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Safeguard Scientifics, Inc. (NYSE:SFE)

Q4 2012 Earnings Call

March 7, 2013 9:00 AM ET

Executives

John Shave – VP, Business Development and Corporate Communications

Steve Zarrilli – President and CEO

Jeff McGroarty – SVP, Finance and Chief Accounting Officer

Jim Datin – EVP and Managing Director

Analysts

Bob Labick – CJS Securities

Matt Dolan – ROTH Capital Partners

Jim McDonald – First Analysis

Ed Woo – Ascendiant Capital

Ryan Lynch – KBW

Operator

Good morning and welcome to the Safeguard Scientifics Fourth Quarter and Full Year 2012 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to John Shave. Please go ahead.

John Shave

Good morning and thank you for joining us for the Safeguard Scientifics Fourth Quarter and Full Year 2012 Conference Call and Update. Joining me on today’s call are Steve Zarrilli, Safeguard’s President and Chief Executive Officer; Jeff McGroarty, Senior Vice President of Finance; and Jim Datin, Executive Vice President and Managing Director and Head of our Deal Team.

Results for the quarter and year ended December 31, 2012 were distributed earlier today. During today’s call, Steve will highlight – will review highlights of the fourth quarter and full year 2012 as well as other developments. Jeff will discuss Safeguard’s financial results and strategies, then there is a new component to our quarterly calls, which includes having Jim Datin provide perspective on market opportunities and capital deployment initiatives in Safeguard’s various targets. Today, Jim will focus on growth stage diagnostics in healthcare IT companies. After that, we will open the lines for your questions.

As always I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involves certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies and the risk of acquisition or disposition of interest in partner companies; capital spending by customers; and the effect regulatory and economic conditions generally as well as the development of the healthcare and technology markets and other uncertainties that are described in our filings.

During the course of today’s call, words such as expect, anticipate, believe, and intend will be used in our discussions of goals or events in the future. Management cannot be certain that final outcomes will be as described today. We encourage you to read Safeguard’s filings with the SEC, including our Form 10-K, which describe in detail the risks and uncertainties associated with managing our business. The company does not assume any obligation to update any forward-looking statements made today.

This conference call is the first call that Steve will lead as President and CEO of Safeguard since he succeeded Peter Boni on November 1, 2012. As background for any newcomers on today’s call, Steve was CFO at Safeguard since June 2008 and served as interim CFO for six months during 2007.

Now, I will turn the call over to Steve.

Steve Zarrilli

Thank you, John and thank you all for joining us today for an update on Safeguard Scientifics and our partner companies. With an executive transition, there is always the curiosity about the new person at the helm and where he or she will lead the company. In addition to today’s regular quarterly review, I am going to outline how the Safeguard team intends to build upon the foundation already created. The stage is set in 2013 and beyond for increased activity on all of Safeguard’s strategic fronts. We believe that we have the talent, resources and strategy to accelerate the growth of both Safeguard and our partner companies.

We are sharpening our focus on Safeguard’s core business and intend to be more proactive in driving growth of our existing partner companies. In addition, we are targeting to deploy capital at a more aggressive and consistent case in order to increase our roster of partner companies to up to 25 by the end of 2013 and to realize solid risk adjusted returns from partnered company assets at a more consistent pace as well. Moreover, we believe that we can accomplish these goals without sacrificing Safeguard’s exceptional financial strength and flexibility. Through our disciplined approach, we expect to execute these strategies without meaningful increases in recurring operating cash flows.

To achieve these goals, the Safeguard team will work to increase our stable of partner companies and to deliver multiple assets in any given 12 months period. We anticipate that we will deploy an average of $50 million to $60 million in any given 12 months period on new opportunities targeting cash-on-cash returns of a minimal of two times our cost. The team and I believe that successful execution of these initiatives will drive Safeguard to deploy capital and net cash and our employed capital under management to a range of $550 million to $700 million by the end of 2015 from approximately $317 million at the beginning of this year.

