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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 ownership interests may vary from period to period, our substantial capital requirements and absence of liquidity from our holdings, competition, our inability to obtain maximum value for our ownership interests, our ability to attract and retain qualified employees, our ability to execute our strategy, market valuations in sectors in which our ownership interests operate, our inability to control our ownership interests companies, the uncertainty of the outcomes of corporate strategic transactions, if any, our need to manage our assets to avoid registration under the Investment Company Act of 1940, and risks associated with our ownership interests and their performance, including the fact that most of the companies in which we have an ownership interest have a limited history and a history of operating losses, face intense competition and may never be profitable, the effect of economic conditions in the business sectors in which they operate, compliance with government regulation and legal liabilities, all of which are discussed in Item 1A. “Risk Factors.” Many of these factors are beyond our ability to predict or control. 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

Historically, Safeguard has provided capital and relevant expertise to fuel the growth of technology-driven businesses. Typically, we are actively involved in strategic and operational decisions through our board representation in addition to the influence we exert through our equity ownership. We also continue to hold relatively small equity interests in other enterprises where we do not exert significant influence and do not participate in management activities. In some cases, those ownership interests relate to residual interests from prior larger interests or from companies that acquired companies in which we had ownership interests.

In January 2018, Safeguard ceased deploying capital into new opportunities in order to focus on supporting the existing ownership interests and maximizing monetization opportunities to enable returning value to shareholders. We have considered and taken action on various initiatives including the sale of our ownership interests, the sale of certain or all of our ownership interests in secondary market transactions as well as other opportunities to maximize shareholder value. In December 2019, we declared and paid a $1.00 per share special dividend. In 2021, we repurchased 4.5 million shares through a combination of open market purchases and a tender offer for an aggregate of $40.7 million resulting in an average price of $8.95 per share. In 2022, we repurchased 711,481 shares for $2.9 million at an average price of $4.13 per share through subsequent open market repurchase plans. We will continue to actively work with our ownership interests to seek monetization opportunities while we also evaluate additional strategic alternatives. These strategic alternatives could include the sale of all of our ownership interests in a single transaction or a series of transactions, merger, business combinations or other strategic transactions.

Principles of Accounting for Ownership Interests

We account for our ownership interests using one of the following methods: Equity or Other. The accounting method applied is generally determined by the degree of our influence over the entity, primarily determined by our voting interest in the entity.

Equity Method. The Company accounts for ownership interests whose results are not consolidated, but over which it exercises significant influence, under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an ownership interest depends on an evaluation of several factors including, among others, representation on the board of directors and our ownership level, which is generally a 20% to 50% interest in the voting securities of a company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. The Company records the initial ownership interest at cost. Under the equity method of accounting, the Company does not reflect a company’s financial statements within our Consolidated Financial Statements; however, our share of the income or loss of such company is reflected in Equity income (loss), net in the Consolidated Statements of Operations. The Company also adjusts the carrying value to reflect third party investments in the ownership interests, which typically result in a dilution gain. The Company includes the carrying value of equity method companies in Ownership interests and advances on the Consolidated Balance Sheets. Any excess of the Company’s cost over its underlying interest in the net assets of equity method companies that is allocated to intangible assets is amortized over the estimated useful lives of the related intangible assets. The Company reflects its share of the income or loss of the equity method companies on a one quarter lag. This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these companies.

When the Company’s carrying value in an equity method company is reduced to zero, the Company records no further losses in its Consolidated Statements of Operations unless the Company has an outstanding guarantee obligation or has committed additional funding to such equity method company. If such equity method company subsequently reports income, the Company will not record its share of such income until it exceeds the amount of the Company’s share of losses not previously recognized.

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Other Method. We account for ownership interests in companies that are not accounted for under the equity method that do not have a readily determinable fair value under the fair value measurement alternative. Under the fair value measurement alternative, these ownership interests are based on our original cost less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar interests of the same issuer. Under this method, our share of the income or losses of such companies is not included in our Consolidated Statements of Operations, however, the result of observable price changes, if any, are reflected in Other income (loss), net. We include the carrying value of these interests in Ownership interests and advances on the Consolidated Balance Sheets.

The Company accounts for ownership interests that are not accounted for under the equity method and have a readily determinable fair value at fair value based on the closing stock price on the last trading day of the reporting period. Under this method, the changes in fair value are reflected in Other income (loss), net. As of December 31, 2022 those ownership interests consist of approximately 1.3 million shares of Bright Health Group ("Bright Health") common shares valued at $0.9 million.

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 and advances.

Impairment of Ownership Interests and Advances

On a periodic basis, but no less frequently than quarterly, the Company evaluates the carrying value of its ownership interests and advances for possible impairment based on achievement of business plan objectives and milestones, the estimated fair value of each company relative to its carrying value, the financial condition and prospects of the company, and other relevant factors. The business plan objectives and milestones 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. Management then determines whether there has been an other than temporary decline in the company. Impairment is measured as the amount by which the carrying value of an asset exceeds its estimated fair value.

The reduced carrying value a previously impaired company accounted for using the Equity method is not increased even if circumstances suggest the value of the company has subsequently recovered.

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

Our companies operate in industries which are rapidly evolving and extremely competitive. It is reasonably possible that our accounting estimates with respect to the ultimate recoverability of the carrying value of ownership interests and advances could change in the near term and that the effect of such changes on our Consolidated Financial Statements could be material. While we believe that the current recorded carrying values of our equity and other method companies are not impaired, there can be no assurance that our future results will confirm this assessment or that a significant write-down or write-off will not be required in the future.

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

Year Ended December 31,

(In thousands)

Equity $ — $ —

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

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Results of Operations

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

There is intense competition in the markets in which our companies operate. Additionally, the markets in which these companies operate are characterized by rapidly changing technology, evolving industry standards, frequent introduction of new products and services, shifting distribution channels, evolving government regulation, frequently changing intellectual property landscapes and changing customer demands. Their future success depends on each company’s ability to execute its business plan and to adapt to its respective rapidly changing market.

The following is a listing of certain of our ownership interests as of December 31, 2022 and 2021. The ownership percentages indicated below are presented as of December 31, 2022 for certain companies in which we held ownership interests and reflect 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).

