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Safeguard Scientifics Inc. (NYSE:SFE)

Q4 2011 Earnings Call

February 29, 2012 9:00 am ET

Executives

Peter Boni – President, Chief Executive Officer

Stephen Zarrilli – Senior Vice President, Chief Financial Officer

James Datin – Executive Vice President, Managing Director, Life Sciences Group

John Shave – Vice President, Business Development &Corporate Communications

Analysts

Greg Mason – Stifel Nicolaus

Matt Dolan – Roth Capital

Paul Knight – CLSA

Nick Halen – Sidoti & Co.

Roy Studness – First Manhattan

Operator

Good morning ladies and gentlemen and welcome to the Safeguard Scientifics Fourth Quarter and Year-End 2011 Results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions following at that time. If anyone requires assistance, please press star then zero on your touchtone phone. As a reminder, this conference call is being recorded.

And now I’ll turn the conference over to your host, John Shave. Please begin, sir.

John Shave

Good morning and thank you for joining us for Safeguard Scientifics’ 2011 Year-End Conference Call and Update. Joining me on today’s call are Peter Boni, Safeguard’s President and Chief Executive Officer; Steve Zarrilli, Senior Vice President and Chief Financial Officer; and Jim Datin, Executive Vice President and Managing Director with responsibility for leading our deal team professionals.

During today’s call, Peter will review fourth quarter and 2011 highlights as well as other developments, then Steve will discuss Safeguard’s financial results and strategies. After that, we will open the lines for your questions.

Before we begin, 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 risks of acquisition or disposition of interests in partner companies, capital spending by customers, and the effect of regulatory and economic conditions generally, as well as 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, words such as accept, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot be certain that financial outcomes will be as described today. We encourage you to read our filings with the SEC, including our Form 10-K which describes these risks in details. The Company does not assume any obligation to update any forward-looking statements made today.

Now here’s Safeguard’s President and Chief Executive Officer, Peter Boni.

Peter Boni

Thanks John, and thanks to all of you for joining us today for updates on Safeguard Scientifics and our partner companies. Results for the fourth quarter and year ended December 31 were distributed at close of market yesterday. 2011 was an exceptional year of value-creating activity at Safeguard. We executed two well-timed exits with net proceeds of $182 million, including escrowed amounts, booking at cash-on-cash returns of 4 times and 14 times on the sale of our positions in Portico Systems and Advanced BioHealing, respectively.

Safeguard’s deal teams deployed $69.4 million of capital in seven new partner companies and made three follow-on deployments in existing partner companies for $14 million. The strategic and operational support of Safeguard’s partner companies drove aggregate revenues to increase 27% year-over-year. We also launched Penn Mezzanine, Safeguard’s first platform expansion initiative in alternative asset management through which we expect to generate management fee and interest income, as well as profit participation opportunities. The repayment of $31 million in corporate debt bolstered Safeguard’s balance sheet, improving the Company’s ratio of total debt to equity year-end to 1:8. In short, the team is executing a focused and disciplined strategy which is enhancing Safeguard’s brand as the preferred catalyst to build great companies, ultimately boosting the Company’s financial strength, flexibility, and driving value for our shareholders.

Our momentum is strong and I find our prospects really quite exciting. This year is off to a very promising start despite the macroeconomic environment where geopolitical headlines disrupt global capital markets and our domestic economy’s growth is tenuous and politically charged. For those who are new to the Safeguard story, I’ll review the hallmarks of our strategy which are built on three pillars: focus, discipline and execution.

Focus is the first pillar of Safeguard’s strategic foundation. We deploy capital to high potential businesses in specific segments of life sciences and technology industries that exploit five strategic growth driving themes: maturity, migration, convergence, compliance, and cost containment. In life sciences, we target opportunities in the areas of lower relative technological and regulatory risk, not in new therapeutics but rather in molecular and point-of-care diagnostics, medical devices, specialty pharmaceuticals, and some selected healthcare services. In technology, we pursue transaction-enabling applications with a recurring revenue business model in Internet and new media, financial technology, healthcare IT, and other selected business services.

Safeguard’s discipline complements our focus. We will not deploy capital or pursue exits simply for activity’s sake. If an opportunity clears our strategic growth and return hurdles, we will respond appropriately.

