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Safeguard Scientifics, Inc. (NYSE:SFE)

Q2 2012 Earnings Call

July 26, 2012 09:00 am ET

Executives

Peter Boni – President & Chief Executive Officer

Steve Zarrilli – Senior Vice President & Chief Financial Officer

Jim Datin – Executive Vice President & Managing Director

John Shave – Vice President, Business Development & Corporate Communications

Analysts

Jim Macdonald – First Analysis Securities

Paul Knight – CLSA

Greg Mason – Stifel Nicolaus

Matt Dolan – ROTH Capital Partners

Operator

Good morning, and welcome to Safeguard Scientific’s Q2 2012 Results Conference Call. Please note this event is being recorded. (Operator instructions.) I would now like to turn the conference over to John Shave, Vice President of Business Development and Corporate Communications. Please go ahead.

John Shave

Good morning, and thank you for joining us for Safeguard Scientific’s 2012 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 Head of the Safeguard Deal Team.

During today’s call Peter will review Q2 2012 highlights as well as other developments, then Steve will discuss Safeguard’s financial results and strategies. After that we will 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 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 “expect,” “anticipate,” “believe” and “intend” will be used in our discussion 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.

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

Peter Boni

Thanks, John, and thank you all for joining us today for updates on Safeguard Scientifics and our partner companies. Results for Q2 ending June 30 were distributed earlier today. Our 16 partner companies continue to grow strategically and operationally, and we are therefore increasing our 2012 aggregate partner company revenue guidance to the range of $170 million to $175 million. That’s up from our previous guidance range of $160 million to $165 million. This is evidence that we are continuing to build genuine value in our businesses.

Safeguard’s platform expansion initiative with the partnership with Penn Mezzanine is producing interest and fee income. We believe this now small but growing Mezzanine lending activity is a natural expansion of Safeguard’s strategic strengths and can be an important long-term activity for us. Safeguard’s deal pipeline is also full of exciting opportunities in our target markets in the life sciences and technologies sectors. With a challenging exit environment we remain cautious and disciplined in pursuing new capital deployments. Additionally, with fewer venture firms actively investing deal syndicates are supporting more selectively. We also continue to monitor the impact of Obamacare on our healthcare IT deployment strategy and thesis. Furthermore, we’ve set a high bar on our return expectations and we remain firm on our valuations we will pay for new opportunities.

We’re encouraged by Safeguard’s performance in the short term and optimistic about our long term despite the ongoing volatility and uncertainty in the economy and capital markets as well as in the political landscape. Our optimism stems from this team’s execution of a focused and disciplined strategy. During the team’s tenure we’ve focused Safeguard’s strategy, broadened our business model, boosted the company’s financial strength and flexibility and we’ve driven value for shareholders. Today we’re prepared for the vagaries of capital markets, politics, and the economy.

Safeguard continues to push forward as the preferred catalyst to build great companies, grooming companies of substance for growth and ultimately an exit transaction remains our path to ongoing financial strength and flexibility, as well as improved shareholder value. There are always listeners on the call who are new to Safeguard’s story, and as a result I’ll review the hallmarks of our strategy which is built on three pillars: focus, discipline and execution.

Focus is the first pillar of Safeguard’s strategic foundation. We deploy capital in high-potential businesses and 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 technological and regulatory risk in molecular and point of care diagnostics, medical devices, specialty pharma and selected healthcare services.

In technology, we pursue transaction-enabling applications with recurring revenue business model in internet and new media, financial technology, healthcare, IT and other selected business services. Safeguard’s discipline compliments 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.

Our Deal Teams evaluate more than 1000 proposals annually. We typically deploy up to $25 million in growth capital per company and then time our exits from ownership positions in these companies to achieve aggregate targeted risk adjusted returns on capital of 2x to 5x over a three to five year period. For all non-legacy partner companies capital deployments since January, 2006, that have been realized or written off, Safeguard had realized aggregate growth returns of 2x cash on cash.