Safeguard Primary Ownership as of December 31,

Aktana, Inc. 13.6 % 13.4 % Equity

Clutch Holdings, Inc. 41.7 % 41.7 % Equity

InfoBionic, Inc. 25.2 % 25.2 % Equity

meQuilibrium 31.3 % 31.9 % Equity

Moxe Health Corporation 19.3 % 27.6 % Equity

Prognos Health Inc. 28.4 % 28.5 % Equity

Syapse, Inc. 11.0 % 11.1 % Equity

Trice Medical, Inc. 11.6 % 12.6 % Equity

Year ended December 31, 2022 versus year ended December 31, 2021

Year Ended December 31,

(In thousands)

General and administrative expense $ (4,775 ) $ (7,153 ) $ 2,378

General and Administrative Expense. Our general and administrative expenses consist primarily of employee compensation, stock based compensation, insurance, office costs and professional services. General and administrative expense decreased $2.4 million, or 33%, for the year ended December 31, 2022 compared to the prior year due to lower employee compensation of $1.1 million, lower severance costs of $0.8 million, lower stock based compensation costs of $0.3 million, lower insurance costs of $0.2 million and various other lower costs. General and administrative expenses also can include amounts estimated for the Transaction Bonus Plan (the "LTIP"), which is a component of employee compensation. As described in Note 11 in the accompany consolidated financial statements, the LTIP provides a cash bonus pool to employees based upon meeting certain thresholds of sales of the Company's ownership interests. Expense recognized pursuant to the LTIP was zero and $0.7 million during the years ended December 31, 2022 and 2021, respectively. The Company paid $2.5 million pursuant to the LTIP plan during 2021. No further amounts have been accrued with respect to the LTIP. General and administrative expense also includes stock based compensation expense of $1.4 million and $1.8 million years ended December 31, 2022 and 2021, respectively. Stock based compensation continues to include a significant proportion of management's overall compensation, including the settlement of amounts due pursuant to the annual management incentive plan, and Director compensation, which aggregated to $0.7 million for the year ended December 31, 2022.

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Other income (loss), net. Other income (loss), net decreased by $25.3 million for the year ended December 31, 2022, compared to the prior year. During the year ended December 31, 2022, the primary component was unrealized losses resulting from the decline in the fair value of BHG common stock of $3.7 million. During the year ended December 31, 2021, the Company recorded a gain from the sale of Flashtalking of $32.5 million, gains aggregating to $2.8 million from the sales of Velano Vascular and T-REX Group, unrealized losses net of $10.8 million from an observable price change and subsequent changes in the fair value of BHG common stock, and a $2.5 million impairment related to certain other ownership interests. The impairments were determined based on declines in the fair value of our ownership interests resulting from reduced valuation expectations and extended exit timelines resulting from the more challenging mergers and acquisitions environment related to COVID-19 and the related uncertain economic impact.

Interest Income. Interest income increased $0.5 million for the year ended December 31, 2022 compared to the prior year due primarily to higher market interest rates on marketable securities during 2022.

Equity Income (Loss), net. Equity income (loss), net fluctuates with the number of companies accounted for under the equity method, our voting ownership percentage in those companies and the net results of operations of those companies. We recognize our share of losses to the extent we have cost basis in the equity of the company or we have outstanding commitments or guarantees. Certain amounts recorded to reflect our share of the income or losses of our companies accounted for under the equity method are based on estimates and on unaudited results of operations of those companies and may require adjustments in the future when audits of these entities are made final. We report our share of the results of our equity method companies on a one quarter lag basis.

Equity income (loss), net decreased $18.8 million for the year ended December 31, 2022 compared to the prior year. The components of equity income (loss), net for the years ended December 31, 2022 and 2021 were as follows:

Year Ended December 31,

(In thousands)

Loss on impairments — — —

Share of losses of our equity method companies, net (17,897 ) (16,552 ) (1,345 )

During the year ended December 31, 2022, the gains on sales of ownership interests are primarily related to Lumesis of $4.9 million. During the year ended December 31, 2021, the gains on sales of ownership interests are comprised primarily of gains related to Zipnosis for $17.3 million and AHS for $2.0 million.

The unrealized dilution gains for the year ended December 31, 2022 were related to Moxe and for the year ended December 31, 2021 were the result of Syapse and Trice, who each raised additional equity capital that diluted the Company's interest in those entities.

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The increase in our share of losses of our equity method companies for the 2022 year compared to the prior year period was due to increased losses at principally three companies which did not experience their planned revenue growth. These increases were offset the decrease in losses applicable to two ownership interests where our carrying value was reduced to zero.

Income Tax Benefit (Expense)

There was no income tax benefit (expense) for the years ended December 31, 2022 and 2021. 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, 2022, the Company had $13.3 million of cash and cash equivalents and $6.0 million of marketable securities.

In 2015, the Company's Board of Directors authorized us, from time to time and depending on market conditions, to repurchase up to $25.0 million of the Company's outstanding common stock. During the years ended December 31, 2022 and 2021, we did not repurchase any shares under this authorization.

In May 2021, the Company's Board of Directors authorized a $6.0 million share repurchase program (the "2021 Plan") using existing funds in accordance with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the year ended December 31, 2021, the Company purchased 236,159 shares under the 2021 Plan at an aggregate cost of $1.6 million, or $6.94 per share. During October 2021, the Company suspended the 2021 Plan and completed a modified Dutch auction self-tender that resulted in the repurchase of 4.3 million common shares for an aggregate price of $38.7 million, or $9.00 per share.

In March 2022, the Company's Board of Directors replaced the 2021 Plan and authorized a separate $3.0 million share repurchase program (the "2022 Plan") using existing funds in accordance with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the year ended December 31, 2022, the Company purchased 711,481 shares under the 2022 Plan at an aggregate cost of $2.9 million, or $4.13 per share. The Company completed the 2022 Plan in January 2023 by purchasing an additional 25,096 shares, resulting in an average price of $4.09 for the 2022 Program.

We may consider additional stock repurchases or dividends in the future based on prevailing market conditions and other factors when and if additional liquidity becomes available.

Our ability to generate liquidity from transactions involving our ownership interests has been adversely affected from time to time by adverse circumstances in the U.S. capital markets and other factors, including the impact of COVID-19. We may be requested to provide additional capital to our companies, which may cause us to face liquidity issues that will constrain our ability to execute our business strategy and limit our ability to provide financial support to all of our existing companies in the amounts that we desire. The transactions we enter into in pursuit of our strategy could increase or decrease our liquidity at any point in time. As we seek to provide additional funding to existing companies where we have an ownership interest or commit capital to other initiatives, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, as we dispose of our interests in our ownership interests, we may receive proceeds from such sales, which could increase our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly. Accordingly, the Company could also pursue other sources of capital in order to maintain its liquidity. The Company believes that its cash and cash equivalents at December 31, 2022 will be sufficient to fund operations past one year from the issuance of these financial statements.