Now while Safeguard’s deal team evaluates over 1,000 proposals annually, we remain disciplined in our capital deployment process. Today we hold interest in 17 partner companies. We have typically deployed up to $25 million in growth capital per company. We will time our exits from ownership positions in these companies to achieve targeted risk-adjusted returns on capital of 3 to 5 times over three to five years. As background, for all deployments since January 2006 than have been realized, written down or written off, Safeguard has realized aggregate cash-on-cash returns of 2.4 times. By way of comparison, according to Cambridge Associates, U.S. venture capital investments made since 2006 generated average cash-on-cash returns of 1.2 times. Now, based upon our evolving diversified deployment strategy, equity and debt in companies at varying stages, we believe that our aggregate returns on total capital deployed could reach 2 to 4 times over that three to five-year period.

Exit opportunities may arise at any time and in different forms, including privately negotiated sales of stock or assets and public offerings. In the case of a publicly traded partner company, exits could involve the sale of stock in the open market. Execution is how focus and discipline are tested, and that’s how Safeguard has distinguished itself. Focus, discipline and execution have served Safeguard and its shareholders well. By any measure, the Company is fundamentally stronger today, better positioned for continued growth and value creation not only in 2012 but beyond.

Let me move on and highlight Safeguard’s newest partner companies. We have five in all since the last call. They include in alphabetical order: Crimson Informatics, Hoopla Software, Lumesis, Medivo, and Spongecell.

Crimson Informatics combines mobility technology and high-powered data and analytic software into a single revolutionary offering in the usage-based auto insurance market – I’ll refer to that as UBI. UBI analyzes data on driver behavior and enables underwriters to base insurance coverage on more detailed information. The Crimson offering helps drivers improve their driving and benefit from personalized rates and safe driver discounts. As the demand for UBI has grown in the U.S. and throughout Europe, Crimson has secured large marquee customers for wide-scale rollouts. According to our report from management consultant A.T. Kearney last year, the potential U.S. market alone for UBI could grow to 55 million subscribers, and that’s from less than a million today. By 2014, more than 20% of U.S. and European vehicles are likely to have an embedded data capturing hardware according to the Kearney report. In December, Safeguard deployed 1.7 million and we have a 24% primary ownership position.

Hoopla Software has a complete performance optimization system designed to steer the actions and behaviors of employees. Hoopla’s platform leverages enterprise data, advanced game mechanics, and sophisticated communication tools to cultivate a high-performance culture that drive results. According to Gartner Research, more than 50% of organizations that manage innovative incentive-based programs will gamify those processes by 2015. Note the new word in the American vocabulary – gamify. Safeguard deployed $1.3 million and we have a 25% primary ownership position.

Our newest partner company, Lumesis, is based in Stamford, Connecticut. Lumesis provides robust visualization and analytical tools and time-sensitive notifications for the fixed income market. The company’s lead product, DIVER, is an interactive web-based fixed income research tool that offers more than 130 data sets from more than 30 distinct sources. DIVER provides timely and meaningful demographic and economic data that impacts the fiscal wellbeing of states, counties and other municipalities that include data and portfolio visualization tools, analytics and notification applications. Earlier this month, Safeguard deployed $2.2 million into Lumesis and we have a 32% primary ownership stake.

Medivo is a healthcare IT company. The provide data analytics and lab testing services via the Internet that empower and enable patients and physicians to improve health. Medivo has a convenient online HIPAA-compliant platform that connects patients to a nationwide network of physicians, lab service centers, and home testing services. Managed care companies sponsor broad-based screening programs to their members and life sciences companies fund advertising to specific physician and patient populations on the Medivo platform. The company also delivers clinical data analytic services and direct-to-consumer lab testing access. In November, Safeguard deployed approximately $6.3 million and we have a 30% primary ownership position.

And last but not least, Spongecell is an expansion-stage business. Earlier this year, Safeguard led financing for Spongecell, an advertising technology company that turns standard banner ads into dynamic ads with rich media features, including engagement rates by 25 to 50% versus standard banner ads. Spongecell’s interactive features like video, social media, interactive maps are all easily integrated without disrupting the creative workflow. In addition, Spongecell allows companies to collect data and analytics that provide a detailed portrait of audiences that cannot be produced in other advertising platforms. Spongecell competes in the display advertising market, expected to grow to over $27 billion in five years – 2016, at a compounded annual growth rate of 20% in 2011. In January, Safeguard deployed $10 million in Spongecell and we have a 23% primary ownership stake.

There were also notable developments at partner companies MediaMath, NovaSom, PixelOptics, and Putney. MediaMath enables digital advertisers to figure out which ads to buy, how much to pay for them, how to analyze which factors drove performance. Their revenue increased approximately 43% in 2011 and is expected to generate continued strong growth in 2012. Their customer base is among the who’s who of digital advertising and the company is continually recognized as a leader in its space. We have a 22% primary ownership stake in MediaMath.

