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Safeguard Scientifics, Inc. (NYSE:SFE)

Q3 2010 Earnings Call

November 03, 2010 09:00 am ET

Executives

John Shave - VP of Business Development and Corporate Communications

Peter Boni - President & CEO

Steve Zarrilli - CFO

Analysts

Bob Labick - CJS Securities

Troy Ward - Stifel Nicolaus

Matthew Pommer - ROTH Capital

Bill Sutherland - Boenning & Scattergood

Nick Halen - Sidoti & Company

Sam Rebotsky - SER Asset Management

Operator

Good day ladies and gentlemen and welcome to the Safeguard third quarter 2010 conference call. This conference may be recorded, I’d like to introduce for today. Mr. John Shave, Vice President of Business Development and Corporate Communications. Sir, please go ahead.

John Shave

Good morning and thank you for joining us for Safeguard Scientifics conference call update. Joining me on today’s call are Peter Boni, Safeguard’s President and Chief Executive Officer; and Steve Zarrilli, Senior Vice President and Chief Financial Officer. During today’s call Peter will review highlights from the third quarter of 2010 and some subsequent events and Steve will discuss Safeguard’s financial results and strategies. After that we’ll open the line for your questions.

Before we begin, I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involve certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies, and the risks of acquisition or disposition of interests in partner companies, capital spending by customers, and the effect of the economic conditions generally, the development of the life sciences and technology markets and other uncertainties that are described in our SEC filings.

During the course of today’s call we would use words such as expect, anticipate, believe, and intend will be used in our discussion of goals or events in the future. Management cannot be certain that the financial 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 obligations to update forward-looking statements made today.

These statements made herein that we are in discussion undertaken in connection with these materials regarding or relating to the proposed acquisition of Clarient by GE Healthcare are intended solely to describe the execution by Safeguard of its long-term strategy to build towards its achievement of successful exits from its partner company relationships as well as the potential impact of the transaction on or with respect to Safeguard and the potential benefits that maybe recognized by the shareholders of Safeguard. Not being included herein or said today should be deemed that we are construed as a recommendation or solicitation with respect to GE Healthcare’s tender offered for the shares in the Clarient.

Any statements made with respect to the Clarient transaction are being made on behalf of Safeguard solely in its capacity as a stockholder of Clarient and not behalf of Clarient.

Now, here is Safeguard’s President and CEO, Peter Boni.

Peter Boni

Thanks John. Good morning and thank you all for joining us today for this quarterly update on Safeguard Scientifics and our partner companies. Results for the quarter ending September 30 were distributed earlier today, and as you can see Safeguard continues to execute against this game plan at improving the strength of our balance sheet, increasing our financial flexibility and ultimately building value for our shareholders.

Our partner companies again have shown steady growth in that duration. During the third quarter, aggregate partner company revenue increased 73% year-over-year and we continue to be encouraged by their growth and their improved performance. We are, as a result, increasing our aggregate partner company revenue guidance to the range of $360 million to $285 million. This is the second time this year that we've revised our guidance upward. Our previous guidance was $325 million to $350 million while the initial guidance was $300 million to $325 million. This is evidence that we are building genuine value.

The transaction was announced subsequent to the third quarter and we're excited by the potential GE Healthcare acquisition of our partner company Clarient. Now Safeguard owns 30.2 million common shares of Clarient and 700,000 ones at various trade points. When the transaction closes, anticipate it will be late 2010, early 2011, net proceeds to Safeguard will be approximately $145 million.

Let me provide you with a brief case study on Clarient because it underscores our ability to identify and build value at companies with high growth potential and then drive shareholder value. Over the past five years we have enhanced Clarient's financial strength, we have developed alliances and syndication partnerships with the top-tier partners and which set a stage to realize value through this well-timed exit with GE Healthcare. Clarient was founded in 1996 as MicroVision Medical Systems, later renamed ChromaVision, to develop and manufacture digital microscopes under the leadership of our new CEO Ron Andrews and with direction from Safeguard’s current management team, the company was repositioned and rebranded as Clarient. To focus the business solely on cancer diagnostic services. Clarient sold its Instrument Systems business to Carl Zeiss MicroImaging in 2007 for $12 million, completing its evolution from an equipment-sales model to a diagnostic-services model. After its repositioning, Clarient grew revenues tenfold, achieved the profitability and grew its market cap by more than $430 million, based on progress proposed acquisition price.