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

Let’s move on and highlight progress in our partner companies, starting with the Technology Group. We continue to believe the verticals in which we deploy capital represent significant opportunity for growth. Now, Bridgevine, MediaMath and Spongecell are excellent examples of our partner companies capitalizing on significant growth drivers. Research firm Gartner recently predicted that by 2017 the chief marketing officer will control more technology spending than the chief information officer.

Partner companies Briedgevine, MediaMath and Spongecell have all commercialized advanced technology platforms that are tapping into this trend and they have all exhibited exciting growth. In total, Gartner predicts that all companies will spend $25 billion annually, now that’s up from $20 billion last year, on marketing software devoted to managing customer relationships, predicting customer behavior and running online storefronts. Now let’s explore this trend further by focusing first on Bridgevine.

Based in Florida, Bridgevine is noteworthy because of its steady growth and its new CEO. The company acquires customers for internet, phone, television, wireless, entertainment and other service providers and advertisers. Recent improvements to Bridgevine’s technology platform are driving revenue and profitability. In June, JP Bewley joined Bridgevine as CEO and JP had built a distinguished record as a Division President of Axiom, a $1 billion leader in marketing and data services and IT infrastructure management. Safeguard has deployed $10 million of capital to Bridgevine in August of 2007 and we have a 23% primary ownership stake.

The second is MediaMath. The company was the first to market with the technology in 2007 that allows digital advertisers to determine which ads to buy, how much to pay for them, and to analyze which factors drove performance. MediaMath’s revenue showed high double-digit growth last year and it remains on track for strong growth this year. We’ve deployed $16.9 million in New York-based MediaMath since July, 2009, and have a 22% primary ownership position.

Now Spongecell represents one of our newest partners companies. They’re a digital advertising technology company that enhances standard online ads by adding rich interactive features including video, social media, interactive maps, downloadable coupons and more. Spongecell allows companies to collect data and analytics that provide a detailed portrait of audiences and consumer engagement that cannot be produced by other advertising platforms; and in recognition of its vital forward-thinking software and innovation, market potential, commercialization, shareholder value and media buzz, Spongecell was named to the 2012 Always On Global 250 Top Private Companies list in the Digital Media category.

This list represents the best emerging innovators and disruptors for all the technology sectors. Spongecell competes in the digital advertising market which according to Forrester is expected to grow to $27.6 billion in 2016, and that’s a compounded annual growth rate of 20% since 2011. Safeguard deployed $10 million to Spongecell in January and we have a 23% primary ownership position.

Now let’s turn to the Life Sciences Group and focus on three companies: Alverix, NuPathe, and PixelOptics. Alverix is an initial revenue stage diagnostic instrument maker based in San Jose, California. It has teamed with Becton Dickinson to develop and commercialize a proprietary point of care system that improves infectious disease diagnoses. The test for influenza was launched in the US in December of last year and sales began in March of this year for sales of influenza and strep tests in Japan. BD anticipates launching more tests on the device over the next several years.

Alverix’s technology has a solid intellectual property foundation, three recent patents bringing Alverix’s patent total to 23 along with 20 in-license patents. We’ll continue to support Alverix through future funding and/or strategic acquisition. Safeguard deployed $8.4 million of capital in Alverix since October, 2007, and we have a 50% primary ownership position.

NuPathe is a publicly traded developmental stage life sciences partner company who are developing some innovative neurosciences solutions for disease of the central nervous system. This week NuPathe announced that it named Armando Anido as Chief Executive Officer for the company. Armando delivers more than thirty years of executive, operational and commercial leadership experience in a biopharmaceutical industry and a demonstrated track record of leading rapidly growing commercial stage companies.

He’s the former President and CEO of Auxilium Pharma and under his leadership sales grew more than six fold to $260 million over a six-year period and its market cap increased from $200 million to more than $900 million. He’s also held executive and senior sales and marketing positions at MedImmune, GlaxoWellcome and Lederle Laboratories. Under Armando’s leadership, GlaxoWellcome’s US migraine business grew to just under $1 billion of revenue, spearheaded by a rapid growth of Imitrex or sumatriptan. Armando will also serve on NuPathe’s Board of Directors.