NovaSom is a provider of diagnostic devices and services for home testing and evaluation of obstructive sleep apnea. An expansion stage company, NovaSom’s home sleep test reduces the cost associated with diagnostics by two-thirds as compared to sleep labs. It’s been adopted by some major HMOs and they recently released a wireless device for home deployment. We deployed $20 million of capital in NovaSom last year and we have a 30% primary ownership position.

At PixelOptics, results are really encouraging from the regional launch of the company’s innovative electronically focused eyewear; and then last month Brett Craig, formerly the president of Transition Optics joined PixelOptics as President and CEO. He’s succeeding founder, Dr. Ron Blum, who continues as the company’s chief visionary officer. A progressive regional rollout of PixelOptics emPower! eyewear is expected to result in a full national presence by the end of this year, as well as an international presence. Safeguard has a 25% ownership position in PixelOptics.

As for Putney, a high-growth expansion stage specialty pharma company that’s developing high quality generic meds for pets, we deployed $10 million of capital last year and we have a 28% primary ownership position. Putney is using the proceeds from its Series C financing to increase both the number of products and the overall brand value of drugs in it’s pipeline, as well as enhance it’s management ranks.

Now let’s review some recent developments to illustrate how we’re expanding Safeguard’s business model. Safeguard’s partnership with Penn Mezzanine, formed in 2011, represents our first initiative to augment our capabilities as a growth capital provider and then to participate in the management of external alternative sources of capital. We expect this platform expansion initiative to produce management fee and interest income as well as profit participation. Managed by a team of experienced mezzanine lenders, this platform enables Safeguard to provide flexible financing strategies to our current and prospective partner companies as well as other potential low or mid-market borrowers to build value in their businesses and ultimately realize that value through well-timed exits.

Penn Mezzanine closed its first round last year after raising more than $64 million. That was including $30 million of committed capital from Safeguard. As of December 31, Penn Mezzanine has deployed in excess of $26 million in seven companies. Safeguard deployed 13.6 million into Penn Mezz and in Penn Mezzanine capital deployment participation in 2011, and we have a 36% ownership position in Penn Mezzanine.

There’s no shortage of progress throughout Safeguard’s other partner companies, but in the interests of time I’ll stop now and turn the call over to our CFO, Steve Zarrilli. Steve will give you an update on Safeguard’s financial strategies and our performance. Go ahead, Steve.

Stephen Zarrilli

Thanks, Peter. Over the next few minutes, I wanted to outline a few big-picture trends in the Company’s financial performance and some initial thoughts on valuation. Let’s start with valuation.

At December 31, Safeguard’s interest in its 15 partner companies represented an aggregate of $168 million of capital deployed. Our net cash, cash equivalents and marketable securities totaled $258 million as of the same date. The sum of these components is $426 million. Using shares outstanding of approximately 21 million, this total represents approximately $20 per share.

Over the past five years, the Safeguard team has delivered meaningful and measurable results for shareholders. Despite unprecedented volatility in capital markets, we remain focused on building value in partner companies, realizing that value, and then communicating our progress concisely, consistently, and credibly.

Disciplined focus on enhancing Safeguard’s financial strength and flexibility also has positioned the Company for continued success. We repaid and restructured corporate debt, controlled holding company expenses, developed alternative sources of capital and income. Today Safeguard is stronger, leaner, and better positioned to execute our game plan than at any other time over the last 10 years. This team’s focus on value creation is keen and we remain optimistic about prospective opportunities.

Focus – it’s that simple and that powerful. Of course, share repurchases, early debt retirement, or special dividends cannot be ruled out as potential uses of cash to enhance shareholder value. While our team has demonstrated that our deploy build realized strategy delivers solid cash-on-cash returns, we also are aware of the views of our shareholders and factor them into our decision-making. Our interests are closely aligned with Safeguard shareholders by virtue of our long-term compensation incentives. Our management team remains focused on building and realizing value for shareholders.

Now let’s move on to key financial metrics for the quarter and year-ended December 31. At 12/31, we had $258 million in cash, cash equivalents, and marketable securities. This amount does not include an aggregate of 18.7 million of restricted cash and cash held in escrow. During the quarter and the year, primary uses of cash were operating expenses of 4.1 million in the fourth quarter, total operating expenses of 17.7 million for the year or approximately $0.85 per share, and that compares to 16 million or $0.78 per share in 2010. During the fourth quarter, Safeguard deployed a total of 19.6 million into partner companies Crimson, Hoopla, and Medivo, as well as into Penn Mezzanine loan participation and a follow-on deployment in Alverix. For the full year 2011, Safeguard deployed $96.9 million. During 2011, Safeguard repurchased 30.8 million of our convertible senior debentures.