Throughout Clarient’s transformation, Safeguard worked as an active partner to support Clarient’s growth including: initial and follow-on rounds of equity capital, mezzanine debt facilities, lines of credit guarantees, executive management recruitment, sales and marketing expansion, facilities project management and strategic communications and partnerships.

In addition Safeguard facilitated a $40 million private placement in Clarient by old investment partners during the first quarter of the 2009. This transaction allowed Clarient to retire it’s and reduce the interest expense and fees that were in capital to drive growth and propelled the company towards net income. In total Safeguard’s realized net proceeds of approximately $206 million from its ownership of the Clarient.

Now let’s take a few moments to summarize Safeguard’s business model, plenty of newcomers on today’s call and then we will provide some third quarter results. But we typically deploy up to $25 million in growth capital for company to develop high potential life sciences and technology business that exploit five strategic things; maturity, migration, conversion, convergence, compliance and cost containment.

Safeguard has 17 partner companies today. 10 on life sciences and 7 on technology, we time our exits from ownership positions in these companies to achieve aggregate targeted risk-adjusted returns of capital of three to five exit a minimum. Exit opportunities may arrive from anytime and it could be in different forms including privately negotiated sales of the securities or assets, public offerings of partner company securities or in a case of probably traded partner company the sale of securities in the open market.

Several Safeguard partner companies continue to grow revenues in the tour operationally. And the potential is very real for additional exit transactions over the course of the next year despite an uncertain economic outlook. M&A activity has been shunted and IPO pricing has been stopped. But if an opportunity clears our strategic growth in return hurdles, we’ll respond appropriately. In the meantime, we’ll continue to work everyday to build value in our partner companies drive their growth and keep their spending plans in line. Now we've said this often, and it bears repeating, that discipline is the hallmark of our strategy. Our deal teams evaluate many hundreds of opportunities throughout any given year as potential partners see growth capital.

Those of you who have attended our recent investor day events in New York City I heard of statements we remained focused on enhancing value on our partner companies rather than just deploying capital, or pursuing exits simply for activity sake. And Safeguard's pipeline of new opportunities is substantial and our diligent research and analysis of those opportunities are ongoing, so more to come.

Now let's review some specific recent developments at some of our partner companies that illustrate the power of the Safeguard business model. Avid Radiopharmaceuticals, one of Safeguard's partner companies that focuses on the area of diagnostics remains on track to have this NDA filed, that’s New Drug Application filed within the FDA before year end for its amyloid imaging agent designed to image Alzheimer's disease pathology.

Positive Phase III results for this agent were recently reported at the scientific congress for Alzheimer's disease and that was subject to the front page New York Times article that I'm sure many of you have seen.

In addition, Avid is progressing with Phase II trials of its imaging compound for the detection of brain changers associated with Parkinson's disease and Dementia, and its compound for imaging beta cell loss in diabetes remains in proof-of-concept Phase I trials. Safeguard deployed $12 million of capital in Avid since 2007 and holds a 13% ownership stake.

Our group of diagnostic companies now includes Good Start Genetics, which is developing more accurate and a comprehensive pre-pregnancy genetic testing based upon proprietary next-generation gene sequencing technology. This is designed to replace single-disorder-only tests that are currently on the market. In September, we deployed $6.8 million of capital for a 27% primary ownership position in Good Start.