Those are the highlights of our core objectives going forward at Safeguard. In 2013, we will continue to focus on our core business to provide capital and operational support, the high potential growth stage businesses in healthcare and technology.

In healthcare, we target companies with lower technological and regulatory risk in MedTech, which includes diagnostics and devices, HealthTech, also known as Healthcare IT and specialty pharmaceuticals. In technology, we pursue leading edge companies with sustainable business models in digital media, financial technology and enterprise 3.0, which includes mobile technology, cloud, the Internet of things and big data.

Safeguard targets initial capital deployments between $5 million and $15 million and follow-on financings of between $5 million and $10 million with the total size not to exceed $25 million over the lifecycle of our partnership.

We are generally one-off if not the only primary institutional shareholder in each partner company and have a strong network of syndication partners that we work with along the way. The Safeguard Deal Team will run hard evaluating partner company prospects. We continue to screen for opportunities where we can add value and drive growth with the goal of achieving risk-adjusted cash-on-cash returns at a minimum of two times cost over a three to five-year period.

The team funnels more than a 1,000 leads through a process that we believe can result in the closure on average of four to eight deals in any given 12-month period. While focus on the core business will be paramount over the next three years, platform expansion remains an important component in Safeguard’s strategy.

Brian Sisko, Safeguard’s Executive Vice President and Managing Director is heading the initiative to explore ways to expand our assets under management to augment Safeguard’s capital with third party funds raise and to partner with other alternative asset managers.

Through these efforts, we seek to leverage the capital deployment and operational capabilities we have built over the years. In addition, we remain an active partner with Penn Mezzanine. This separately managed platform drives asset diversification and is a solid source of interest in fee income for Safeguard.

A key gauge of Safeguard’s progress is its partnered companies’ aggregate revenue growth. In 2012, aggregate revenue for our partner companies as of December 31, 2012 was $197.3 million, up from $142.7 million in 2011. This represents a 38% increase year-over-year. We are encouraged by our partner companies’ steady growth and are optimistic about their continued growth in 2013.

As a result, our guidance for 2013 aggregate partner company revenue for the same companies has increased to a range of $250 million to $270 million. This represents an increase of 27% to 37% between 2012 and 2013, and as a reminder, partner company revenue is reported on a one quarter lag basis. We deployed $28.7 million which was below our 2012 target into four new promising partner companies in 2012 despite a sputtering economy, volatile capital markets and domestic and international political turbulence.

Our four new partner companies include digital media company like FinTech company Lumesis, enterprise software company AppFirst and molecular diagnostics company Crescendo Bioscience. You will hear more about Crescendo later in this call from Jim Datin.

Follow-on deployments in existing partner companies totaled $26.4 million. During the fourth quarter, we completed the repurchase of $47 million of our 10.125 convertible debentures due March 2014 primarily with the proceeds from the issuance of $55 million convertible debt issuance of five in a quarter percent convertible debentures due May of 2018. The new instrument matures more than six years from now and carries a lower interest rate reducing corporate interest expense. The 2008 debenture is also convertible into common equity at a higher price than the 2014 debentures and also has features that preserve Safeguard’s flexibility and ability to use cash to meet the obligations instead of diluting shareholders.

With that, I’m going to turn the call over to Jeff McGroarty, our Senior VP of finance to provide us with an update on Safeguard’s financial strategies and performance.

Jeff McGroarty

Thanks, Steve. I would like to review some key financial metrics for the quarter and year ended December 31, 2012. At year end, we had $206 million in cash, cash equivalents, and marketable securities. This amount does not include $6.4 million of cash held in escrow. The total carrying value of outstanding debt was $49 million, resulting in net cash of $157 million.