Analysis of Consolidated Cash Flows

Cash flow activity was as follows:

Year Ended December 31,

(In thousands)

Net cash used in operating activities $ (3,258 ) $ (8,152 ) $ 4,894

Net cash provided by (used in) investing activities (4,662 ) 58,114 (62,776 )

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Net Cash Used In Operating Activities

Year ended December 31, 2022 versus year ended December 31, 2021. Net cash used in operating activities decreased for the year ended December 31, 2022 compared to the prior year. The activity during the year ended December 31, 2022 was primarily the result of various non-cash adjustments to net loss, including $7.0 million of equity loss and a $3.7 million unrealized loss on the decrease in fair value of Bright Health common stock. The activity during the year ended December 31, 2021 was primarily the result of various non-cash adjustments to net income, including the $11.8 million of equity income, non-cash gains, net, of $8.5 million for observable prices changes and $35.3 million for gain on sales of ownership interests which were partially offset by $19.3 million change in the fair value of ownership interests and $2.5 million impairment losses at certain Other ownership interests.

Net Cash (Used in) provided by Investing Activities

Year ended December 31, 2022 versus year ended December 31, 2021. Net cash (used in) provided by investing activities decreased by $62.8 million for the year ended December 31, 2022 compared to the prior year. During the year ended December 31, 2022, the Company funded an aggregate of $5.7 million to Syapse, Inc, Prognos Health, Clutch Holdings, meQuilibrium and Trice Medical, Inc. as compared to aggregate of $2.7 million funded to Trice Medical and Aktana during the year ended December 31, 2021. During the year ended December 31, 2022, the Company received $5.5 million of cash proceeds from the Lumesis transaction and various other amounts resulting from the resolution or expiration of escrow contingencies, as compared to the Company receiving an aggregate of $60.8 million of cash proceeds from the Flashtalking, WebLinc, Zipnosis, T-REX and Velano Vascular transactions during the year ended December 31, 2021.

Net Cash Used In Financing Activities

Year ended December 31, 2022 versus year ended December 31, 2021. Net cash used in financing activities decreased by $37.3 million for the year ended December 31, 2022 compared to the prior year. The decrease was primarily the result of repurchases of common stock of $2.9 million for the year ended December 31, 2022 as compared to $40.7 million for the year ended December 31, 2021. There were no other significant financing activities for the years ended December 31, 2022.

Contractual Cash Obligations and Other Commercial Commitments

Payments Due by Period

(In millions)

Contractual Cash Obligations:

Operating leases (a) $ 2.0 $ 0.6 $ 1.2 $ 0.2 $ —

Total Contractual Cash Obligations (b) $ 2.0 $ 0.6 $ 1.2 $ 0.2 $ —

(a) In 2015, we entered into an agreement for the lease of our former principal executive offices which expires in April 2026. Payments pursuant to this lease are approximately $2.0 million through expiration, however, in March 2019 we entered into a sublease for this office space which is expected to result in future aggregate sublease receipts of $1.9 million through April 2026.

(b) The maximum aggregate exposure under employment and severance agreements for remaining employees was approximately $1.1 million at December 31, 2022 and up to 250,000 common shares. We are involved from time to time in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of any of these matters which are currently pending will not have a material adverse effect on our consolidated financial position or results of operation.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable for a smaller reporting company.

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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.

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) 22

Consolidated Balance Sheets as of December 31, 2022 and 2021 23

Notes to Consolidated Financial Statements 27

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Safeguard Scientifics, Inc

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Safeguard Scientifics, Inc. (a Pennsylvania corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Impairment of ownership interests and advances

The Company evaluates the carrying value of its ownership interests and advances for possible impairment. This evaluation requires management to apply significant judgment particularly related to the achievement of business plan objectives and milestones, the financial condition and prospects of the portfolio company, market conditions and other relevant factors. Based on the above, management then determines whether there has been an other than temporary decline in the value of its ownership interest in or advance to the portfolio company. The identification of other than temporary impairment of ownership interests and advances was determined to be a critical audit matter.

The principal consideration for our determination that the identification of other than temporary impairment of ownership interests and advances is a critical audit matter is due to it being an area of the financial statements requiring significant auditor judgment and subjectivity in assessing the results of management’s qualitative impairment analysis. Ownership interests and advances held by the Company are primarily comprised of early-stage companies in industries that are rapidly evolving, where evaluation of other than temporary declines in value requires significant judgment by management.

Our audit procedures related to identification of other than temporary impairment of ownership interests and advances included the following, among others:

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2021.

Philadelphia, Pennsylvania

March 10, 2023

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

As of December 31,

ASSETS

Current Assets:

Restricted cash 25 25

Marketable securities 5,956 —

Prepaid expenses and other current assets 1,251 965

LIABILITIES AND EQUITY

Current Liabilities:

Accounts payable $ 16 $ 41

Accrued compensation and benefits 507 794

Accrued expenses and other current liabilities 865 524

Lease liability - current 429 375

Lease liability - non-current 1,249 1,678

Other long-term liabilities 50 50

Commitments and contingencies (Note 11)

Equity:

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

Accumulated other comprehensive loss (25 ) (25 )

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Year Ended December 31,

General and administrative expense $ 4,775 $ 7,153

Net income (loss) before income taxes (14,263 ) 27,004

Income tax benefit (expense) — —

Net income (loss) per share:

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

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(In thousands)

Total Deficit Loss Shares Amount Capital Shares Amount

Stock-based compensation 606 — — — — 606 — —

Stock-based compensation 736 — — — — 736 — —

Repurchases of common stock (2,940 ) — — — — — 712 (2,940 )

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash Flows from Operating Activities:

Adjustments to reconcile to net cash used in operating activities:

Amortization of right of use asset 271 229

Impairments of ownership interests and advances — 2,521

Gain from observable price changes (553 ) (8,505 )

Gain from sales of ownership interests — (35,284 )

Change in fair value of ownership interests 3,689 19,255

Stock-based compensation, including liability classified awards 1,445 1,779

Changes in assets and liabilities:

Prepaid expenses and other current assets (534 ) (238 )

Net cash used in operating activities (3,258 ) (8,152 )

Cash Flows from Investing Activities:

Proceeds from sales and distributions from ownership interests 6,879 60,832

Advances and loans to ownership interests (5,670 ) (2,718 )

Purchase of marketable securities (11,871 ) —

Proceeds, from sales and maturities in marketable securities 6,000 —

Net cash (used in) provided by investing activities (4,662 ) 58,114

Cash Flows from Financing Activities:

Repurchases of common stock (2,939 ) (40,655 )

Tax withholdings related to equity-based awards (549 ) (144 )

Net cash used in financing activities (3,488 ) (40,799 )

Net change in cash, cash equivalents and restricted cash (11,408 ) 9,163

Cash, cash equivalents and restricted cash at end of period $ 13,356 $ 24,764

See Notes to Consolidated Financial Statements.