In 2012, we project uses of cash to be between 100 and 150 million in the following primary areas: corporate expenses, capital deployment into new partner companies, follow-on funding for current partner companies and mezzanine participation, and the expansion of our platform. During 2011, we received approximately $500,000 in cash returns related to our Penn Mezzanine participations. We expect to receive between 1.4 and 1.6 million in 2012 from such participations. This cash return directly offsets our operating cash expenses.

Our federal tax carry-forwards totaled 159 million at December 31, 2011 compared with 266 million at December 31, 2010. Significant gains realized in 2011 on the sales of Advanced BioHealing and Portico Systems were offset by the use of those tax loss carry-forwards.

Previously our Internet new media partner companies reported revenue on a gross basis. It is anticipated that our Internet new media partner companies will report and forecast revenues on a net basis going forward. As a result, Safeguard has updated its aggregate revenue guidance for 2012 and prior years to reflect revenue on a net basis. This change in presentation does not impact the long-term value of our partner companies.

Overall, partner company aggregate revenue for full-year 2011 was 140 million. Our technology partner companies accounted for 116.5 million of that total, representing an increase of 38% as compared to 2010. Aggregate revenue for all partner companies for the period 2007 through 2010 were 31.5 million, 50.1 million, 67.7 million, and 110.5 million respectively. Safeguard’s partner companies remain well positioned for continued revenue traction and value creation. For 2012, Safeguard projects partner company aggregate revenue in a range of 160 to 165 million. Revenue for Safeguard partner companies is reported on a one quarter lag basis.

Our partner companies continue to execute aggressively, are using their cash to grow, and in some cases generating cash and making strategic and opportunistic acquisitions. 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 ongoing processes allows Safeguard to assist partner management teams in unique ways to drive value creation and maturity.

And with that, I’ll turn it back over to Peter to lead the question and answer session.

Peter Boni

Thanks, Steve. Just to let you know, Jim Datin, our Executive VP responsible for our capital deployment and capital returns initiatives, is not on the road today – he’s joined our call. Steve, Jim and I will take questions now. Tyrone, if you’d open up the phones.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, if you have a question, please press star then one on your touchtone phone. If your question has been answered and you wish to remove yourself from the queue, you can do so by pressing the pound key. Again, if you have a question, please press star then one on your touchtone phone.

First question is from Greg Mason of Stifel Nicolaus. Your line is open.

Greg Mason – Stifel Nicolaus

Great. Good morning, gentlemen. I wanted to dig into some of those new investments you made, but before that maybe talk a little bit bigger picture about your investment philosophy. I know in the past you’ve said your target is deploying 5 to $25 million in new investments, but I think three of these five new investments you’ve made are $2 million and under for your initial investment. So could you talk about what you’re seeing or your reasons for kind of going outside of that normal target of 5 to 25 million?

Peter Boni

Sure, Greg. We don’t view this as outside of our normal target. We’ve stated 5 to $25 million per company for the life of the company inside of our holdings. This was the first of what might be another round of activity. Many folks have noted that in the technology world, Internet-enabled firms have far less capital requirements to start themselves up. Some folks have said that $500,000 is the new 5 million. The good news is it takes far less capital to build a business in that space, but just by putting $2 million in doesn’t mean that’s the end of it. And we’ve really looked at the businesses as terrific opportunities going forward and had an opportunity to take an early stake. Oftentimes when you get an early stake, you have the opportunity to play later on. If you don’t take the early stake, you don’t have the opportunity play later on.

Greg Mason – Stifel Nicolaus

Okay, great. And then another bigger picture – it feels like the pace of deployment has picked up significantly. Just based on our database, it looked like two new deals in 2009, one new deal in 2010, then in 2011 you did seven new deals and already two this year. So can you talk about what you’re seeing in the marketplace or why it appears your pace of deployment has picked up significantly?

Peter Boni

Why don’t I let Jim Datin speak to his rich and full pipeline.

James Datin

Hi Greg, it’s Jim. Just to follow on Peter’s comments, our pipeline is the best that it’s been in my six-plus years here at Safeguard. We have a very structured outbound activity to proactively look for good deal opportunities. Two of our partner companies came through that process last year. And because of our success of having sold four companies in just over the past year, we now have a very strong pipeline of inbound opportunities that come from CEOs, other venture capitalists, private equity groups out there that want to partner with us. So from our perspective, it’s a great time to be putting capital to work. We also had the ability to a do a couple recaps recently to reset valuations and get a bigger stake in companies as well.