During the quarter, primary uses of cash were deployments of $16.5 million in new partner companies AppFirst and Crescendo Bioscience. Follow-on deployments in three existing partner companies in the quarter totaled $8.2 million. We repurchased essentially all of our 2014 convertible debentures for $58.7 million in cash, primarily using proceeds from the issuance of $55 million of 2018 convertible debentures.

For the year, in addition to the net cash outflow associated with the convertible debentures refinancing, Safeguard’s primary uses of cash were $28.7 million deployed into four new partner companies, $26.4 million in follow-on deployments into seven existing partner companies, and $4.2 million into Penn Mezzanine loan participations. Cash used in operations was $16.5 million versus $17.7 million in 2011. For 2012 and 2011, this amount was net of $1.1 million and $0.5 million respectively in cash interest and fees related to our Penn Mezzanine loan participation.

For 2012, this also included $800,000 cash paid for interest in conjunction with the repurchase of the 2014 debentures. Based on capital deployments in 2012 and the goals that Steve outlined for 2013 and beyond. Safeguard’s priorities for uses of cash remain unchanged: Capital deployment for new partner companies, follow-on funding for current partner companies and Penn Mezzanine loan participations, corporate expenses and expansion of our platform.

Our partner companies continue to execute aggressively, use their cash to grow and make strategic and opportunistic acquisitions. Partner company revenue growth in 2012 certainly bears this out. We work with the management teams of each partner company to evaluate levels of existing and required capital, strength of personnel resources and unique opportunities for growth.

Our focus on these processes allow Safeguard to assist partner company management teams in unique ways to drive value creation and maturity.

Steve Zarrilli

Thanks Jeff. And with that, I’d like to turn the call over to Jim Datin, who leads our deal team to elaborate on developments that three of our promising partner companies within our healthcare group, Good Start Genetics, Medovo and Crescendo Bioscience. Jim.

Jim Datin

Thanks, Steve. As Steve mentioned, my remarks today will be on deploying growth capital into diagnostics and HealthTech companies. Although diagnostic testing comprises less than 10% of the total U.S. healthcare spend, this sector drives more than 75% of healthcare decisions. As a result, tremendous interest has been and continues to be focus on developing and delivering the high value diagnostic tests to personalize the delivery of care and treatment and prove the efficacy and decrease the cost of medical interventions.

Safeguard has ridden this way through two prominent former partner companies, Clarient which was acquired by GE Healthcare in 2010 for $587 million and generated the largest cash-on-cash return in Safeguard’s history along with Avid Radiopharmaceuticals which was acquired by Eli Lilly in 2010 for a 3x cash-on-cash return for Safeguard, which could approach an 8x return based on achieving certain difficult revenue milestones.

We see the potential for similar growth and value-creating successes with our diagnostic and HealthTech partner companies, Good Start Genetics, Medivo and Crescendo Bioscience. Good Start Genetics is harnessing the power and potential of next generation DNA sequencing technology to its carrier screen offering Good Start Select which delivers the most accurate panel to detect parent at risk for having a child with 1 of 23 genetic disorders recommended for screening by the American College of Obstetrics and Gynecology. Physicians can order a test encompassing the full menu of disorders or pick and choose from among the 23.

Good Start Genetics has a strong team led by CEO, Don Hardison and a differentiated product in a large addressable market. Good Start Genetics launched its test in the second quarter of 2012 which brought in approximately $6 million in net revenue and end of the year an annualized revenue rate of nearly $14 million. The company anticipates triple-digit revenue growth and profitability in 2013.

In addition, the company is currently evaluating plans for expanding the market for GoodStart Select as well as additional product opportunities. Safeguard has a 30% primary ownership in Good Start Genetics. Crescendo Bioscience is commercializing the first and only quantifiable multi-biomarker blood test Vectra DA, which we believe is the most accurate way to assess disease activity in patients with rheumatoid arthritis, also known as RA. More than 1.5 million U.S. patients and 4 million people worldwide suffer from RA with 100,000 new U.S. patients diagnosed annually. Crescendo Science’s Vectra DA helps rheumatologists, the specialists who treat patients with RA make more informed treatment decisions. The drugs used to treat RA are among the most costly and are associated with significant potential side effects.