Earlier in July, NuPathe resubmitted a new drug application or NDA for its first lead product candidate, a transdermal patch for the treatment of migraine. The patch is designed to provide migraine patients fast onset and sustained relief from pain and related nausea. During the review process, NuPathe will continue preparation for the commercial launch of the migraine patch and NuPathe also expects to raise additional capital in 2012 to fund operations. Safeguard owns 18% of NuPathe’s common stock and we have deployed $18.3 million of capital in the company since 2006.

Lastly in Life Sciences, I’d like to highlight PixelOptics. PixelOptics has changed the standard of care for eyeglass wearers through a novel approach to vision correction and the transition between near and far distances. Their product emPower! substantially reduces or eliminates the perceived distortion or other limitations associated with multi-focus lenses. Currently more than 1000 domestic eye care professionals have signed on to get trained and display emPower! in their eye care locations.

Interest in emPower! is substantial, however Pixel is up to 18 months behind in their plan due to unanticipated supply chain delays which they now believe they have addressed. Accordingly, Safeguard Scientific recognized an impairment charge during Q2 of $3.7 million related to its interest in Pixel. The company is well equipped to deal with these commercialization challenges under the leadership of Brett Craig, a distinguished leader in the field. The opportunity for Pixel’s emPower! remains significant and we expect the company to re-launch emPower! during the early to mid-2013. We have deployed $29.1 million of capital in Pixel since April of 2011 including $2.1 million in Q2 and $2 million in July, and we have a 25% primary ownership position.

Now I’ll stop and turn the call over to our Chief Financial Officer Steve Zarrilli for an update on Safeguard’s platform expansion initiatives, our financial strategies and our performance. Go ahead, Steve.

Steve Zarrilli

Thank you, Peter. Good morning. I’m going to first start with Penn Mezzanine. As you remember, Safeguard’s partnership with Penn Mez was formed in 2011. It represents our first initiative to augment our capabilities as a growth capital provider and to participate in the management of external sources of capital. This platform expansion initiative is producing current interest and loan fee income, and we expect it to produce management fee income as well as profit participation as the initiative grows and matures.

Penn Mez is managed by a team of experienced mezzanine lenders. This platform enables us to provide a flexible financing alternative to our current and prospective partner companies as well as other potential lower middle-market borrowers. Penn Mez closed its first fund in 2011 after raising more than $64 million including $30 million of capital from Safeguard. Planning is currently underway for a second fund.

As of June 30, Penn Mez has outstanding an aggregate of $20.9 million in seven companies. Safeguard recognized an impairment charge in Q2 of about $700,000 related to its Penn Mez loan participation activities. As of June 30, 2012, Safeguard had outstanding an aggregate of $13.7 million in Penn Mezzanine and Penn Mezzanine capital deployment participations. Safeguard maintains a 36% ownership position in Penn Mezzanine.

Shifting gears I wanted to outline a few key big picture trends in Safeguard’s financial performance. 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. We also remain focused on ensuring that we are managing operating costs and developing ongoing capital augmentation strategies in connection with our platform expansion strategies. Our goal is to continue to leverage our current infrastructure against other pools of assets of which we can manage or co-manage. We continue to actively work towards these long-term strategies.

Our interests are closely aligned with Safeguard’s 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 some key financial metrics for the quarter ended June 30.

At period end we had $241.4 million in cash, cash equivalents, and marketable securities. This amount does not include an aggregate of $16.4 million of restricted cash and cash held in escrow. Our total carry value of outstanding debt was $46 million, resulting in net cash of $195.3 million. During the quarter primary uses of cash were cash operating expenses of $2.9 million, or $0.14 per share versus $0.15 per share in the same period of 2011. During Q2 2012 Safeguard deployed an additional $2.1 million in PixelOptics.