Peter Boni

I’ll supplement that a little bit, Greg. Capital providers have actually been downsizing as an industry over the last couple of years because their fundraising initiatives have really been retarded by all of the disruption we’ve had in capital markets. With an evergreen model, it’s well known that Safeguard has capital; and we’re finding significant activity as a result of that.

Greg Mason – Stifel Nicolaus

Okay, great. And then from—I appreciate the kind of overview of the new portfolios, but maybe if you wouldn’t mind giving us a little more detail in terms of what were the key characteristics you feel about the growth prospects – you know, competitors that you looked at and industry multiples, starting with maybe Spongecell and Medivo as the bigger investments.

Peter Boni

Steve and Jim, why don’t you attack that and then I’ll supplement it.

James Datin

Sure. Maybe starting on the healthcare side, one of the areas, Greg, that you know that we’ve been looking to put more capital to work is healthcare IT, which is a natural fit for Safeguard because we’re able to use the healthcare experience that we have as well as our IT backbone here. So Medivo was a perfect hybrid for us because we were able to leverage the strength of the deal teams on both a due diligence and in helping add value to the Company moving forward. Medivo currently has revenues. They are expecting to go through a strong potential this year, and it fits our two core themes of Medivo reducing the cost of healthcare and bringing the data closer, back to the patient, empowering the patient to make more informed decisions.

The same could be said for Spongecell. Clearly that industry is transitioning significantly from, as Peter said, old banner ads segment advertising to more rich media where there’s an opportunity to expand both internationally and domestically. We expect the company to produce good results and growth this year, both in terms of revenue and EBITDA.

Stephen Zarrilli

And I’ll just further augment those statements by noting that our successes over the last 24 to 36 months have put us in positions where we get some first peeks at some of these opportunities, so our competitive framework is such that we’re actually looking at some of these companies well before the competition may be aware, and then have had the chance to get involved in structuring our discussions with those companies to put us in a better position to succeed in the overall competitive framework of deploying that capital.

Peter Boni

I’ll supplement that, Greg, by talking about strategic growth drivers, and we are really seeing the impact of that. Maturity, migration, convergence, compliance, cost containment – many of our new businesses are playing on those themes: the migration of desktop to mobile, the use of big data analytics for decision support, the convergence of information technology into healthcare applications not only to facilitate the paying of healthcare but actually the providing of healthcare services at a far lower cost, and then of course doing this in a regulatory compliant way. So we are really playing to those strategic growth-driving themes. Those are seen in some of the new deployments we’ve done.

Operator

Thank you. Our next question is from Matt Dolan of Roth Capital. Your line is open.

Matt Dolan – Roth Capital

Hey guys, good morning. First question just on the aggregate revenue you put up in 2011. Can you give us an apples-to-apples comparison of now with the adjusted reporting style for tech, what would you have put up relative to guidance? It looks like form a percentage standpoint you might have exceeded your guidance, but was just hoping to get a clearer number there.

Peter Boni

Well as we’ve noted in the past, a good deal of the 2011 revenue came from our technology businesses. Since the life sciences firms, after the sale of ABH, Clariant and Alike were really in the initial and moving to the expansion stages of revenue. So the technology businesses grew 38% in 2011, that we thought was pretty robust; and we’re off to a great start in 2012.

Stephen Zarrilli

So in addition to that, Matt, more specifically, we would have been at the top end of the revenue guidance that we had provided to you last quarter on an apples-to-apples comparison basis.

Matt Dolan – Roth Capital

Okay, that’s great. And then within your 100 to 150 in cash usage this year, should—maybe Steve, you could tell us what to anticipate. I know you touched on this slightly, but on debt pay-down, is that a component of the forecast or will you shift proportionately more towards straight equity deployments and mezzanine?

Stephen Zarrilli

Yes, Matt, no repayment of corporate debt anticipated this year, so you’ve got three primary categories, or four, really. You’ve got new partner company deployments and follow-on – that’s two. You’ve got Penn Mezz, that’s three; and then you have corporate expenses, that’s four. And that’s a gross number, so it’s not offset by the million and a half or so of additional cash that we expect from Penn Mezz. And we’ve given ourselves a little bit of a range to work with here so that we can be opportunistic, but I think you’ll see a fair amount of consistency between what you see in 2012 compared to what you saw in 2011 from a dollar perspective.

Matt Dolan – Roth Capital

Okay, and just two follow-ups to that: (a) what are your corporate spend expectations; (b) from a timing standpoint, it seemed like last year you had a lot of exits up front and a lot of deployments into the second half of the year. Should we anticipate similar timing this year?