The US clinical laboratory testing market for the company's DNA sequencing technology is estimated at $4.7 billion, it’s a fast growing area and Good Start Genetics’ platform is also applicable to other areas such as oncology, cardiovascular and adult genetic disorders unlike. Another target segment for Safeguard life sciences was Regenerative Medicine and the most mature permanent company in this area is Advanced BioHealing or ABH. And ABH is on track to generate over $130 million in revenue in 2010, that’s up more than 50% from 2009. The company’s growth continues to be self funded in line with its increasing demand for the bio-engineered skin substitute, Dermagraft, for diabetic foot ulcers, which is a market estimated at more than $1 billion in size. ABH continues to expand its US commercial sales and marketing efforts and is exploring new applications for the products in domestic and international markets. In mid-2010, a pivotal international trial was launched using Dermagraft to heal venous leg ulcers, this is a market opportunity estimated at $600 million annually. Safeguard deployed $10.8 million of capital in ABH since February 2007 and we have a 28% ownership position.

Last quarter I highlighted NuPathe on our specialty pharmaceuticals target segment NuPathe raised $43 million in net proceeds from its IPO in August and recently submitted an NDA to the FDA for its lead product candidate, Zelrix, a single-use transdermal patch for the treatment of acute migraine. This is the first ever submission to the FDA of a transdermal patch for the treatment of migraine. The commercial launch of Zelrix, is expected for the first half of 2012. And Safeguard has deployed $18.3 million of capital at NuPathesince September 2006, and we own 18% of NuPathe’s outstanding common shares.

Among our seven technology partner companies, Healthcare IT companies; AdvantEdge Healthcare Solutions or AHS and Portico Systems again reported solid growth during the quarter. And then we see strategic and financial buyers continue to drive activity in the Healthcare IT sector.

AHS is now one of the nations 15 largest medical billing firms. The company’s state-of-the-art technology efficiently collects financial information and then accelerates the reimbursement of third-party claims and patient payments, this enables hospital aids, physician groups, larger office space, medical practices and also surgery standards to maximize revenue and decrease their billing and practice management costs frequently in dramatic ways.

AHS is achieving profitable growth organically as well as by acquisition. It expects 2010 revenues to increase more than 95% versus and the company also has an active pipeline of potentially accretive acquisition candidates. Safeguard deploys $13.5 million of capital in AHS since November 2006 and we hold 40% ownership position.

Portico Systems offers innovative software and services solutions to health insurance companies that help reduce administrative, medical and IT costs. Portico has 39 healthcare customers and the big ones. We serve more than 42 million members. Company revenues have grown at double-digit rates over each of the last five years. And Safeguard has deployed $9.3 million in Portico since August 2006 and we have a 45% stake in that company.

Within our internet and new media segment, growth at MediaMath is especially impressive. Annual revenue for 2010 expected to be more than double. Actually their CEO reported almost triple growth year-over-year in September from the 2009 levels and demand continues to build for MediaMath's enterprise-class digital media buying and reporting service.

The company's platform allows advertising agencies and advertisers to analyze billions of daily impressions or daily ad impressions. And company has been recognized as well, it's named by AlwaysOn as the leader in their space and among the Top 100 private companies globally, and its CEO, Joe Zawadzki was named among the Top 100 Movers and Shakers by Silicon Alley Insider. Now we were at MediaMath's 2009 financing deployed $6.7 million of capital and we hold 17% primary ownership position.

We have no shortage of congress throughout Safeguard's other partner companies but in the interest of time, I'll stop now and turn the call over to our CFO, Steve Zarrilli. Steve will update you on Safeguard's financial strategies and performance. Go ahead, Steve.

Steve Zarrilli

Thanks Peter. Good morning. This morning my focus is on trends in our performance and strategic objectives, however I'll be happy to elaborate on any aspect of our financial or strategic initiatives during the Q&A period. Today, Safeguard is stronger, leaner and better positioned to execute our strategic game plan than at any time over the last five years. Now and for the foreseeable future our emphasis is on increasing Safeguard's cash balance, reducing our debt and further leveraging our operating infrastructure.

GE's announced acquisition of partner company Clarient is an important illustration of the power of Safeguard business model and focus on financial fundamentals. Net proceeds from the Clarient transaction will further strengthen our balance sheet enhancing our financial flexibility. That strength in turn allows us to target higher growth opportunities and support value creation in our partner companies.