Based upon new capital deployments year-to-date and our expected pace of deployments during the second half of 2012, we believe our projected uses of cash will be near the low end of our $100 million to $150 million projected range. Uses of cash remain unchanged and they are as follows: capital deployment to new partner companies, follow-on funding for current partner companies and Penn Mezzanine, corporate expenses and the expansion of our platform.

During Q2 we received $9 million in additional proceeds from the December, 2010 sales of Avid Radio Pharmaceuticals comprised of a milestone payment and the release of amounts held in escrow. In addition during Q2 we received $1.9 million in additional proceeds from the July, 2011 sale of Portico Systems, representing a milestone payment. Lastly during Q2 we received $0.5 million in cash, interest and fees related to our Penn Mezzanine participations. This cash return directly offsets our cash expenses. We expect to receive between $1.0 million and $1.1 million in 2012 from such participations, approximately $0.5 million lower than previously forecasted.

We are encouraged by the continued growth and improved performance of Safeguard’s partner companies so as Peter mentioned we are increasing our aggregate partner company revenue guidance to a range of $170 million to $175 million. Our previous guidance was $160 million to $165 million. As a reminder, Safeguard reports the revenue of its partner companies on a one-quarter lag basis.

Our partner companies continue to execute aggressively and are using their cash to grow, and in some cases are generating cash and are making strategic 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 companies’ management teams in unique ways to drive value creation and maturity. And with that I’ll turn it back over to Peter who can lead us through our Q&A session.

Peter Boni

Okay, thanks Steve. Valerie, let’s open the phones for any questions that the audience might have.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator instructions.) The first question comes from Jim Macdonald of First Analysis.

Jim Macdonald – First Analysis Securities

Good morning, guys. On your platform expansion comments, can you give me more specifics about possibly timing for a second Penn Mezzanine fund and any new funds? And is it possible those new funds could be more equity related?

Peter Boni

Jim, let me ask Steve to make a comment.

Steve Zarrilli

So let me take the second question first and then I’ll answer the first question second. With regard to what we might look for in future opportunities outside of Penn Mezzanine, we probably will most likely pursue platforms that are more equity oriented than debt oriented. With regard to Penn Mezzanine, they continue to look for the proper ways in which to deploy their capital and I would suspect that their planning activities will ultimately lead to the launch of some specific activities on a second fund within the next twelve to eighteen months.

Jim Macdonald – First Analysis Securities

And in terms of timing of a possible equity related fund, would that be this year or next year?

Steve Zarrilli

We have actually been discussing opportunities with a number of parties, all at various stages of their own fundraising activities and processes. Part of the diligence is to try to understand their track record as well as their legitimate capability of actually raising the particular fund that they may be focused on, so it’s very difficult for us to be predictive with regards to a timeline as to when those opportunities may actually end up coming to fruition.

Jim Macdonald – First Analysis Securities

And moving over to the Penn Mezzanine results and then I’ll get back in queue, the impairment charge – does that relate to a write down of an investment or what does that relate to?

Steve Zarrilli

It related to one of the loans that they have and where they believe that there’s been a change in the short- and near-term prospects for that company, and we properly evaluated that particular situation and thought it prudent to provide for a partial reserve against the loan balance recognizing that the loan currently is in a non-pay, non-accrual situation. But we expect that within the next three to six months that that situation may change and allow us to potentially get back into a current pay situation with that loan.

Jim Macdonald – First Analysis Securities

Thanks for that. So for your P&L, did the Avid and the Portico things run through the P&L? They’re sort of hard to see – I guess they’re offset by these impairment charges? Is that how it worked?

Steve Zarrilli

They do run through the P&L, and in the P&L you have to take into account not only the income related to these milestone or escrow payment receipts, you have any impairment charges that we took during the quarter and then our pro rata share of the losses or income of our partner companies.

Jim Macdonald – First Analysis Securities

So the only two impairment charges were Penn Mezzanine and Pixel, so that implies I guess that the partner losses increased in the quarter.