We believe Vectra DA will help the healthcare system manage tasks while providing better outcomes to patients. Safeguard deployed $10 million for 13% primary ownership position. While there continues to be rapid adoption of diagnostic test in managed disease, we still need to improve the way testing is performed, that is we can do a better job making sure the right individuals get the right test at the right time. Medivo is a fast growing data analytics and care management platform facilitating interactions between patients and their physicians around diagnostic testing. Medivo’s proprietary platform identifies patients who are both at risk for disease and candidates for testing.

Medivo then facilitates the testing, deliver the results back to the physicians and explains the results to patients in a clear comprehensible way. One of the goals is to ensure that patients show up for their appointment with the appropriate test results in order to increase the value of the patient-physician interaction.

Over time, Medivo’s unique position in the information flow between patient and physician will allow the company to create value for the four Ps in the healthcare ecosystem, patient, provider, payer, and pharma.

Safeguard has a 30% primary ownership stake in Medivo. Our goals in identifying opportunities in the diagnostic space begin with finding the best technologies to fit a particular testing need. Next, we build or augment the best teams to navigate any operational sales, marketing, and reimbursement issues. Then we deliver the technology to the market. What begins with the single patients, a single physician, and a single effective and efficient test spreads across the healthcare ecosystem to larger patient populations.

Safeguard identifies and supports the right partner companies and patients, providers, payers, and pharma as well as our shareholders benefit and realize value. Safeguard’s motivation in the diagnostic space remains, finding opportunities to deliver value to all of these stakeholders.

Now, I’ll turn the call back over to Steve to lead us through the Q&A segment of the call.

Steve Zarrilli

Thanks, Jim, and thanks, Jeff. Operator, could you please open the phone lines for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Bob Labick of, I’m sorry, CJS Securities. Please go ahead.

Bob Labick – CJS Securities

Good morning.

Steve Zarrilli

Good morning, Bob.

Jeff McGroarty

Good morning.

Bob Labick – CJS Securities

Good morning. Steve. First I wanted to say congratulations again on a well deserved promotion.

Steve Zarrilli

Thank you.

Bob Labick – CJS Securities

I wanted to start with capital allocations. You highlighted today in the release you expected two exits in 2013. We already have a rock solid cash laden in balance sheet. You mentioned deploying $50 million to $60 million in new opportunities plus on add-ons but presumably after the exits or subsequent exits, you’re going to reach a point of excess capital. Can you discuss your thoughts about returning capital to shareholders via share repurchase or dividends or what you’re broad thinking is on that?

Steve Zarrilli

Sure. And Bob, you are nothing but consistent with your enquiry there. As I’ve mentioned in the past and as I continue to remain focused, I believe that one of the things that Safeguard has to initially do is demonstrate to ourselves and to our shareholders that we can be consistent with regard to the pace of capital deployed and capital retrieved. And in 2013, we have a specific set of objectives that are guiding the team in a way that will allow us to determine and to more importantly demonstrate that we are able to consistently put capital to work and retrieve capital.

As we get into that process and convince ourselves that we’re able to consistently do that, I think at that point we will have the opportunity to go back to our board, to look at our capital and liquidity, and determine ways in which we can most enhance the value to our shareholders with respect to not only operating our business, but also looking for ways in which we may be able to provide other forms of return to those shareholders. But until we get to that point, I am very much steadfast in wanting to stay focused on execution and keeping our balance sheet strong so that we can be a very credible and legitimate capital provider in the marketplace.

Bob Labick – CJS Securities

Okay. Great. Thank you very much. I have plenty of questions and I will hold back in queue and let us take in a minute. Thank you.

John Shave

Thank you.

Operator

The next question comes from Matt Dolan of ROTH Capital Partners. Please go ahead.