Here is a summary of how Safeguard's balance sheet is expected to strengthen over the next two quarters. At September 30, we had 55 million in cash, cash equivalent to marketable securities excluding cash held in escrow and restricted cash equivalents totaling 23 million. The cash balance at December 31 was a 106 million excluding 6.9 million cash held in escrow. The restricted cash equivalent I referred to primarily relate to the interest escrow associated with our 2014 convertible debentures.

A year ago our debt to equity ratio was one to one. Today the ratio is one to two, achieved through our strategic initiative to enhance Safeguard’s financial strength and flexibility and to improve our balance sheet. Assuming the Clarient GE transaction closures, Safeguard’s cash balance would be approximately 200 million on a pro forma basis at September 30, our debt to cash ratio of 1 to 2.6 after the anticipated recurring of the outstanding balance of 31 million in Safeguard’ 2.625% convertible debentures at March of 2011, our cash balance would be approximately 170 million on a pro forma basis. And the debt to cash ratio of 1 to 3.6.

We are definitely prepared to put that cash to work, supporting existing partner companies and deploying capital on new high growth opportunities. In the third quarter primary uses of cash were cash operating expenses of 3.4 million. This total excludes interest payments, non-cash stock-based compensation and depreciation expense. For the nine months, cash operating and expenses totaled 11.5 million. Expenses for 2010 are expected to be within our previously updated range of between 14.5 to $15 million. In addition, we deploy 6.8 million in Good Start Genetics and we deployed another 4.3 million to support the capital needs of existing partner companies.

Safeguard’s debt balance at September 30, was 78.2 million 31.3 million represented by our 2.625% senior convertible debentures with a due date of March of 2024 but with an expected put date of march of 2011 and 46.9 million in the recently issued 10.125% senior convertible debentures due in March of 2014.

In 2011, we intend to continue our disciplined evaluation in pursuit of growth opportunities and to own an existing capital with well timed exits and/or alternative holds of capital.

There is no shortage of interesting opportunities with attractive economic parameters. Our deal teams are actively evaluating several new partner companies. We believe that Safeguard and its partner companies remain well positioned for continued revenue traction and value creation in 2010 and beyond.

Our current partner companies grew revenue in the aggregate by 73% year-over-year in Q3. As we disclosed in this mornings news release, we are increasing our guidance on projected aggregate partner company revenue for the year to range between 360 to 385 million. As a reminder, Safeguard reports the revenue of its equity method and cost method partner companies on a one quarter lag.

Our partner companies continue to execute aggressively our conserving cash and making strategic and opportunistic acquisitions. We have worked with the management teams of each of our partner company to evaluate levels of existing and required capital, strength of personal recourses and unique opportunities for growth. These ongoing processes allow us to assist management in unique ways to continually drive value creation and maturity.

Now with that I'll turn it back to Peter who will take us all on our Q&A session.

Peter Boni

Thanks Steve. Karen lets open the phone lines up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Bob Labick of CJS Securities.

Bob Labick - CJS Securities

Good morning. First let me offer you congratulations on a great job at Clarient to turn around all the effort in the value creation you did.

Peter Boni

Thank you, Bob.

Bob Labick - CJS Securities

And with that in mind, some of your closures as expected, this discussion will have a significant net cash balance approaching a $150 million. I was hoping you could expand on your plan. Tell us little bit how you anticipate your portfolio will be. You have 17 partner companies now. Does that grow to 30? How do you see the investments of those funds over the next year or two?

Peter Boni

Bob, I think we'll take the same very prudent approach that we have continued to take of evaluating opportunities and deploying capital, where we see the very best opportunity. We have a rich pipeline of activity, we continue to be very choosy over the last four years, we have evaluated over 1000 companies in any given year, and we have put out I think a grand total of just about 40 term sheet starting that period of time still again through the 17 companies that we have, revenue for those company as they have seen those grown from a 100 million in 2007 to approaching $400 million, so we are pretty tricky about what we get the one we get we think we have a good track. So we’ll continue to evaluate these opportunities and deploy capital when we see the rate opportunity I can’t be predictive on that.