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SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

Liquidity And Capital Resources

As of December 31, 2022, Safeguard Scientifics, Inc. ("the Company") had $13.3 million of cash and cash equivalents and $6.0 million of marketable securities.

In January 2018, Safeguard ceased deploying capital into new opportunities in order to focus on supporting the existing ownership interests and maximizing monetization opportunities to enable returning value to shareholders. We have considered and taken action on various initiatives including the sale of our ownership interests, the sale of certain or all of our ownership interests in secondary market transactions as well as other opportunities to maximize shareholder value. As we seek to provide additional funding to existing companies where we have an ownership interest, we may be required to expend our cash or incur debt, which will decrease our liquidity. From time to time, we are engaged in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly. Accordingly, the Company could also pursue other sources of capital in order to maintain its liquidity.

The Company believes that its cash and cash equivalents at December 31, 2022 will be sufficient to fund operations past one year from the issuance of these consolidated financial statements.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Safeguard and all of its wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

Principles of Accounting for Ownership Interests in Companies

The Company accounts for its ownership interests using one of the following methods: Equity or Other. The accounting method applied is generally determined by the degree of the Company's influence over the entity, primarily determined by our voting interest in the entity.

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

Equity Method. The Company accounts for ownership interests whose results are not consolidated, but over which it exercises significant influence, under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an ownership interest depends on an evaluation of several factors including, among others, representation on the board of directors and our ownership level, which is generally a 20% to 50% interest in the voting securities of a company, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the company. The Company records the initial ownership interest at cost. Under the equity method of accounting, the Company does not reflect a company’s financial statements within our Consolidated Financial Statements; however, our share of the income or loss of such company is reflected in Equity income (loss), net in the Consolidated Statements of Operations. The Company also adjust the carrying value to reflect third party investments in the ownership interests, which typically result in a dilution gain. The Company includes the carrying value of equity method companies in Ownership interests and advances on the Consolidated Balance Sheets. Any excess of the Company’s cost over its underlying interest in the net assets of equity method companies that is allocated to intangible assets is amortized over the estimated useful lives of the related intangible assets. The Company reflects its share of the income or loss of the equity method companies on a one quarter lag. This reporting lag could result in a delay in recognition of the impact of changes in the business or operations of these companies.

The Company accounts for ownership interests that are not accounted for under the equity method and have a readily determinable fair value at fair value based on the closing stock price on the last trading day of the reporting period. Under this method, the changes in fair value are reflected in Other income (loss), net. As of December 31, 2022 those ownership interests consist of approximately 1.3 million common shares of Bright Health Group ("Bright Health") valued at $0.9 million.

Comprehensive Income (loss)

During the years ended December 31, 2022 or 2021, there were no items of comprehensive income (loss).

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Accounting Estimates

The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. These estimates include the evaluation of the recoverability of the Company’s ownership interests and advances, the recoverability of deferred tax assets, stock-based compensation and commitments and contingencies. Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.

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

It is reasonably possible that the Company’s accounting estimates with respect to the ultimate recoverability of the carrying value of the Company’s ownership interests and advances could change in the near term and that the effect of such changes on the consolidated financial statements could be material. At December 31, 2022, the Company believes the carrying value of the Company’s ownership interests and advances is not impaired, although there can be no assurance that the Company’s future results will confirm this assessment, that a significant write-down or write-off will not be required in the future or that a significant loss will not be recorded in the future upon the sale of a company.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits that are readily convertible into cash. The Company has not experienced any significant losses on cash equivalents and does not believe it is exposed to any significant credit risk on cash and cash equivalents.

Restricted Cash

Restricted cash represents cash required to be set aside by a contractual agreement as a shareholder representative. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Statements of Cash Flows:

(In thousands)

Restricted cash 25 25

Total cash, cash equivalents and restricted cash $ 13,356 $ 24,764

Financial Instruments

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

Right-of-use asset

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

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Lease liability

The initial lease liability represents the present value of the fixed escalating lease payments through April 2026 associated with the Company's prior corporate headquarters operating office lease. The discount rate used to calculate the lease liability was based on the Company's incremental borrowing rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease, which was approximately 12%, at the transition to the guidance of ASU No.2016-02,Leases. Subsequent values of the lease liability reflect the reduction in the lease liability for operating lease payments less an amount representing interest, which is included in the straight-line lease expense. There is no residual value guarantee associated with this operating lease arrangement. The Company has incurred operating lease expenses and operating cash outflows of $0.5 million for each of the years ended December 31, 2022 and 2021, respectively, and $0.6 million for each of the years ended December 31, 2022 and 2021.

In March 2019, the Company entered into a sublease of its prior corporate headquarters office space. The term of the sublease is through April 2026, the same as the Company's underlying lease. Fixed sublease payments to the Company are escalating over the term of the sublease and are reported as a component of general and administrative expenses.

A summary of the Company's operating lease cash flows at December 31, 2022 follows:

Operating lease payments Expected sublease receipts

(In thousands)

Thereafter — —

Total future minimum lease payments 2,046 1,918

Less imputed interest (368 )

Total operating lease liabilities $ 1,678

Impairment of Ownership Interests and Advances

On a periodic basis, but no less frequently than quarterly, the Company evaluates the carrying value of its ownership interests and advances for possible impairment based on achievement of business plan objectives and milestones, the estimated value of each company relative to its carrying value, the financial condition and prospects of the company and other relevant factors. The business plan objectives and milestones the Company considers include, among others, those related to financial performance, such as achievement of planned financial results or completion of capital raising activities, and those that are not primarily financial in nature, such as hiring of key employees or the establishment of strategic relationships.

