Putney and Bridgevine, proceeds received from AppFirst from the sale of its assets, cash received from escrow associated with the sale of our interests in DriveFactor, Thingworx, and Quantia and cash received associated with the achievement of performance milestones related to the sale of our interest in Thingworx. Cash proceeds from the sale of and distributions from companies was $25.1 million for the year ended December 31, 2015 which related to the sale of our interests in DriveFactor and Quantia, cash received from escrow associated with the sale of our interests in Crescendo Bioscience and Alverix, and cash received associated with the achievement of performance milestones related to the sale of our interest in Thingworx. The increase in cash provided by (used in) investing activities also related to a $21.2 million increase in cash proceeds from the net change in marketable securities, a $17.8 million decrease in acquisitions of ownership interests in companies, a $1.4 million decrease in capital expenditures, and a $0.4 million increase in repayments of advances and loans to companies which were partially offset by $12.8 million increase in advances and loans to companies.

Net Cash Provided by (Used In) Financing Activities
Year ended December 31, 2017 versus year ended December 31, 2016. Net cash provided by (used in) financing activities increased by $35.5 million for the year ended December 31, 2017 compared to the prior year. The increase was primarily related to $44.3 million of net proceeds from borrowings under the Credit Facility and a decrease of $5.4 million in repurchases of our common stock, which were partially offset by $14.5 million paid to repurchase and retire $14.0 million face value of the 2018 Debentures, including transaction fees.
Year ended December 31, 2016 versus year ended December 31, 2015. Net cash used in financing activities increased $1.5 million in 2016 compared to the prior year. The increase related to a decrease of $0.7 million in proceeds received from the exercise of stock options, an increase of $0.5 million in tax withholdings related to share-based payment awards and an increase of $0.4 million in repurchases of our common stock.

Contractual Cash Obligations and Other Commercial Commitments
The following table summarizes our contractual obligations and other commercial commitments as of December 31, 2017, by period due or expiration of the commitment. 
 
Payments Due by Period
 
Total
 
2018
 
2019 and
2020
 
2021 and
2022
 
After
2022
 
(In millions)
Contractual Cash Obligations:
 
 
 
 
 
 
 
 
 
Convertible senior debentures (a)
$
41.0

 
$
41.0

 
$

 
$

 
$

Credit facility
50.0

 

 
50.0

 

 

Interest payments on debt
14.4

 
6.4

 
8.0

 

 

Operating leases (b)
5.0

 
0.6

 
1.2

 
1.2

 
2.0

Potential clawback liabilities (c)
0.3

 

 
0.3

 

 

Other long-term obligations (d)
2.6

 
0.8

 
1.6

 
0.2

 

Total Contractual Cash Obligations
$
113.3

 
$
48.8

 
$
61.1


$
1.4

 
$
2.0

 
 
 
 
 
 
 
 
 
 
 
Amount of Commitment Expiration by Period
 
Total
 
2018
 
2019 and
2020
 
2021 and
2022
 
After
2022
 
(In millions)
Other Commitments:
 
 
 
 
 
 
 
 
 
Letters of credit (e)
$
6.3

 
$

 
$
6.3

 
$

 
$

 

31


(a)
We have outstanding $41.0 million of our 5.25% convertible senior debentures due May 15, 2018.
(b)
In 2015, we entered into an agreement for the lease of our principal executive offices which expires in April 2026.
(c)
We are required to return a portion or all the distributions we received as a general partner of a private equity fund for further distribution to such fund's limited partners (“clawback”). Our ownership in the fund is 19%. The clawback liability is joint and several, such that we may be required to fund the clawback for other general partners should they default. We believe our potential liability due to the possibility of default by other general partners is remote. We were notified by the fund's manager that the fund is being dissolved and $1.0 million of our clawback liability was paid in the first quarter of 2017. The maximum clawback liability is $0.3 million which was reflected in Other long-term liabilities on the Consolidated Balance Sheets at December 31, 2017.
(d)
Reflects the estimated amount payable to a former Chairman and CEO under an ongoing agreement.
(e)
A $6.3 million letter of credit is provided to the landlord of CompuCom Systems' Dallas headquarters lease as required in connection with our sale of CompuCom Systems in 2004. The letter of credit is now secured by cash which is classified as Long-term restricted cash equivalents on the Consolidated Balance Sheet.
In January 2018, we announced a change in strategy and we implemented an initiative to generate annual cost savings of between $5 million and $6 million. We will incur approximately $1.3 million of severance payments to terminated employees that will be paid over approximately twelve months. We have agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or if the employee terminates his employment for “good reason.” The maximum aggregate cash exposure under severance agreements for employees who were not terminated in January 2018 in connection with the change in strategy was approximately $2.9 million at December 31, 2017.
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position or results of operations.