Steve Zarrilli

To add to that Bob I think you’ll see us continue to practice the same methodology as one even put somewhere between 10 to $25 million of capital into any particular opportunity we see.

Bob Labick - CJS Securities

But I was going to follow up and ask you that question so, also you know you had I guess time right in the three to five on some previous investments and right now obviously that’s coming through (inaudible) as the team’s been there you know probably a little over four years and we have seen some great exit. Will that continue to be your time horizon on investments are there opportunities to you to have shorter term investments?

Peter Boni

We are based upon capital availability evaluating moving into the low market space if you will and may bee we will be doing two to three kinds of opportunities and perhaps that will be 2 to 4X cash on cash return target as opposed to three to five. So that will be blended with the current stages that we are now working upon.

Bob Labick - CJS Securities

So a kind of little bit of each potentially

Peter Boni

Actually...

Bob Labick - CJS Securities

Great and then at the analyst day you discussed that you are at the early stages of looking to leverage your infrastructure without side investors like foreign investors, can you may be elaborate a little bit on the types of structures or economics that would be attractive to Safeguard if we do go forward?

Peter Boni

The notion on this is we would attract some partners, they have co-participate with us side-by-side on the same terms with our current deployment of capital. We would gain, before that a management fees for the capital and the carrying interest when the exit occurred, and that carrying interest would simply work to augment our cash on cash return for the money that we do. That’s the strategic notion.

Operator

Our next question in queue comes from the line of Troy Ward of Stifel Nicolaus.

Troy Ward - Stifel Nicolaus

Real quick, now that Clarient has been monetized in obviously some point early in 2011, it will be coming out of your revenue guidance. Can you speak just the revenue increases potentially have been in some of your other portfolio companies and what kind of the guidance might request?

Steve Zarrilli

Well we've talked about ABH and MediaMath as an example of companies with very strong and substantial revenue growth but our other smaller companies are showing some double-digit revenue growth as well. We were serious about these five strategic growth drivers; maturity, migration, convergence, compliance and cost-containment that has enabled this growth from 100 million to become 400 over the last few years. And we’ll continue to look to that.

Troy Ward - Stifel Nicolaus

And then following, the second one on Bob’s comments previously. We talk about the middle market maybe a TD backed transaction. Can you tell us what those transactions may look like that you’d be focused on potentially going forward with this additional capital?

Steve Zarrilli

That stands somewhat predictive. I don’t want to do that Troy, hypothetically though there were some $500 billion in the fresh money and the private equity community and more than 80% of that is actually mid-market on up kinds of transactions. We think the lower mid-market is a neglected space. The build time, Safeguard's potential and its infrastructure is the main expertise. It could be in healthcare services and business services for instance.

Troy Ward - Stifel Nicolaus

And then finally, can you just give us an update on your view of the M&A activity in Lifescience? Of course we've heard a lot about the need for big pharma to rebuild pipelines and things like that. Can you run some color on what you are seeing in that M&A environment?

Peter Boni

Just a commentary that these big strategic buyers whether it be Lifesciences or technology, had been sitting on a huge war chest of cash. It's been a volatile capital market, there has been disrupted and discounted IPOs and the economic recovery that we've seen some disruption over the last couple of years has been tenuous. So there has been a slow, cautious, bargain earning group of M&A buyers. But we're beginning to see that their loosening their war chest of cash, they grip on that war chest of cash, and beginning to make some strategic deployment of that capital. Companies like GM have been doing this over the last quarter or two. So we think this could very well be a trend going forward for 2011 that these strategic buyers are coming out of the wood right now saying that they just have to put this capital to good use to enable their growth.

Operator

Thank you. And our next question comes from the line of Matthew Pommer of ROTH Capital.

Matthew Pommer - ROTH Capital

Let's see; so first, why did general life sciences side of the house with regard to ABH, clearly ABH has continued to generate impressive growth this year, again and as you look toward 2011 can you talk about the drivers of that growth such as sales forces size, maturity and client additions as well as the paces growth?