Stephen Zarrilli

Deployments, interestingly enough, and this kind of builds on a prior question, one of the reasons why we’ve been able to get out of the gates a little bit more robustly in Q1 is because we’ve had this capital to work with, and that’s actually prudent for us to have somewhat of a more steady stream of deployments over the course of the year. I think that that actually works well for us in a number of ways, including operationally so that we can use our skill sets and our functional expertise in a more leveraged fashion.

From an expectation of exits, we’re going to continue to try to make sure that we’re realizing opportunities to monetize when we think it’s appropriate. Our companies are growing pretty nicely, and you never know when there’s going to be an opportunity presented. But when we look at where these partner companies are today, we can’t be very predictive as to whether or not it’s going to be first half, second half, or even into parts of 2013. So as we get clarity, we’ll share that clarity with you.

Matt Dolan – Roth Capital

Okay, and last one maybe on PixelOptics – I know we were thinking of demand picking up here in the first half of the year. Maybe Jim, you can touch on what you’ve experienced so far in the initial commercial ramp with that company, and if so, just touch on the manufacturing capabilities and the ability to meet that demand. Thanks.

Peter Boni

So Matt, Steve is going to take that question since he sits on the Pixel board along with Dr. Kurtzman.

Stephen Zarrilli

So Matt, let me just frame the discussion here a little bit for you. Very broadly, there is an $82 billion vision and optical market that we’re trying to penetrate, but more specifically the premium progressive lens market is stated to be about 8.7 million pairs a year, and our goal is to have a 20 to 30% market share, and at 20% that would be 1.7 million pairs per year that we would be selling. The broader progressive lens market – so the first one was premium – the broader progressive lens market is 62 million pairs. Our goal would be to be somewhere between 2 to 5% of that marketplace, which would result in a similar number of pairs, roughly about 2 million pairs per year.

Now if you put that into perspective as it relates specifically to PixelOptics, here are a couple of quick facts. There are 1,400 stores currently in place. What that means is opticians or what we call eye care professionals, and we expect that number to grow to about 2,000 by the end of the year. Of the 1,400, approximately 400 are currently selling emPower! and we started in the southeast, we’ll be working our way to the west coast, then migrating ourselves back to the northeast over the course of the year. So we expect 2012 to be a year in which Pixel begins to generate its early stage revenue, and we believe that Pixel, using Safeguard’s terminology if you will, is positioned to move quickly into the expansion stage, if not the high traction stage as it works it’s way into 2013.

Operator

Thank you. Our next question is from Paul Knight of CLSA. Your line is open.

Paul Knight – CLSA

Thank you. Peter or Steve, you had mentioned earlier the possible distributions to shareholders. I know that institutions out there would appreciate or look forward to participation in payouts. What milestones would you have to get to for that to become more likely?

Peter Boni

Steve, you want to make a comment?

Stephen Zarrilli

Yeah, so this obviously gets to the question of whether or not there are stock buybacks or dividends in our future, and clearly as we’ve tried to indicate in the past, we’re on a regular basis looking at the cash that we have, the utilization of that cash, and whether or not we are in a position to provide some return to shareholders. The primary question that we ask ourselves every day, and I would expect that you would expect us to be asking ourselves this question, is can we put this capital to work in a meaningful fashion to provide meaningful returns to our shareholders, and we think that the answer is yes. Jim pointed out that he’s never seen the pipeline as robust. We have been on a very definitive game plan to put this capital to work in a very disciplined fashion, and we believe that our exit opportunities will provide the returns that our shareholders are looking for. That doesn’t preclude us from looking at other opportunities to provide a return to our shareholders in the future, but as we sit today, we think that the highest and best use of our cash is the deployment into our core business.

Keep in mind with about a quarter of a billion dollars of assets under management, at one level, through one lens, that’s a large number; but through another lens, that isn’t necessarily as large compared to some of our competitors in the marketplace, so we constantly balance that equation as well when we consider how to best utilize our cash for the benefit of our shareholders.

Paul Knight – CLSA

And you had mentioned earlier Penn Mezzanine. Could you go back over how much capital is there, what is currently already paying out in terms of dividends, what you would like to see as the perfect result of your Penn Mezzanine funds?

Stephen Zarrilli

So Penn Mezz has actually exceeded our expectations in a number of ways. The pace of deployment of capital has been on target, and what I mean by that is not too slow and not too fast, and they’re finding some terrific opportunities in areas where they’re trying to put forth a credit in the amount of 2 to $7 million. The structure of those deals are also meeting expectations, generally, 12 to 14% coupons with warrant coverage to augment the return with some closing fees attached to that, and we have used approximately $9 million of capital in the deployment or the participation of these loans, and it’s already providing us with current cash flow. I mentioned in 2011, cash in was about a half million dollars; when we look at 2012 on a conservative basis, we think that that number is somewhere between 1.4 and 1.6. And if $30 million was fully deployed against an average of 12 to 14% coupon, that would be generating somewhere between 3 and $3.5 million of annual cash flow to Safeguard. So all of those factors work well for us and are meeting or exceeding our expectations.

