SAFEGUARD SCIENTIFICS INC. Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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,
fluctuations in the market prices of our publicly traded holdings, competition,
our inability to obtain maximum value for our ownership interests, or at all,
and the return of value to our shareholders, 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, 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 our ownership
interests 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 ownership interests operate, including
the impact of COVID-19, compliance with government regulation and legal
liabilities, all of which are discussed in Item 1A. "Risk Factors" in
Safeguard's Annual Report on Form 10-K and updated, as applicable, in "Factors
that May Affect Future Results" and Item 1A. "Risk Factors" below. 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.



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Business Overview



Over the recent past, Safeguard has provided capital and relevant expertise to
fuel the growth of technology-driven businesses. In many, but not all cases, we
are actively involved, influencing development through board representation and
management support, in addition to the influence we exert through our equity
ownership. We also continue to hold relatively small equity interests in other
enterprises where we do not exert significant influence and do not participate
in management activities. In some cases, those 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 announced that we will not deploy any capital into
new opportunities and will focus on supporting our existing companies and
maximizing monetization opportunities to enable the return of value to
shareholders. In that context, we have, are and will consider initiatives
including, among others: the sale of our ownership interests, the sale of
certain or all ownership interests in secondary market transactions, or a
combination thereof, as well as other opportunities to maximize shareholder
value. We initiated the return of value to shareholders in 2019 with a $1.00 per
share special dividend and continued in 2021 through share repurchases
aggregating to 4.5 million shares for $40.3 million.  We anticipate additional
actions could occur in the future, once significant dispositions occur, in the
form of stock repurchases and/or special dividends based on available cash
resources, prevailing market conditions and other factors.



Results of Operations

We operate as a single operating segment based on the similar nature of our technology-driven companies, functional alignment of organizational structure and reports that are regularly reviewed by the chief operating decision maker with the aim of evaluating performance and d ‘allocate 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 list of some of our participations in September 30, 2021 and 2020, respectively.

                            Safeguard Primary Ownership as of September 30,
Company Name                      2021                           2020           Accounting Method
Aktana, Inc.                     15.0%                          15.2%                Equity
Clutch Holdings, Inc.            41.7%                          41.2%                Equity
InfoBionic, Inc.                 25.2%                          25.2%                Equity
Lumesis, Inc.                    43.2%                          43.5%                Equity
MediaMath, Inc.                  13.2%                          13.3%                 Other
meQuilibrium                     31.9%                          32.0%                Equity
Moxe Health Corporation          27.6%                          29.9%                Equity
Prognos Health Inc.              28.5%                          28.5%                Equity
Syapse, Inc.                     11.1%                          19.6%                Equity
Trice Medical, Inc.              12.6%                          16.6%                Equity




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Three months ended September 30, 2021 versus the three months ended September
30, 2020



                                          Three Months Ended September 30,
                                        2021              2020         Variance
                                                   (In thousands)

General and administrative expenses $ (1,564) $ (2,275) $

 711
Other income (loss), net                  20,588              (820 )      21,408
Interest income                               70                52            18
Equity income (loss), net                   (761 )          (1,300 )         539
                                     $    18,333       $    (4,343 )   $  22,676




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 for the three months ended September 30, 2021 as compared to the prior
year quarter due to lower employee compensation of $0.5 million, lower insurance
costs of $0.1 million and various other lower costs. General and administrative
expense includes stock based compensation of $0.5 million for the three months
ended September 30, 2021 as compared to $0.5 million in the comparable prior
year quarter.  General and administrative expenses also include amounts
estimated for the Transaction Bonus Plan (the "LTIP"), which is a component of
employee compensation.  As described in Note 9, 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 $0.2 million and $0.4 million for the three month period ended September 30,
2021 and 2020, respectively.  The Company did not make any payments during the
quarter.  The remaining $2.1 million accrual is presented as a current liability
at September 30, 2021 and was paid in October 2021 in accordance with the terms
of the LTIP.