Steve Zarrilli

You have Penn Mezzanine and Pixel as impairments and you have the pickup of losses. And Jim, I don’t know… Oh, that’s right, somebody just mentioned to me we also have Tengion running through that which is also going to distort the numbers that you see there.

Jim Macdonald – First Analysis Securities

And the Tengion, was that impaired last quarter or this quarter?

Steve Zarrilli

Now remember, Tengion’s marked at fair value and as the stock value of Tengion moves we take that change through our P&L as well.

Jim Macdonald – First Analysis Securities

Thanks, I’ll get back in queue.

Operator

The next question comes from Paul Knight of CLSA.

Paul Knight – CLSA

Hi, I was wondering how the commercialization of Good Start Genetics is developing?

Peter Boni

Hi Paul. Since Jim Datin is in the room and Jim has a good command of Good Start I’ll ask Jim to answer that. Jim, you okay with that?

Jim Datin

Sure. Paul, this is Jim. Good Start recently launched their product in Q2. They are gaining widespread customer acceptance. There will be a national launch this quarter. They now appear to have their test menu that should be nearing full status or completion by end of Q3 and they seem to be gaining a lot of steam, good traction. The orders are picking up, the ASP is increasing, and a surprisingly good size, the majority of the cases have been approved by insurance. So look for further updates on this but we’re pleased that they’re on plan year-to-date.

Paul Knight – CLSA

And then a broader question I guess for either of you would be the hoped for change in diagnostics discovery tools with genetic sequencing rapidly advancing. Obviously Good Start is a beneficiary of that. What do you see in deal flow? Is genetics changing the type of deal flow you’re seeing?

Peter Boni

Jim, go ahead.

Jim Datin

Paul, the sequencing market continues to be hot. We’ve seen a lot of deals there since we’ve got a lot of traction and expertise and know the space well. We’re looking at several opportunities in that field today. We believe that based on reimbursement trends and the technology shifts toward this marketplace it’s clearly where the future is going to be. So it’s another component of our diagnostics strategy in addition to molecular point of care. Genetics and the sequencing fields are going to continue to expand and we expect to expand our portfolio there as well.

Paul Knight – CLSA

And the Peter, you had started out or the press release started by talking about deal flow or less competition. Are you seeing better pricing, higher quality deals or what are the components of that that make you excited?

Peter Boni

Why don’t we do this in two pieces, Paul? I’ll answer that question and then I’ll ask Jim to do some supplemental commentary, okay? Regarding the pace of capital deployment, we have a challenging exit environment and we continue to be cautious and disciplined in our pursuit of new capital deployments as a result. And there’s a consolidation going on within the venture community and actually there are fewer firms that are actively investing, and as a result deal syndicates are forming a little bit more selectively. We’re part of that selective forming process.

We’re looking at the impact of any political change, Obamacare as an example, and that’s providing some additional filter on our healthcare and IT deployment strategy in our thesis. Anecdotally we had three deals that were in the terms sheet stage. One we opted out on at the funding stage, another company backed out at the funding stage deciding not to raise funds, and the third was actually acquired by a strategic who paid a higher multiple than we were willing to pay. Furthermore we’ve set a high bar on our return expectations and we remain firm on any valuation that we are looking at that we will pay for new opportunities.

Paul Knight – CLSA

And then last, PixelOptics, is that going as expected or where are we with rollout there?

Peter Boni

Steve, you’re on the Board at PixelOptics so I’ll ask you to make some commentary.

Steve Zarrilli

So we’re behind plan with regard to market launch. We’re probably 18 months behind plan at this point in time. Management is effectively working through a number of challenges that they’ve been dealing with with regard to supply chain and some other elements of the go to market strategy. Brett Craig has now been onboard for more than six months. He’s actually in the process of calibrating his management team. We are continuing to support Pixel from a capital perspective because we do believe in the long-term prospects for Pixel but it is behind schedule based upon our original investment thesis.

We did take an impairment as we mentioned with regard to Pixel because of some of those reasons in order to properly reflect what we think the value of the business is currently today, but that does not suggest that that will not change in the future. Pixel is a work in progress and we continue to feel bullish but recognize the practical matters that have to be addressed in order for it to be in the market in 2013.