One last point as it relates to Penn Mezz – they are finding that the marketplace that they are focused on, that credit size of 2 to $7 million, is very robust and under-served, and they’re able to really kind of have the pick-of-the-litter, if you will, on opportunities; and (b) they’ve got some great deal source. About 50% of their activity is provided through funded sponsors, which is actually an important metric for us because it shows stability of those businesses and the ability for those funded sponsors to keep a proper level of equity in those organizations, which makes our credit risk less and it also provides for future pipeline development for Penn Mezz activity.

Paul Knight – CLSA

And then last on the portfolio companies, the BD Handheld Diagnostic launches in Japan, I guess this month, any initial color there for Alverix? And then secondly, Good Start, any color on traction there as they roll out commercial?

Peter Boni

Jim, you go ahead and make comments.

James Datin

Sure. So the CDC just published earlier this month that the flu season is here. Becton, Dickinson is actively marketing the product in both the United States and Japan, where it has been approved. It’s been recognized as the most sensitive flu test available at the point of care. The Veritor system is built on Alverix’s platform and Becton, Dickinson has been very active with that. We expect to be able to share progress with you in the near future on that.

In regards to Good Start, they did receive their CLIA lab approval. They are completing a beta launch wrap-up at this point from their pilot, and we expect that in Q2 they will be launching their products and platform on a nationwide launch across the U.S. They are on target at this point, meeting our expectations in terms of financials and timelines.

Operator

Thank you. Our next question is from Nick Halen of Sidoti & Company. Your line is open.

Nick Halen – Sidoti & Co.

Good morning guys. So first question I had was I was just wondering if you guys could elaborate a little bit on what caused the $5.7 million impairment charge that you guys took relating to Swap.com.

Peter Boni

Jim and Steve both, I’ll let you comment.

James Datin

Sure. The company has launched their recent swap marketplace but has struggled to transition to be a revenue-based company at this point. They are currently evaluating strategic options at this point as there has been some interest in the company. At this point, we thought it was prudent thing to do considering the marketplace.

Nick Halen – Sidoti & Co.

Okay. And then also, I know at your investor day MediaMath mentioned they would possibly raise capital in the beginning of 2012, and I was wondering if you guys have any updates on that, if they’ve actually raised any of the capital yet?

Peter Boni

We don’t have any updates, Nick. We looked at that as a potential, not a certainty, but we don’t have any updates.

Nick Halen – Sidoti & Co.

Okay. And then lastly, I know you guys—you know, you break down your partner companies in specific stages, and it seems like a lot of your companies are making some great traction right now. I was wondering if any of your partner companies are approaching or are starting to make significant progress toward the high traction stage.

Peter Boni

I’ll let Jim speak to that and then I’ll supplement that with a comment, Nick.

James Datin

Sure. So we have several companies that are expected to grow revenues substantially this year. NovaSom, for one, is expecting a significant increase. Putney is planning to have further products approved in their pipeline. Beyond continues to impress us. They had over 30% revenue growth last year in a challenging marketplace. We expect the strong growth rate to continue again this year. There are other companies. MediaMath, we continue to believe from both the top line revenue and EBITDA will continue impressive revenue growth. And we mentioned Spongecell earlier, where we’ve recently put capital work in. We think that’s going to continue that growth. The other one would be Bridgevine, which in a challenging marketplace had a strong year and looks to have another impressive year in terms of revenue and EBITDA growth.

Peter Boni

So the current high traction firms are actually growing well and contributing cash – they’re making money and making more of it. EBITDA in particular is significantly growing, and we do anticipate that several of our expansion stage companies could make the shift to high traction in 2012.

Nick Halen – Sidoti & Co.

Great. Thanks, guys.

Operator

Thank you. Our next question is from Roy Studness of First Manhattan. Your line is open.

Roy Studness – First Manhattan

Hey guys. I had a question – I was wondering how many shares have you guys repurchased under the new buyback authorization?

Stephen Zarrilli

We have not repurchased any shares, Roy.

Roy Studness – First Manhattan

Okay, so why is that, Steve?

Stephen Zarrilli

We believe that our capital is best deployed right now in the deployments that we’ve noted and the opportunities that we’re seeing. We did put into place a program that should our shares drop substantially in relationship to book value, the Board has given us some opportunity to then be reactive to that set of events, which has not occurred and we don’t expect it to occur. But should there be a substantial decrease in value in that regard, then we’ve got some tools to use in order to address that.