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Management then determines whether there has been an other than temporary decline in the value of its ownership interest in the company. Impairment is measured as the amount by which the carrying value of an asset exceeds its estimated fair value.

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

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

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

Income Taxes

The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period of the enactment date. The Company provides a valuation allowance against the net deferred tax asset for amounts which are not considered more likely than not to be realized.

Net Income (Loss) Per Share

The Company computes net income (loss) per share using the weighted average number of common shares outstanding during each year. The Company includes in diluted net income (loss) per share common stock equivalents (unless anti-dilutive) which would arise from the exercise of stock options and conversion of other convertible securities and adjusted, if applicable, for the effect on net income (loss) of such transactions. Diluted net income (loss) per share calculations adjust net income (loss) for the dilutive effect of common stock equivalents and convertible securities issued by the Company’s consolidated or equity method companies.

Segment Information

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

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2. Ownership Interests and Advances

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

(In thousands)

Equity Method:

Private equity funds 97 117

Other Method:

Companies, fair value measurement alternative 1,067 514

Private equity funds, fair value measurement alternative 250 250

Advances to companies 4,382 —

In September 2022, Lumesis, Inc. was acquired by another entity for cash. The Company received $5.5 million in cash proceeds in connection with this transaction, excluding holdbacks and escrows. This transaction resulted in a gain of $4.9 million, including $0.8 million other receivable related to an indemnification escrow during the year ended December 31,2022.

In March 2021, Zipnosis, Inc. was acquired by another entity, Bright Health. The Company received $3.5 million in cash proceeds, including escrows, and $15.3 million in preferred equity in the acquiror in connection with this transaction. This ownership interest represented a security that did not have a readily determinable fair value. Due to the inherent uncertainty of determining the fair value of ownership interests that do not have a readily determinable fair value, this estimated value may differ significantly from the value that would have been reported had a ready market for the security existed, and it is reasonably possible that the difference could be material. The Company recognized a $17.3 million gain on the sale, which is included in Equity income (loss), net in the Consolidated Statements of Operations. The fair value of the ownership interest received as a result of the acquisition was estimated based on evaluating several valuation methods available, including the value at which independent third parties have recently invested, the valuation of comparable public companies, and the present value of our expected outcomes. Assumptions considered within these methods include determining which public companies are comparable, projecting forward revenues, selecting an appropriate valuation multiple, discounts to apply for the lack of marketability or lack of comparability, other factors and the relative weight to apply to each valuation method available. Due to the unobservable nature of some of these inputs, we determined this initial estimate to be a Level 3 fair value measurement. During the three months ended June 30, 2021, Bright Health completed an initial public offering that resulted in our ownership interest converting into approximately 1.3 million common shares. Accordingly, the Bright Health common shares represent an ownership interest with a readily determinable fair value (Level 1), which will subsequently be measured at fair value with unrealized gains (losses) being reported as a component of Other income (loss), net. As a result, the Company recognized a $10.8 million unrealized loss, net, on Bright Health subsequent to the initial public offering during the year ended December 31, 2021. The Company recognized a $3.7 million unrealized loss on Bright Health during the year ended December 31, 2022.

In August 2021, Flashtalking was acquired by another entity. The Company has received $45.0 million in cash proceeds, including escrows, and included a $32.5 million gain in Other income (loss), net, during the year ended December 31, 2021. The Company may receive additional amounts of up to approximately $0.5 million over the next 12 months from the resolution of escrow contingencies.

In January 2021, WebLinc, Inc. was acquired by another entity. The Company has received $3.6 million in cash proceeds to-date, which could be partially offset by indemnifiable claims. The Company has recognized a $0.1 million loss on the sale during the year ended December 31, 2021, which is included in Equity income (loss), as certain contingencies were resolved. During the year ended December 31, 2022, the Company recognized $0.5 million as gain on sale as the result of the collection of additional amounts and as contingencies were resolved, those amounts were recorded as gain on the sale and included within Equity income (loss).

QuanticMind and Hoopla were acquired in separate transactions during the first quarter of 2021 by other entities, however there were no resultant proceeds to the Company. There was no resulting gain or loss due to this equity method ownership interest being impaired during the prior year.

In March 2021, the Company's ownership interest in T-REX Group, Inc., which was accounted for using the fair value measurement alternative, was acquired for $3.0 million in cash. The Company recognized a $0.9 million gain, which is included in Other income (loss), net.

In April 2021, Velano Vascular was acquired by another entity. The Company has received $4.0 million in cash proceeds, including escrows, and included a $1.9 million gain in Other income (loss), net, for the year ended December 31,2021.

In December 2021, the Company received $2 million of contingent proceeds resulting from resolution of certain valuation thresholds remaining from the 2018 sale of AdvantEdge Healthcare Solutions.

During the year ended December 31,2021, the Company recorded an impairment of $2.5 million related to reduced expectations for certain Other ownership interests, which is included in Other income (loss), net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2022, the Company held ownership interests accounted for using the equity method in 8 non-consolidated companies.

Certain of the Company’s ownership interests as of December 31, 2022 and 2021 included the following:

Safeguard Primary Ownership as of December 31,

Aktana, Inc. 13.6 % 13.4 % Equity

Clutch Holdings, Inc. 41.7 % 41.7 % Equity

InfoBionic, Inc. 25.2 % 25.2 % Equity

meQuilibrium 31.3 % 31.9 % Equity

Moxe Health Corporation 19.3 % 27.6 % Equity

Prognos Health Inc. 28.4 % 28.5 % Equity

Syapse, Inc. 11.0 % 11.1 % Equity

Trice Medical, Inc. 11.6 % 12.6 % Equity

Summarized Financial Information

The following table provides summarized financial information for ownership interests accounted for under the equity method for the periods presented and has been compiled from respective company financial statements, reflect certain historical adjustments, and are reported on a one quarter lag. Results of operations are excluded for periods prior to their acquisition and subsequent to their disposition. Historical results are not adjusted when the Company exits or writes-off a company.

As of December 31,

(In thousands)

Balance Sheets:

Total liabilities and shareholders’ deficit $ 181,115 $ 180,871

Number of equity method ownership interests 8 9

Year Ended December 31,

(In thousands)

Results of Operations:

As of December 31, 2022, the Company’s carrying value in equity method companies, in the aggregate, exceeded the Company’s share of the net assets of such companies by approximately $2.7 million. Of this excess, $2.5 million was allocated to goodwill and $0.2 million was allocated to intangible assets.