Operator

The next question comes from Greg Mason of Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Great, thanks. And Steve, just to follow up on that last comment on Pixel: you had to put in a little bit more capital this quarter. Given that we’ve got another year until the official launch how much more capital do you expect you have to put up in Pixel to get them to that launch?

Steve Zarrilli

We’re going to continue to put capital under the current structure of a bridge right now through March of next year, and you can expect that it will be somewhere in the $2 million to $5 million range between now and then. We are also exploring ways in which we can potentially introduce other forms of capital to complement the existing shareholder base with Pixel and we typically are focused on potential strategic partners that can help in augmenting the capital need for Pixel beyond the end of 2012.

But I do want to again reiterate we are very positive about Pixel’s future. There are some things that we have to work through. Management is working through specific milestones and we’re working to ensure that our capital deployment kind of works in lockstep with the achievement of those milestones. So said differently, we’re wanting to make sure that the capital that’s being deployed is being used very specifically in connection with these milestones that we think will be effective in getting them to the market in 2013.

Once they get to the market we believe that there will be some other funding alternatives that they can legitimately seek and we’re trying to help them in assessing what those additional alternatives could look like, and in the same vein protecting the current investment that we have within the company. And we still remain as a significant shareholder and expect to going forward.

Greg Mason – Stifel Nicolaus

Great. And then a question on the Penn Mez, the slightly lower guidance - $1.0 million to $1.5 million down from $1.5 million: is that due to the one loan that went on non-accrual or is it due to slower portfolio growth than originally anticipated?

Steve Zarrilli

It’s actually both. There’s some impact from the non-accrual scenario that’s impacting that projected amount of income and there’s also a recognition that they’ve deployed a lesser amount of capital in 2012 than originally anticipated so we wanted to at this mid-year point adjust our forecast of what we thought we were going to earn in income. Interestingly enough, the mezzanine market has become quite competitive principally due to the fact that commercial lenders are actually becoming more involved in providing credit alternatives to even the lower middle market enterprises.

So what we’re trying to do is find credits that still fall within the thesis that we put forward. We have some targeted returns that we have as a part of the long-term plan here and we’re trying to remain consistent with those theses and game plans. I would suspect that we will continue to find ways to deploy capital but it probably will be for the next six months or so at a pace that’s a bit slower than what we originally anticipated.

Greg Mason – Stifel Nicolaus

Okay. And then the Alverix sales that began in March, I know it’s just a short timeframe here but how have they been relative to your expectations out of the gate?

Peter Boni

Jim, why don’t you take that question?

Jim Datin

Sure, I’d be happy to. So Alverix has partnered with Becton Dickinson on the flu product; they’re launching that in Japan. Clearly a lot will depend on the flu season that’s upcoming but Becton Dickinson has enormous interest in this and has expanded their sales force and resources to be able to properly launch it, not only ex-US but in the US as well. There’s also a lot of interest from other partners out there as well who would like to work with Alverix in this area and we expect further announcements to be made of other collaborations with Alverix.

Greg Mason – Stifel Nicolaus

Okay, great. And then I just want to make sure I noticed this correctly: it looks like the Beyond.com moved to the high traction stage this quarter, am I remembering that correctly? And can you remind us exactly what that means?

Peter Boni

Yes, Greg, that’s correct. The expansion phase companies are all $5 million to $20 million in size and the high traction companies are $20 million on up. So Beyond has been growing and growing appreciably and they have made the transition from stage three to stage four this past quarter.

Greg Mason – Stifel Nicolaus

Okay, great. And then one last question: with the new CEO at NuPathe, is the old CEO still there in a different capacity? Or what’s the reason for the change in CEO leadership there?

Peter Boni

Jim, would you take that?