32


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Convertible Senior Debentures
At December 31, 2017, we had $41.0 million outstanding of our 5.25% convertible senior debentures due May 15, 2018.
Liabilities
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
Fair
Value at December 31, 2017
2018 Debentures due by year (in millions)
 
$
41.0

 
$

 
$

 
$

 
$

 
$

 
$
41.0

 
$
41.6

Fixed interest rate
 
5.25
%
 
 
 
 
 
 
 
 
 
 
 
5.25
%
 
 

Credit Facility
At December 31, 2017, we had $50.0 million outstanding on a $75.0 million secured, revolving Credit Facility with HPS Investment Partners, LLC. The Credit Facility bears 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: 2%; the Federal Funds Rate plus 0.5%; LIBOR plus 1%; or the U.S. Prime Rate, payable monthly in arrears. The Credit Facility is scheduled to mature on May 11, 2020.




33


Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements, and the related Notes thereto, of Safeguard Scientifics, Inc. and the Reports of Independent Registered Public Accounting Firm are filed as a part of this Form 10-K.
 

34


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
Safeguard Scientifics, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Safeguard Scientifics, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017, 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated March 7, 2018 expressed an unqualified opinion on those consolidated financial statements.
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. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP
Philadelphia, Pennsylvania
March 7, 2018



35


Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Safeguard Scientifics, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Safeguard Scientifics, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. 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, 2017, 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 7, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, based upon its projections, the Company will not be able to maintain compliance with certain of its debt covenants over the next twelve months. If the lender were to accelerate the maturity of the debt as a result of such non-compliance, the Company would not have sufficient liquidity to repay the entire balance of its outstanding debt. This raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP    
We have served as the Company’s auditor since 1986.
Philadelphia, Pennsylvania
March 7, 2018



36



SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
 
As of December 31,
 
2017
 
2016
ASSETS



Current Assets:



Cash and cash equivalents
$
20,751


$
22,058

Marketable securities
4,452


8,384

Trading securities
3,761

 

Prepaid expenses and other current assets
4,644


2,109

Total current assets
33,608


32,551

Property and equipment, net
1,513


1,873

Ownership interests in and advances to partner companies
134,691


183,470

Long-term marketable securities


7,302

Long-term restricted cash equivalents
6,336

 
6,336

Other assets
316


296

Total Assets
$
176,464


$
231,828

LIABILITIES AND EQUITY



Current Liabilities:



Accounts payable
$
155


$
140

Accrued compensation and benefits
3,321


3,498

Accrued expenses and other current liabilities
1,851


2,223

Convertible senior debentures - current
40,485

 

Total current liabilities
45,812


5,861

Other long-term liabilities
3,535


3,630

Credit facility
45,321

 

Convertible senior debentures - non-current


52,560

Total Liabilities
94,668


62,051

Commitments and contingencies



Equity:



Preferred stock, $0.10 par value; 1,000 shares authorized



Common stock, $0.10 par value; 83,333 shares authorized; 21,573 issued at December 31, 2017 and 2016, respectively
2,157


2,157

Additional paid-in capital
812,536


816,016

Treasury stock, at cost; 999 and 1,209 shares at December 31, 2017 and 2016, respectively
(17,308
)

(21,061
)
Accumulated deficit
(715,476
)

(626,904
)
Accumulated other comprehensive loss
(113
)
 
(431
)
Total Equity
81,796


169,777

Total Liabilities and Equity
$
176,464


$
231,828

See Notes to Consolidated Financial Statements.


37



SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
General and administrative expense
$
17,131


$
18,692

 
$
17,554

Operating loss
(17,131
)

(18,692
)
 
(17,554
)
Other income (loss), net
(339
)

(1,682
)
 
217

Interest income
3,876


2,075

 
1,935

Interest expense
(8,620
)

(4,634