3. Acquisitions of Ownership Interests

2022 Transactions

The Company funded $1.6 million of convertible loans to Syapse, Inc. The Company had previously deployed an aggregate of $25.0 million. Syapse drives healthcare transformation through precision medicine, enabling provider systems to improve clinical outcomes, streamline operations, and shift to new payment models.

The Company funded $2.0 million of convertible loans to Prognos Health Inc. The Company had previously deployed an aggregate of $12.6 million. Prognos is a healthcare platform company transforming the ability to access, manage and analyze healthcare data 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.

The Company funded $1.4 million of convertible loans to Clutch Holdings, Inc. The Company had previously deployed an aggregate of $16.9 million. Clutch provides customer intelligence and personalized engagements that empower consumer-focused businesses to identify, understand and motivate each segment of their customer base.

The Company funded $0.5 million of convertible loans to meQuilibrium. The Company had previously deployed an aggregate of $14.0 million. meQuilibrium is a digital coaching platform that delivers clinically validated and highly personalized resilience solutions to employers, health plans, wellness providers, and consumers increasing engagement, productivity and performance, as well as improving outcomes in managing stress, health and well-being.

The Company funded $0.1 million of convertible loans to Trice Medical. The Company had previously deployed an aggregate of $11.8 million. Trice Medical is focused on orthopedic diagnostics using fully integrated camera-enabled technologies to provide clinical solutions to physicians. The Company also committed to provide another $0.3 million under certain conditions pursuant to a subordinated line of credit. The Company's obligation under this line of credit is included in accrued expenses. Subsequent to the year end, the Company funded $0.3 million in accordance with this line of credit.

2021 Transactions

The Company funded $1.7 million to Aktana, Inc. during the three months ended September 30, 2021. The Company had previously deployed an aggregate of $14.2 million. 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.

Syapse raised $68 million of preferred equity during the three months ended March 31, 2021, which reduced the Company's ownership interest to approximately 11.1%. The Company recorded a $7.3 million dilution gain as a result of this transaction, which is included in Equity income (loss), net in the Consolidated Statements of Operation.

The Company funded $1 million of convertible loans to Trice Medical, Inc. during the three months ended June 30, 2021. During the three months ended September 30, 2021, Trice Medical raised additional preferred equity which reduced the Company's ownership interest to 12.6%. The Company's existing convertible loans and related interest in Trice Medical were also converted into this new class of preferred equity. As a result of this transaction, the Company recorded a $2.0 million dilution gain for the year ended December 31, 2021.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. Fair Value Measurements

The Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Cash, cash equivalents and restricted cash approximate fair value due to their short term nature. The Company did not have any Level 2 or Level 3 financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022.

Carrying Fair Value Measurement at December 31, 2022

Value Level 1 Level 2 Level 3

(in thousands)

Cash and cash equivalents $ 13,331 $ 13,331 $ — $ —

Restricted cash $ 25 $ 25 $ — $ —

Marketable securities—held-to-maturity:

U.S. Government securities $ 5,956 $ 5,956 $ — $ —

Ownership interests $ 860 $ 860 $ — $ —

Carrying Fair Value Measurement at December 31, 2021

Value Level 1 Level 2 Level 3

(In thousands)

Cash and cash equivalents $ 24,739 $ 24,739 $ — $ —

Restricted cash equivalents $ 25 $ 25 $ — $ —

Ownership interests $ 4,549 $ 4,549 $ — $ —

Ownership interests accounted for at fair value as of December 31, 2022 consist of approximately 1.3 million common shares of Bright Health. The securities are carried at fair value based on the closing stock price on the last trading day of the reporting period. The Company was restricted from trading these securities until December 2021 as a result of a lock-up agreement from the Bright Health Group initial public offering.

5. Equity

In July 2015, the Company's Board of Directors authorized the Company, from time to time and depending on market conditions, to repurchase up to $25.0 million of the Company's outstanding common stock. During the years ended December 31, 2022 and 2021, the Company did not repurchase any shares under the existing authorization.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Stock-Based Compensation

Equity Compensation Plans

The 2014 Equity Compensation Plan has 4.1 million shares authorized for issuance. During 2022 and 2021, the Company issued no stock-based awards outside of existing plans. To the extent allowable, service-based options are incentive stock options. Options granted under the plans are at prices equal to or greater than the fair market value at the date of grant. Upon exercise of stock options, the Company issues shares first from treasury stock, if available, then from authorized but unissued shares. At December 31, 2022, the Company had reserved 2.2 million shares of common stock for possible future issuance under its 2014 Equity Compensation Plan and other previously expired equity compensation plans.

Classification of Stock-Based Compensation Expense

Stock-based compensation consists of time based awards to employees, financial liability based awards to employees and non-employees to be settled in stock, performance based awards to employees, and financial liability based awards to Directors for quarterly and annual services. Stock-based compensation expense was recognized in the Consolidated Statements of Operations as follows:

Year Ended December 31,

(In thousands)

General and administrative expense $ 1,445 $ 1,779

Stock-based compensation expense of $1.2 million and $1.2 million was recognized during the years ended December 31, 2022 and 2021, respectively, related to annual and quarterly Board fees, time based management awards and management bonuses earned during the year that were subsequently settled in stock. For the years ended December 31, 2022 and 2021, respectively, the Company issued 165 thousand and 83 thousand of restricted shares to Directors for their annual and quarterly services. The annual grants vest over a one year period, or are vested at issuance for directors 65 or older, while quarterly amounts are paid in arrears. The Company vested 110 thousand and 95 thousand shares during the years ended December 31, 2022 and 2021. The Company vested 22 thousand and 67 thousand shares during the years ended December 31, 2022 and 2021, respectively, for time based management compensation. The Company settled in stock other management bonuses resulting in the issuance of 82 thousand and 60 thousand vested shares for the years ended December 31, 2022 and 2021, respectively. The Company issued 15 thousand and 20 thousand vested shares to a non-employee for services during the years ended December 31, 2022 and 2021. The Company had liabilities of $0.4 million and $0.8 million as of December 31, 2022 and 2021, respectively, that were settled through the issuance of common stock in the subsequent period.