Matt Dolan – ROTH Capital Partners

Hi, guys. Good morning. Can you hear me? Okay.

Steve Zarrilli

We can Matt. Good morning.

Matt Dolan – ROTH Capital Partners

Perfect. Just a few things that – assets on the, in the press release that seems new to the strategy. One is your ability to be more involved in the revenue build in your portfolio companies, and the second is, your ability to tangibly predict to access this year. Can you walk through what that involves and why you’re confident in putting that right?

Steve Zarrilli

Well, for those of who have been following Safeguard for a number of years, and Matt, I know you’ve been one of those. You know that we’ve been very diligently working to develop a number of our partner companies and many of them have started to above very nicely and in somewhat of a very predictable way quite honestly.

And when I look at the family of companies that we currently have today, there are a few that are getting to a point in the evolution where we are beginning to see real signs of opportunity for them to be legitimate targets of well-heeled strategic buyers looking to augment their growth objectives with tuck-in acquisitions that I think many of our partner companies would serve to as an example of. So when I think about those elements, I begin to get more comfortable in seeing a very distinct pattern that I think is going to be materializing over the next 12 to 36 months, not only in the deployment of capital but also in the retrieval of capital.

Secondly, you may have heard us mention that we want to increase the number of partner companies that we manage at any given time. Those relationships are important to us. We also believe that having a greater number somewhere in that 25 range will add greater diversification thus having more things in play at any given time and therefore being able to run to a balance or foundation of consistency. So, as I think about exits and I think about monetizations, that is some of the specific thoughts to go into that. From a revenue build perspective, it also plays on the same theme. We have companies who are maturing and with that maturation comes a much greater level of confidence around how they will build the revenues and how we can measure revenue growth within any given 12-month period of time.

Matt Dolan – ROTH Capital Partners

Okay. That’s great. And then secondly, did you provide any cash to usage guidance this year either deployment or both – I guess both deployment and usage within your operations?

Steve Zarrilli

I’ll let Jeff speak to that.

Jeff McGroarty

We did not provide any guidance overall other than to say that we think we’ll put $50 million to $60 million to work in new deployments. I think you’ll see the other uses of capital remain consistent with what we’ve done over the past year or so.

Matt Dolan – ROTH Capital Partners

Okay. And then, finally the long-term goals targeting net cash plus deployed capital by 2015, is that a purely self-funded program or what are your expectations in terms of capital needs in that three-year timeframe?

Jeff McGroarty

Yeah. That number is solely self-funded and has no – is not impacted in any way through some of our other capital augmentation strategies.

Operator

Our next question comes from Jim MacDonald of First Analysis. Please go ahead.

Jim McDonald – First Analysis

Yes, good morning guys. Just to follow-up on that last question, so then, to get to $550 million to $700 million, you are expecting returns to get there, but – and maybe you could also comment on what size of fund you’re hoping to raise separately?

Steve Zarrilli

So the answer to your first question is, yes, we ultimately see our pathway to get into that number through the retention of profits as well as achieving those cash-on-cash goals that we’ve exceeded.

Jeff McGroarty

Jim, with respect to the second question, we are still in the process of determining of; a) the source of that capital, and b) the quantity of potential LPs that may participate. When I am at liberty to say today, without specifying a number is that, much of our activity is actually focused on (inaudible) are not located in here in the U.S. but elsewhere in the world, principally in Europe.

Jim McDonald – First Analysis

Okay. And just following up on the couple of the other things. I think maybe I’m wrong here, but your goal of 2x return, is that slightly lower than before? And if so, why?

Steve Zarrilli

Well it’s not lower, it’s a minimum of a 2x cash-on-cash return. So we look at ranges. If you look at the historic track record of this team since 2006 on a aggregate basis, all winners and losers combined so to speak, 2x was the number that we achieved. We target that as our minimum. We obviously look for amounts that are greater than that.