Other Income (loss), net. Other income (loss), net increased $21.4 million for
the three months ended September 30, 2021 compared to the prior year quarter.
During the three months ended September 30, 2021, the Company recorded a gain of
$32.3 million resulting from the acquisition of Flashtalking by another entity.
The Company also recorded an unrealized loss of $11.9 million related to the
decline in the fair value of Bright Health common stock.  During the three
months ended September 30, 2020, the Company recorded an impairment of
$0.4 million related to the ownership interests of T-REX and an unrealized loss
from an observable price change of $0.5 million related to BritePool.  The
impairment was determined based on continued decline in the fair value of our
ownership interest resulting from reduced expectations and extended exit
timelines.

Interest income. Interest income increased in the three months ended
September 30, 2021 compared to the same period of the previous year, mainly attributable to a higher average balance of advances on participations.

Equity Income (loss), net. Equity income (loss), net increased $0.5 million for
the three months ended September 30, 2021 compared to the prior year period. The
components of equity income (loss), net for the three months ended September 30,
2021 and 2020 were as follows:



                                                           Three Months Ended September 30,
                                                        2021               2020          Variance
                                                                    (In thousands)

Capital gains on disposals of shareholdings, net $ 346 $

     58     $       288
Unrealized dilution gains                                  1,950              2,471            (521 )
Loss on impairments                                            -                  -               -

Share of net loss of our associates (3,057)

 (3,829 )           772
                                                    $       (761 )     $     (1,300 )   $       539










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  There were no material gains on sales of ownership interests, net, or
impairments from ownership interests accounted for under the equity
method during the three months ended September 30, 2021 or 2020.  The unrealized
dilution gains for the three months ended September 30, 2021 was the result of
Trice Medical, who raised additional equity capital that diluted the Company's
interest.  The unrealized dilution gains for the three months ended September
30, 2020 was the result of Aktana, Inc., who raised additional equity capital
during each of those three month periods that diluted the Company's interest.
The change in our share of loss of our equity method companies for the three
months ended September 30, 2021 compared to the prior year period of
$0.8 million was due to less companies in 2021 and a decrease in losses
associated with our ownership interests.



Nine Months Ended September 30, 2021 versus the Nine Months Ended September 30,
2020



                                          Nine Months Ended September 30,
                                        2021             2020        Variance
                                                  (In thousands)
General and administrative expense   $    (6,018 )     $  (7,835 )   $   1,817
Other income (loss), net                  28,027          (7,045 )      35,072
Interest income                              197             209           (12 )
Equity income (loss), net                 13,432         (15,591 )      29,023
                                     $    35,638       $ (30,262 )   $  65,900




General and Administrative Expense. General and administrative expense
decreased $1.8 million for the nine months ended September 30, 2021 compared to
the prior year period primarily due to decreases in employee compensation of
$1.0 million, lower severance expenses of $1.1 million, lower office rental
costs of $0.1 million, lower professional fees of $0.1 million and other various
costs, which were partially offset by higher stock based compensation of
$0.5 million. General and administrative expense also includes stock based
compensation of $1.5 million for the nine months ended September 30, 2021 as
compared to $1.0 million in the comparable prior year. Stock based compensation
expense for the nine months ended September 30, 2021 includes the impact of a
larger proportion of management's compensation, including a portion of existing
accruals under the management incentive plan, that are paid in vested stock as
well as Director compensation, which is paid entirely in vested stock.

Other income (losses), net. Other income (losses), net increased $ 35.1 million for the nine months ended September 30, 2021 compared to the period of the previous year.

 During the nine months ended September 30, 2021, the Company recorded a gain of
$32.3 million from the acquisition of Flashtalking, a $1.9 million gain
resulting from Velano Vascular and $0.9 million gain resulting from T-Rex, each
of which were acquired by other entities.  The Company also recorded unrealized
losses, net, of $4.5 million related to the observable price change and
additional price movements in Bright Health common stock resulting from the
initial public offering and subsequent market activity.  During the nine months
ended September 30, 2021, the Company recorded an impairment of $2.5 million
related to reduced expectations for certain Other ownership interests.  During
the nine months ended September 30, 2020, the Company recorded impairments of
$8.1 million related to the ownership interests of T-REX, b8ta, Velano Vascular
and others accounted for under the Other method.  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.  Partially offsetting
these impairments, the nine months ended September 30, 2020 also included a
$1.5 million non-cash gain for our ownership interest in Flashtalking based upon
an observable price change.