Peter Boni

Sure ABH today has been generating revenue of principally in the US, they have their trials ongoing for their current quarters and their existing application and the diabetic foot ulcers space essentially with double the size of their market space. ABH has continually grown their sales force as they have been self funding and their efforts to grow and they continue to do exactly that. What they have also seen is the product Dermagraft has been employed by physicians earlier in the process as opposed to waiting until the diabetic foot ulcers is chronic and that patient is near anti-patient. They are being pre-emptive in their application of Dermagraft might sooner in the process and that by itself is enlarge the market space and enlarge the growth. So is the ABH taking the same product and bringing it to the venous leg ulcers market, essentially have a company that’s penetrating at a $500 million space that could well have $2 billion worldwide market opportunity in front of us with the fundamental with same product offering. So they are really in a good space they have plenty of capacity their profits are substantial their gross margins were substantial and they continued to work well within this changing world of reimbursement.

Matthew Pommer - ROTH Capital

And maybe one on the technology side with regards to MediaMath you mentioned an impressive growth year-on-year. Can you tell us about a little bit more about where the growth is coming from and maybe specifically if its coming from increased penetration of existing customer accounts or if its from newer accounts and also maybe as a follow on to that, if you could tell us about the significance of the terminal 1 buying platform and its opportunity and maybe any air we see back on the success?

Peter Boni

The growth is coming from this penetration to both advertising agencies and then significant advertiser principally CPG advertisers and recognize too that online ad sales is substantially on the rise, it grew just 14% last quarter to a record of 6.2 billion according to some industry reports. So this rise in demand for digital is also moving into the video at our arena. So there is certainly a mega trend of analog to digital that MediaMath is capitalizing on. I believe also last quarter for the first time a digital display advertising revenue exceeded newspaper advertising revenue so that’s clearly an indication of this giant migration of analog to digital.

Matthew Pommer - ROTH Capital

Very interesting and finally I know you get this question a lot, where are you going to put your new investments. And looking at life sciences and specifically your exit of Clarient your team over the years I'm sure has developed a wealth of expertise and cancer diagnostics and laboratory services and how that business and industry work. As you look for new investments, what's the probably that you’ll make future investments in this industry given your overall view of the market performance and opportunity and your experience with Clarient? Thank you.

Peter Boni

While diagnostics continues to be an attractive segment for us that we do have some degree of focus and as you pointed out some degree of expertise, particularly molecular diagnostics, and we have a number of companies in that diagnostic space today. And devices and specialty pharma are the other two segments where we continue to target. And I think the past should be an indication of the future there.

Operator

Our next question comes from the line of Bill Sutherland of Boenning & Scattergood.

Bill Sutherland - Boenning & Scattergood

Hey Steve any investments since the end of the quarter?

Steve Zarrilli

Nothing since the end of September, Bill but we are constantly in a process of evaluating potential opportunities so we never say never as it relates to what may transpire in Q4.

Bill Sutherland - Boenning & Scattergood

It’s like with existing companies, I'm just trying to get a feel for, just on the cash flow.

Steve Zarrilli

Perhaps not with any significant deployment of capital into existing partner companies since the quarter end. There are a couple of drugs in areas that we're evaluating where we may be able to augment the capital structure with some modest mezzanine facilities to benefit the companies.

Bill Sutherland - Boenning & Scattergood

And do you pass this asset for sale, correct?

Steve Zarrilli

Correct.

Bill Sutherland - Boenning & Scattergood

Remind me what the means as far as your window for impacting on that?

Steve Zarrilli

It doesn’t necessarily suggest that we have a particular intension to do something with it within the prescribed period of time its more of an accounting convention to allow us to apply chare market value accounting to the asset and recognizing that the category in which it resides suggest that at some point in the future we will monetize our investment.

Steve Zarrilli

Pointing out in NuPathe, we really considered NuPathe idea was a financing event to enable the company to get closer to commercialization as opposed to enclose liquidity event. As a financing event there was a 50% upground we view that as a highly successful activity for NuPathe.