We aren’t necessarily though trying to swing for the fences on every opportunity we have. We love to have a couple of more ABHAs in the world, and for those that are new to the call, that was one where we had a outsized return at something north of 13 times, but generally speaking, if we can be realistically on a consistent basis between two and five times within three to five years, that’s a really solid return and that allows us to achieve the goals that we have outlined for ourselves.

Jim McDonald – First Analysis

Let me ask one more question, I’ll get back in the queue. In the quarter, you had it looked like gains in the healthcare segment, which is compared to losses in previous quarters. Could you explain that?

Steve Zarrilli

Sure. And I’ll let Jeff answer that question.

Jeff McGroarty

Sure. That relates to our holdings in new path. During the quarter, we deployed $5 million in a transaction, a private placement that NewPath did. Our accounting method for NewPath changed because of that, mark-to-market on gains and losses in NewPath’s stock use to go through equity as an available for sales security. It’s now classified as a fair value message holding for us. So the gains and losses and in this quarter gains go through the P&L each period.

Jim McDonald – First Analysis

Okay. Thanks very much. And could you tell them the amount of the gain in the quarter?

Jeff McGroarty

Yeah, it was $11 million.

Operator

The next question comes from Ed Woo of Ascendiant Capital. Please go ahead.

Ed Woo – Ascendiant Capital

Yeah. Hi. I hope some glimpse of your goals for two exits this year, what do you – how do you feel that given the stock market is at relatively high levels, do you think that that’s going to impact whether you would want to accelerate more in this year?

Steve Zarrilli

Hi Ed, good morning. I am not sure if we’re – it would accelerate more exits and we’ll always be opportunistic as it relates to monetization in any given period of time. We obviously have a target of two this year to begin with. What we are seeing, and even though the stock market may be hitting new highs, most of the companies that would be targeting the companies that we today are very well well-heeled multinational type players who are most likely going to be using cash to facilitate any kind of transaction. And we actually prefer a monetization to occur with the strategic rather than having one of our companies pursue an IPO.

So, having said that, I don’t necessarily rule out that one or two or three of our companies at some point in the revolution may use the public offering process to serve as an exit for us. But we – as we look at the landscape, we think it’s actually very fertile for potential strategic parties to look at some of the companies that we currently have where – who, which are out of state of maturation, and will serve for not only an interesting target from a product or services perspective, but will also augment particular revenue or growth goals that those companies may have.

Ed Woo – Ascendiant Capital

Great. Well, thank you and good luck.

Steve Zarrilli

Thank you.

Operator

The next question comes from Ryan Lynch of KBW. Please go ahead.

Ryan Lynch – KBW

Thanks. Good morning, gentlemen.

Steve Zarrilli

Good morning, Ryan.

Ryan Lynch – KBW

Given your kind of expectations of two exists during 2013, I was hoping you guys to give us an update on your high traction companies, how those are performing and get back out of them.

Steve Zarrilli

Yeah, the companies had fallen the high traction for us today are AHS, Beyond, Bridgevine, and MediaMath, and all of those companies are growing very nicely. They have solid management teams in place and are able to execute against the goals that have established for themselves. These companies are on average expecting growth that exceeds at least 20% at the top line with very solid EBITDA performance at the bottom line.

These are the companies that you might immediately look to see whether or not they will pursue an activity during 2013 that may lead to a monetization opportunity. But as we’ve said in the past, and I think it’s important to remind the listeners today, companies within our family can be find themselves the target of a strategy acquirer at any stage of their evolution. We are found of reminding our shareholders of company called Avid Radiopharmaceuticals who never actually got out of the development stage and had a phenomenal exit for us.

So when you look across the spectrum of the companies that we currently have an interest in, yes, it’s proper to publicly look at some of the high traction companies and begin to think about what their path of near-term monetization could look at – look like, but there is also companies that are moving the way through the development stage from initial revenue or expansion stage that also present some interesting opportunities in the marketplace. So – by going back to the high traction companies, very exciting businesses and very meaningful sectors of the economy with growth rates that are continuing to provide real opportunity for them to create a multitude of alternatives for their paths going forward in the future.