Roy Studness – First Manhattan

And I guess I would just kind of respond to that a little bit and hoping for maybe a little bit more of a proactive approach. As shareholders, I don’t think we agree with the approach that you guys are currently taking in this regard. On the one hand, you guys have put forth a lot of effort to describe the value creation at Safeguard and how undervalued the stock is and the strong financial strength that the Company is in, and obviously you put out the buyback authorization last year. So you have it on the one hand, but when you don’t follow through on it and you don’t actually put your money where the mouth is, so to speak, and actually buy back any of the stock when you say it’s a great value, we think that kind of undercuts the credibility of the message a little bit. I don’t think that’s in the best interest of shareholders currently.

Peter Boni

Appreciate the point of view, Roy. The circumstances didn’t fall under the parameters of our buyback program.

Stephen Zarrilli

And just to augment what Peter said, Roy, and we’ll respectfully acknowledge that we may have a difference of opinion here, even just recently as yesterday in the Wall Street Journal, there was an article highlighting the great debate that goes on within companies and with its shareholders between buyback or not to buy back. So we understand your point of view and we respect that point of view, and we hope that you’ll have some understanding of our point of view as well.

Peter Boni

Roy, we continue to get capital market feedback and advice as well, and we put that into consideration in our decision-making processes.

Roy Studness – First Manhattan

And is it fair to say, I guess, that—I know you have the authorization, but your projected uses of cash that you mentioned, at least in the press release and in the script, did not include share repurchase, so I guess—and you mentioned the program you have in place. So kind of barring that collapse in the stock price that none of us hopes happens, for 2012 there really shouldn’t be any meaningful buyback going on. Is that fair?

Peter Boni

We stated that we’re open to the opportunities if circumstances dictate.

Roy Studness – First Manhattan

Okay. Thanks, guys.

Operator

Thank you. We have a follow-up from Greg Mason of Stifel Nicolaus. Your line is open.

Greg Mason – Stifel Nicolaus

Great, thank you. I believe if I remember correctly, Avid had a potential earn-out based on performance. Can you tell us how that earn-out stands on how Avid’s doing currently?

James Datin

Sure. Avid, as you know, was purchased by Eli Lilly. They are currently in the final stages of seeking FDA approval (inaudible). The PDUFA date is this spring, so we expect with a favorable review there that Lilly, via Avid, will launch this program by year-end.

Greg Mason – Stifel Nicolaus

And then your earn-out is based on how that program does in commercialization?

James Datin

We have two stages left. There would be a milestone payment to us based on the approval, and then secondly there would be financial targets based on the sales over the next three years post-launch.

Greg Mason – Stifel Nicolaus

Okay, great. And Jim, you actually touched on this a little bit. My question was how many products do you think are going to come online with Putney this year from what they’ve got in the pipeline?

James Datin

Putney has submitted and will submit between last year and this year 14 new products to be approved, so we’re not sure what will come on this year based on the FDA timelines. On a conservative basis, we believe that the organic growth will produce good growth and good returns versus last year. I think the crux of most of their new products will be coming online in 2013 and ’14.

Greg Mason – Stifel Nicolaus

Great. And then finally, one last follow-up – your expense expectations for this year, Steve? Could you get that?

Stephen Zarrilli

Yeah, it’s pretty consistent with that of last year. There’s a little bit of additional amounts that have been provided for to allow for some staff building that we may take an opportunity to focus on, especially within the deal teams, and some other corporate development expenses that we’ve included within our projected uses of cash for the year, most specifically around our platform expansion initiatives.

Greg Mason – Stifel Nicolaus

Okay, so I think the number was 17 million last year, so maybe up slightly from that this year?

Stephen Zarrilli

Up slightly, up to about 18 million. Correct.

Greg Mason – Stifel Nicolaus

Great, thank you.

Operator

Thank you. This ends the Q&A portion of today’s conference. I’d like to turn the conference over to Peter Boni for any closing remarks.

Peter Boni

Thanks, Tyrone. Well, we continue to execute our game plan, building value in our companies, realizing some valuable exits, replenishing our holdings with winners, and then expanding the platform. Why own Safeguard? Well, that value realized for developing growth-stage businesses through active ownership is significant. We have a healthy group of well positioned partner companies. There’s been major improvements in our financial strength, our flexibility, and our liquidity. We have initiatives underway to increase capital under management, and my management team has a strong alignment of their interests with shareholder interests. So we continue to execute boldly to realize some value and we look forward to continually keeping you up to date. Thanks for your interest.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect and have a wonderful day.

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