Interest Income. Interest income decreased during the nine months ended
September 30, 2021 compared to the prior year period primarily attributable to
lower average advances to ownership interests and lower average cash equivalent
balances at lower rates.



Equity Income (loss), net. Equity income (loss), net increased $29.0 million for
the nine months ended September 30, 2021 compared to the prior year period. The
components of equity income (loss), net for the nine months ended September 30,
2021 and 2020 were as follows:



                                                          Nine Months Ended September 30,
                                                        2021             2020         Variance
                                                                   (In thousands)
Gains on sales of ownership interests               $     17,134      $      183     $    16,951
Unrealized dilution gains                                  9,252           3,161           6,091
Loss on impairments                                            -          (9,200 )         9,200
Share of loss of our equity method companies, net        (12,954 )        (9,735 )        (3,219 )
                                                    $     13,432      $  (15,591 )   $    29,023




During the nine months ended September 30, 2021, Zipnosis, Inc. was acquired by
another entity, Bright Health.  The Company received $3.5 million in cash
proceeds 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 did not have a readily
determinable fair value, this estimated value could have differed 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 recently invested, the valuation of
comparable public companies, and the present value of our expected outcomes.
Assumptions considered within these methods included 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 the 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 recognized as a component of Other income (loss), net.  As a
result of these changes, the Company recognized an additional $7.4 million
unrealized gain during the six months ended June 30, 2021. The Company
recognized an unrealized loss on Bright Health of $11.9 million during the three
months ended September 30, 2021.



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During the nine months ended September 30, 2021, WebLinc, Inc. was acquired by
another entity.  The Company has received $3.6 million in cash proceeds to-date
and may receive additional amounts over the next 15 months based on certain
transactional performance activities, which could be partially offset by
indemnifiable claims.  The Company has recognized a $0.1 million loss on the
sale during the nine months ended September 30, 2021, which is included in
Equity income (loss), as certain contingencies were resolved during the three
months ended September 30, 2021.  To the extent additional amounts are collected
as contingencies are resolved, those amounts will be recorded as gain on the
sale and included within Equity income (loss).  QuanticMind was acquired during
the nine months ended September 30, 2021 by another entity, 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.

Capital gains on sales of equity securities for the nine months ended
September 30, 2020 includes the settlement of various escrow agreements or other minor contingencies relating to prior transactions.

The unrealized dilution gains for the nine months ended September 30, 2021
were the result of  Syapse and Trice, who each raised additional equity capital
that diluted the Company's interest in those entities. The unrealized
dilution gains for the nine months ended September 30, 2020 were the result of
Aktana, meQuilibrium and Syapse.



There were no impairments during the nine months ended September 30, 2021.  The
Company recorded impairments of $9.2 million during the nine months ended
September 30, 2020 related to the ownership interests of Sonobi, WebLinc, Inc.
and QuanticMind, Inc. accounted for under the equity method.  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.

The change in our share of loss from our equity-accounted companies for the nine months ended September 30, 2021 compared to the period of the previous year of
$ 3.2 million was due to an increase in losses related to our investments.

Income Tax Benefit (Expense)



Income tax benefit (expense) was $0.0 million for the three and nine months
ended September 30, 2021 and 2020. 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 income tax provision that would
have been recognized in the nine months ended September 30, 2021 and 2020 was
offset by changes in the valuation allowance.

Liquidity and capital resources

From September 30, 2021, we have had $ 64.2 million of cash and cash equivalents.

       In January 2018, Safeguard announced that we will not deploy any capital
into new opportunities and will focus on supporting our existing ownership
interests and maximizing monetization opportunities to return value to
shareholders. In that context, we have, are and will consider initiatives
including, among others: the sale of individual ownership interests, the sale of
certain ownership interests in secondary market transactions, or a combination
thereof, as well as other opportunities to maximize shareholder value.



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 year ended December 31, 2020 and
the nine months ended September 30, 2021, we did not repurchase any shares under
this authorization. In May 2021, the Company's Board of Directors authorized a
new $6.0 million share repurchase program 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.  The Company purchased 236,159 shares under
this program at an aggregate cost of $1.6 million, or $6.94 per share. During
October 2021, the Company 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.



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 September 30, 2021 will be
sufficient to fund operations past one year from the issuance of these financial
statements.



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