Ryan Lynch – KBW

Okay. Thanks. And then more of a broad question, can you describe where you guys are seeing the market opportunities in 2013, is it more in the life sciences or technology or kind of a balance?

Steve Zarrilli

Jim?

Jim Datin

It is a balanced, right now particularly in the healthcare sector capital has become tight, longer regulatory timelines and lot of the other capital providers, not enough capital to support that. So for Safeguard, it puts us in a great opportunity to put capital to work at attractive entry points. That being said strategies need to continue to fund growth and that’s going to happen primarily by M&A. They are sitting on record levels of cash, it’s made the buying and technology sector have been a little frothy depending on the segment, but we continue to be disciplined getting in at the right time and the right price.

Ryan Lynch – KBW

Okay, thanks. And then one last question. Can you guys maybe just give us a little description of what you guys saw in your two new portfolio company investments you guys made in 2013?

Steve Zarrilli

I’ll start and I am going to let Jim provide some color commentary. One of the themes that you’ll see playing out for us is that there is a real opportunity to in technology look at both applications and infrastructure around areas of the cloud and big data, but more importantly I also like to draw your attention to the fact that with the technology opportunities we’re finding really interesting opportunities to put capital to work in a series of tranches as the company works its way through achieving certain critical milestones.

So albeit we may be putting a little bit less money to work initially, one of the themes that we would really like you to stay focused on is that we are probably going to continue to fund these companies. And principally be the sole funding source for these companies as they continue to mature over their anticipated lifecycle over the next 36 to 48 months. That creates great opportunity for us to get in earlier to kind of help management create the pathway for growth and opportunity and obviously gives us a meaningful ownership position that allows us to have influence without control and to be a real working partner with the management teams of these companies. So that’s one thing.

On the other side with regard to healthcare, Crescendo was an opportunity where you create a company that is not only focused on providing a very important solution to the market with regard to RA patients, but what’s not necessarily evident when you look at the Crescendo business model is, and I hate to say it in this fashion because it really means that the disease state is a chronic disease state that there is a recurring revenue model that’s almost implied within their business methodology and business model and that is an important element to looking at with regard to that particular opportunity.

But with regard to healthcare, and I wanted to turn it over to Jim for few additional comments, we’re seeing opportunity in a number of different ways and one of the things that we’re trying to stay focused on is what we call the pluming if you will. The underlying infrastructure around healthcare IT, the way information is being gathered and disseminated, the way the technology is being used in both the diagnostic processes as well as the creation of personalized solutions for each of those patients. And Jim?

Jim Datin

Sure. Thank you, Steve. You had asked about our new deployments in 2013. Year-to-date we have two deployments, we’ve made Neuron where we put $5 million of capital to work, and consistent with Steve comments we believe there will be an opportunity as they achieve miles in growth that we’ll be putting further capital to work there.

And secondly, Sotera Wireless, a healthcare company based in San Diego that can remotely monitor patients vital science, a huge marketplace in the United States in an unmet need. Interesting fact about Sotera, we deployed $2.6 million of capital but we have an opportunity with the term sheet to get that ownership up to 20%. So there won’t be an opportunity to put more capital to it based on milestones and performance met by the company.

Operator

The next question comes from Bob Labick of CJS Securities. Please go ahead.

Bob Labick – CJS Securities

Hi, thanks. Thanks for taking more questions. I just wanted to ask, obviously things are going really well, I mean you can see it in the revenue growth from last year and the expectations for 2013, but obviously you can’t always have all winners all the time. So I was hoping you could talk about a few names that haven’t gone to your initial plan, where they stand now and what you’ve done to fix and improve and how you go about working with managements when things aren’t exactly as you’d hoped in the beginning?