Bill Sutherland - Boenning & Scattergood

Remind what’s in other long term liabilities as far as 22 million? (inaudible)

Steve Zarrilli

I apologize I don’t recall specifically.

Bill Sutherland - Boenning & Scattergood

No, that’s alright. And then last thing I was wondering what is the gross that the new revenue target for the year the range would imply I kind of backed in to massive 36% to 46% is that right?

Steve Zarrilli

No its $280 million in 2009, so…

Bill Sutherland - Boenning & Scattergood

I was wondering, okay, 280 Peter. Is that correct.

Peter Boni

Around the year.

Steve Zarrilli

I’d say 250 something.

Operator

Our next question come from the Nick Halen of Sidoti & Company.

Nick Halen - Sidoti & Company

I just had one question what’s actually going forward. The numbers I have in front of me are correct I think with the tax loss cash flow as you guys have a good offset gains of about I think around 126 million and I was basically just wondering if you plan on using those for the eventual gain on the Clarient acquisition and also part two of that what can we expect in terms of taxes going forward?

Steve Zarrilli

Any gain that we generate from the result of our operations or any income, we are looking to shelter that income of gain with the existing tax NOLs that we have. Keep in mind when we're producing that income other by virtue by operating income and or capital gains were therefore not necessarily creating new NOLs for Safeguard. So we do need to expect that if we're successful in our monetization activities as we currently anticipate over the next 12 to 36 months that we will eventually become a tax payer we will have used those tax NOLs as we have always intended and we will be in a position where we will have to begin paying taxes on income and gains. But we expect to see pace in which we use those. We’ll probably be step-step well over the next 12 to 24 months we will be sheltering most of that all of the gains that we recognized but the reality also is that we're grateful for the opportunity to be able to put those NOLs to use because we wouldn’t want them to expire without having the benefit applied to Safeguard and our sheltering of that income from the taxation perspective.

Operator

Our next question comes from the line of (inaudible).

Unidentified Analyst

I was just curious, the attributable revenue you have, I was just curious in that calculation? So have the $360 million to $385 million of revenue that you are expecting your partner companies to generate this year, how much is attributable to Safeguard on a ownership basis?

Steve Zarrilli

We have taken the revenue our partner companies and added it together irrespective of what our percentage ownership is on each of those companies.

Unidentified Analyst

Understood. If you calculate what your total share is, what is that?

Steve Zarrilli

Directially Chris, it's about 35%.

Operator

And our next question comes from the line of Sam Rebotsky of SER Asset Management.

Sam Rebotsky - SER Asset Management

Good morning. Congratulations, the Clarient transaction is wonderful.

Peter Boni

Thanks Sam.

Sam Rebotsky - SER Asset Management

As far the capital loss and the net operating loss going forward, do you have the rate gap between net operating loss and capital the way it is before the Clarient and I assume the Clarient would be a capital gain stock transaction not a NOL transaction and what it look like after the two pieces.

Steve Zarrilli

Well, keep in mind Sam we can use our NOLs for capital gains sheltering. To answer your question specifically as of the end of last year and it hasn’t changed substantially since then, the total NOL balance was $198 million and the total capital loss carryover balance was $157 million. So that gives you a total of $355 million. And you can assume that we can use all or virtually all of that to shelter capital gain activity going forward.

Sam Rebotsky - SER Asset Management

So a stock transaction could be used a net NOL also is that what you are saying?

Peter Boni

If we were to sell in and that could be security and it results in a gain we can use these NOLs to shelter the gain on the net gain of Safeguard and [that’s a secured] period. Great taxable period.

Operator

And I show now further questions in the queue at this time.

Peter Boni

Ladies and Gentlemen, thanks for your continued interest and support of Safeguard and we’ll continue to keep you update as we progress towards executing our game plan.

Operator

Ladies and Gentlemen, thank you for participating in today’s conference, this does conclude the program and you may now disconnect. Everyone have a good day

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