The Company has previously granted certain performance-based stock units that vest based on the achievement of targeted capital returns based on net cash proceeds received by the Company on the sale, merger or other exit transaction of certain identified companies. The requisite service periods for these performance-based awards were based on the Company’s estimate of when the performance conditions will be met. Compensation expense was recognized for performance-based awards for which the performance condition is considered probable of achievement. During the years ended December 31, 2022 and 2021, respectively, 92 thousand and 6 thousand performance-based stock units pursuant to these targeted capital return pools were canceled or forfeited. The Company recorded a reduction of compensation expense related to these performance-based awards of zero and $0.1 million for the years ended December 31, 2022 and 2021, respectively. During October 2020 and in January 2022, the Company granted the CEO restricted stock units that may vest based on certain performance targets and criteria determined by the Board of Directors. Such performance-based stock units represent the right to receive shares of the Company’s common stock, on a one-for-one basis at target, or up to 120% with respect to the 2020 grant, for certain specified thresholds. For the years ended December 31, 2022 and 2021, the Company recognized stock based compensation expense of $0.2 million and $0.5 million, respectively, and vested 64 thousand and 85 thousand shares, respectively, pursuant to these arrangements.

Unrecognized compensation expense related to performance stock units and restricted stock at December 31, 2022 was immaterial.

While there were no stock options granted during 2022 and 2021, the Company had outstanding options that vest based on two different types of vesting schedules:

1) performance-based; and

2) service-based.

Performance-based option awards also entitled participants to vest in a number of awards determined by achievement by the Company of target capital returns based on net cash proceeds received by the Company upon the sale, merger or other exit transaction of certain identified companies. Compensation expense is recognized over the requisite service periods using the straight-line method but is accelerated if capital return targets are achieved earlier than estimated. The Company did not issue any performance-based units during the years ended December 31, 2022 and 2021. During the years ended December 31, 2022 and 2021, respectively, 0 thousand and 1 thousand performance-based options vested and an immaterial amount of compensation cost was recognized. During the years ended December 31, 2022 and 2021, respectively, 11 thousand and 11 thousand performance-based options were canceled or forfeited. The maximum number of unvested options at December 31, 2022 attainable under these grants was zero shares.

Service-based awards generally vest over four years after the date of grant and expire eight years after the date of grant. Compensation expense is recognized over the requisite service period using the straight-line method. The requisite service period for service-based awards is the period over which the award vests. During the years ended December 31, 2022 and 2021, respectively, the Company issued no service-based options to employees and recorded zero compensation expense from the vesting of previously issued awards. During the years ended December 31, 2022 and 2021, respectively, 0 thousand and 5 thousand service-based options were canceled or forfeited.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Option activity of the Company is summarized below:

(In thousands) (In years) (In thousands)

Options granted — —

Options exercised — —

Options canceled/forfeited (16 ) 14.20

Options granted — —

Options exercised — —

Options canceled/forfeited (11 ) 14.48

Shares available for future grant 2,134

At December 31, 2022, total unrecognized compensation cost related to non-vested service-based options was immaterial. At December 31, 2022, total unrecognized compensation cost related to non-vested performance-based options was immaterial.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Shares Weighted Average Grant Date Fair Value

(In thousands)

7. Employee Benefit Plan

The Company maintains a qualified 401(k) retirement plan for eligible employees. The Plan’s matching formula is 100% of the first5% of participants’ qualified compensation. Compensation expense related to our matching contributions to the Plan for the years ended December 31, 2022 and 2021, were $0.1 million and $0.1 million, respectively.

8. Income Taxes

The federal and state provision (benefit) for income taxes was $0.0 million for the years ended December 31, 2022 and 2021.

The total income tax provision (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 21.0% for the years ended December 31, 2022 and 2021 to net income (loss) before income taxes as a result of the following:

Year Ended December 31,

Statutory tax expense (benefit) (21.0 )% 21.0 %

Increase (decrease) in taxes resulting from:

Nondeductible expenses (2.6 ) 3.3

Valuation allowance 23.6 (24.3 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets were as follows:

As of December 31,

(In thousands)

Deferred tax asset:

Carrying values of ownership interests and other holdings $ 33,222 $ 31,985

Disallowed interest carryforwards 6,891 7,120

Accrued expenses 47 24

Stock-based compensation 180 268

Net deferred tax asset $ — $ —

As of December 31, 2022, the Company and its subsidiaries had federal net operating and capital loss carryforwards for tax purposes of approximately $326 million, of which approximately $60 million have an indefinite life. These carryforwards expire as follows:

Total

(In thousands)

In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that it is more likely than not that certain future tax benefits may not be realized as a result of current and future income. Accordingly, a valuation allowance has been recorded against substantially all of the Company’s deferred tax assets.

The Company recognizes in its Consolidated Financial Statements the impact of a tax position if that position is more likely than not to be sustained upon examination, based on the technical merits of the position. All uncertain tax positions relate to unrecognized tax benefits that would impact the effective tax rate when recognized.

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

There were no changes in the Company’s uncertain tax positions for the years ended December 31, 2022 and 2021.

The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. Tax years 2015 and forward remain open for examination for federal tax purposes and the Company’s more significant state tax jurisdictions. To the extent utilized in future years’ tax returns, net operating loss carryforwards at December 31, 2022 will remain subject to examination until the respective tax year is closed. The Company recognizes penalties and interest accrued related to income tax liabilities in income tax benefit (expense) in the Consolidated Statements of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. Net Income (Loss) Per Share

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

Year Ended December 31,

(In thousands, except per share data)

Basic:

Weighted average common shares outstanding 16,337 19,827

Net income (loss) per share $ (0.87 ) $ 1.36

Diluted:

Weighted average common shares outstanding 16,337 19,827

Net income (loss) per share $ (0.87 ) $ 1.36

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

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

Diluted income (loss) per share for the years ended December 31, 2022 and 2021 do not reflect the following potential shares of common stock that would have an anti-dilutive effect or have unsatisfied performance or market conditions:

10. Related Party Transactions

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

11. Commitments and Contingencies

The Company and the companies in which it holds ownership interests are involved in various claims and legal actions arising in the ordinary course of business. In the current opinion of the Company, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations, however, no assurance can be given as to the outcome of these actions, and one or more adverse rulings could have a material adverse effect on the Company’s consolidated financial position and results of operations or that of its companies. The Company records costs associated with legal fees as such services are rendered.

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The Company has provided a guarantee, which is fully funded by escrowed funds held by a third party, of $3.8 million at December 31, 2022 which related to one of the Company's private equity holdings.

The Company has agreements with certain employees that provide for severance payments to the employee in the event the employee is terminated without cause or an employee terminates his employment for “good reason.” The maximum aggregate exposure under severance agreements for remaining employees is approximately $1.1 million at December 31, 2022 and 250,000 common shares.