Steve Zarrilli

Yeah. So thanks, Bob, for the question and you’re right. Things aren’t always rosy and fine at every moment of the day for us. We do have situations where a company does and that’s really perform as planned. And obviously, we pride ourselves on being able to bring the right type of advising guidance and even resources to help those companies get back on track. We also are not immune to potential loss occasionally, where we’ve made the wrong decision about a company and the company is not able to ultimately achieve the goals that it set out for itself and we’ve had a few of those in our history as well.

What I look at the current group of partner companies today, there is a few that actually have – have actually been somewhat challenged more recently and have now begun to get back on track. I think the one that probably comes to mind for most and it’s our largest partner company and something that is actually somewhat outside of the direct focus that we currently have in the market, but that’s PixelOptics. And we’re – if you look back a year ago, Pixel had to seize some of its commercialization because they wanted to get a new product into the marketplace, the original product had some elements that didn’t necessarily provide for the consistency that they thought in the market.

I am happy to report 12 months later, the company is back on track with generation two of the products expecting to launch in a commercialization phase in the spring of 2013. They’ve been actively working through an alpha and beta stage during the course of the winter and they are very much enthusiastic about getting back into the market both here in the U.S. as well as in Europe. So Pixel is slowly but surely getting back to where we would hope it would be and -we’re about 24 months behind schedule in relationship to where we had originally anticipated Pixel being.

Another one that got off to a slow start, but we think is going to gain momentum is Lumesis, and Lumesis is working through a variety of opportunities in the market. It’s an exciting company providing analytics in the municipal bond space, but probably growing a little bit slower in 2012 than we had expected, but with the right amount of emphasis by the management team and with some Safeguard resources, Lumesis is expecting a year in 2013 that should put them back on track.

NuPathe, NuPathe was a company that if you had asked us six months ago, we were a little bit concerned here. Obviously, NuPathe had not received FDA approval. Now, we were trying to figure out how to best capitalize the company. As you may recall, NuPathe received that FDA approval in January and is now looking to figure out what’s the next chapter in its evolution and we’re excited to be a part of that.

And then if I look across the spectrum, the other company that we believe will begin to regain momentum is now NovaSom, and NovaSom probably disappointed itself over the last 12 to 18 months with regards to some of its revenue growth at one level but on the other level, I think the management team has energized about the market opportunity, it’s opportunity in 2013.

We’re excited about what we can see in the markets for those types of services with regard to wireless diagnostic capability in the home with regard to sleep apnea. And if there is one that we continue to work with management to see how we can best help them position for enhanced revenue growth as they go forward.

Operator

The next question comes from Jim McDonald of First Analysis. Please go ahead.

Jim McDonald – First Analysis

Yeah, I wanted to ask a couple of follow-ups on specific partner companies. I know that Advantage has made a couple of acquisitions lately, can you talk to what their revenue run rate might be?

Steve Zarrilli

Advantage – AHS has indicated that they should give approximately $50 million in 2013.

Jim McDonald – First Analysis

And I think Jim mentioned something about the average escrow revenue targets being difficult to achieve, any comments on that?

Steve Zarrilli

There were certain milestones that were attached to the Avid transaction, that could vest us further capital. We don’t have any further updates at this point.

Jim McDonald – First Analysis

Okay. And just one housekeeping issue, did you include Crescendo’s revenue in your 2012 numbers? I noticed that still it’s an expansion or expansion phase company, right?

Steve Zarrilli

All right. We did include – at any time we acquired a new company. We adjust our historical revenue record and the revenue guidance so that we’re comparing apples-to-apples, so all periods in the guidance include Crescendo.

Jim McDonald – First Analysis

Okay, thanks very much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Zarrilli for any closing remarks.

Steve Zarrilli

No, we just wanted to thank everyone for joining us today. We are very excited about 2013. It’s all about execution. The team and I are focused on delivering the results that we have outlined for you and we appreciate your support, and look forward to having further dialogue as we continue the year.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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