In 2018, the Board of Directors (the “Board”) of the Company adopted a long-term incentive plan, which was amended in February 2019 and June 2020, known as the Amended and Restated Safeguard Scientifics Transaction Bonus Plan (the “LTIP”). The purpose of the LTIP is to promote the interests of the Company and its shareholders by providing an additional incentive to employees to maximize the value of the Company in connection with the execution of the business strategy that the Company adopted and announced in January 2018. The June 2020 amendment lowered the level of the first threshold and the resulting bonus pool percentage as an incentive to employees to accelerate actions consistent with the business strategy. Under the LTIP, participants, which includes certain current and former employees, have received awards that may result in cash payments in connection with sales of the Company’s ownership interests (“Sale Transaction(s)”). The LTIP provides for a bonus pool corresponding to: (i) specified vesting thresholds or (ii) specified events. In the first case, the bonus pool will range from an amount equal to 0.2% (previously 1.0%) of received proceeds at the first threshold to 1.3% at higher thresholds. In the second case, a minimum pool will be created and paid under specified circumstances. The bonus pool will be allocated and paid to participants in the LTIP based on the product of (i) the participant’s applicable bonus pool percentage and (ii) the bonus pool calculated as of the vesting date, minus any previously paid portion of the bonus pool. Any portion of the bonus pool available as of the applicable vesting date that is reserved will be allocated in connection with each vesting date so that the entire bonus pool available as of such vesting date is allocated and payable to participants. Subject to the terms of the LTIP, payments under the LTIP will be paid in cash within 60 days of the applicable vesting date. All current officers and employees of the Company are eligible to participate in the LTIP. The Board, in its sole discretion, will determine the participants to whom awards are granted under the LTIP. The Company recorded compensation expense of zero and $0.7 million during the years ended December 31, 2022 and 2021, respectively. The Company paid $2.5 million during the year ended December 31, 2021 and has no amounts accrued under the LTIP as of December 31, 2022.

In June 2011, Advanced BioHealing, Inc. (“ABH”) was acquired by Shire plc (“Shire”). Prior to the expiration of the escrow period in March 2012, Shire filed a claim against all amounts held in escrow related to the sale based principally upon a United States Department of Justice (“DOJ”) false claims act investigation relating to ABH (the “Investigation”). In connection with the Investigation, in July 2015 the Company received a Civil Investigation Demand-Documentary Material (“CID”) from the DOJ regarding ABH and Safeguard’s relationship with ABH. Pursuant to the CID, the Company provided the requested materials and information. To the Company’s knowledge, the CID was related to multiple qui tam (“whistleblower”) actions, one of which was filed in 2014 by an ex-employee of ABH that named the Company and one of the Company’s employees along with other entities and individuals as defendants. At this time, the DOJ has declined to pursue the qui tam action as it relates to the Company and such Company employee. In addition, in connection with the above matters, the Company and other former equity holders in ABH entered into a settlement and release with Shire, which resulted in the release to Shire of all amounts held in escrow related to the sale of ABH.

12. Supplemental Cash Flow Information

During the years ended December 31, 2022 and 2021, the Company converted zero and $1.0 million, respectively, of advances into ownership interests.

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SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. Segment Reporting

As of December 31, 2022 and 2021, all of the Company’s assets were located in the United States.

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SAFEGUARD SCIENTIFICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

14. Selected Quarterly Financial Information (Unaudited)

Three Months Ended

March 31 June 30 September 30 December 31

(In thousands, except per share data)

Income tax benefit (expense) — — — —

Net loss per share (a)

Income tax benefit (expense) — — — —

Net income (loss) per share (a)

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 2022 are functioning effectively.

(b) Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. 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. Our internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our 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.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the framework established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective.

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Election of Directors,” “Corporate Governance and Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Information about our Executive Officers is included in Annex to Part I above.

Item 11.Executive Compensation

Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation.”

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The material features of our equity compensation plans are described in Note 7 to the Consolidated Financial Statements filed as part of our Annual Report on Form 10-K for the year ended December 31, 2022.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

Incorporated by reference to the portions of the Definitive Proxy Statement entitled “Corporate Governance Principles and Board Matters – ‘Board Independence’ and “Review and Approval of Transactions with Related Persons.”

Item 14. Principal Accountant Fees and Services

Incorporated by reference to the portion of the Definitive Proxy Statement entitled “Independent Public Accountant – Audit Fees.”

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Consolidated Financial Statements and Schedules

Incorporated by reference to Item 8 of this Report on Form 10-K.

(b) Exhibits

The exhibits required to be filed as part of this Report are listed in the exhibit index below.

None.

Exhibits

The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Report. For exhibits that previously have been filed, the Registrant incorporates those exhibits herein by reference. The exhibit table below includes the Form Type and Filing Date of the previous filing and the location of the exhibit in the previous filing which is being incorporated by reference herein. Documents which are incorporated by reference to filings by parties other than the Registrant are identified in footnotes to this table.

Incorporated Filing Reference

Exhibit Number Description Form Type & Filing Date Original Exhibit Number

1.a Description

10.7 Compensation Summary — Non-employee Directors Form 10-K 3/11/22 10.7

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10.13* Key Employee Compensation Recoupment Policy Form 10-Q 7/26/13 10.2

14.1 Code of Business Conduct and Ethics — —

21.1 † List of Subsidiaries — —

† Filed herewith

‡ Furnished herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SAFEGUARD SCIENTIFICS, INC.

By: /s/ ERIC C. SALZMAN

Eric C. Salzman

Chief Executive Officer

Dated: March 10, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

Eric C. Salzman

Mark A. Herndon

/s/ ROSS D. DEMONT Director March 10, 2023

Ross D. DeMont

/s/ RUSSELL D. GLASS Director March 10, 2023

Russell D. Glass

/s/ BETH S. MICHELSON Director March 10, 2023

Beth S. Michelson

/s/ JOSEPH M. MANKO, JR. Chairman of the Board of Directors March 10, 2023

Joseph M. Manko, Jr.

/s/ MAUREEN F. MORRISON Director March 10, 2023

Maureen F. Morrison

Safeguard Scientifics Inc SFES US Equity

SFES · 10-K · period ended 2022-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11.Executive Compensation

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Safeguard Scientifics Inc SFES US Equity☆

SFES · 10-K · period ended 2022-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11.Executive Compensation

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Safeguard Scientifics Inc SFES US Equity