Jim Datin

Sure. James Hollingsworth, the former CEO is an advisor to the company. The company is nearing commercialization and it’s hopeful that the product will be approved by the FDA next year and that they’ll be in position to launch soon. I worked with Armando at GlexoWellcome. He ran the Imitrex franchise there; he was very successful in building up a $1 billion business there, and also at Auxilium as Peter mentioned that he commercialized and launched a new product. So he has a lot of expertise in this area and the company had evolved to a stage where Armando’s talents were well suited to take it to the future.

Greg Mason – Stifel Nicolaus

Great, thank you guys.

Peter Boni

Jim, since you have the floor already, we partially answered Paul Knight’s question regarding capital deployment and the pace and you were ready to do something supplemental when we moved on to Greg. So let me just back up and just ask you to talk about the pipeline and so forth.

Jim Datin

Sure. Well, our pipeline continues to be strong as Peter noted and on average here we’ll see over 1000 different business opportunities. Many of it is timing and cycle related – last year we completed eight transactions. We have a strong pipeline and believe that there will be other opportunities closing in the near future. We certainly spend a lot of time building value in our current companies but we’re in late stages, terms sheet stages with several different opportunities both in technology and healthcare and are planning to get several of these completed in the near future.

Peter Boni

Okay, thank you.

Operator

Your next question comes from Matt Dolan of ROTH Capital Partners.

Matt Dolan – ROTH Capital Partners

Hey guys, good morning. First question is on the guidance: what specifically is driving the increase in partner revenue there?

Peter Boni

Steve, go ahead.

Steve Zarrilli

That increase is just evidence of the fact that these companies are getting stronger and achieving or in some cases potentially exceeding their original expectations.

Peter Boni

A good deal of the revenue right now is being produced by our technology businesses, and you’d have to say that the technology businesses in particular are seeing some robust growth although the ones that are in life sciences that are generating that revenue are seeing that growth as well.

Matt Dolan – ROTH Capital Partners

Okay, so we can make some guesses as to who it is. On the deployment side of things I guess two questions: one is the lack of exits, has that impacted any of your deals that you may have participated in otherwise? And secondly, maybe just talk through you still have a ways to go in terms of hitting even the low end of the guidance. Do you expect to do a couple bigger deals than average or are there just a number as Jim said that are in the pipeline that should hit here in rapid fire so to speak in the second half of the year?

Peter Boni

Jim, why don’t you make a comment first and then Steve, if you have something supplemental go ahead.

Jim Datin

Matt, our capital deployment thesis remains the same. We’re not looking to augment it by doing any larger deals. We have deals in the pipeline today that represent the innovation size, the small end to the upper end – the $10 million to $20 million size – so it’s a balanced portfolio. We’ve been very proactive in certain segments, particularly healthcare IT and we believe that several of these can be culminated soon as we work through the terms sheet negotiations.

Matt Dolan – ROTH Capital Partners

Okay, and then the first part of the question was if you’d had any deals that you didn’t do because of this lack of access issue?

Jim Datin

No, no. We have several companies out there now that are performing, doing well, garnering strategic interest but that was not an issue in holding back on our deployment.

Peter Boni

We always ask ourselves, Matt, what’s our exit strategy before deploying capital. That’s one of our criteria but specifically we did not do a deal because of the exit-ability of it.

Matt Dolan – ROTH Capital Partners

I see, so you’re not, maybe to clarify your earlier comment wasn’t surrounding the fact that you haven’t had as many exits as maybe you had a year ago. It has to do with, as you said, the exit-ability of the target investment. Is that what you’re saying?

Peter Boni

Exactly, Matt, thank you.

Matt Dolan – ROTH Capital Partners

Okay. And then the last one just to finish on Pixel, is this purely a supply issue? And Steve, maybe you can just go through what the demand size of the equation is? I know you mentioned there’s some interested customers out there in the eye care world. Just talk about the demand side of the equation because I think that’s what has most people excited about that opportunity.

Steve Zarrilli

Yeah, and that’s what keeps us excited. The demand still is there. The gen one product that they are selling, though modestly selling so I don’t want to misrepresent the amount of revenue that they’re generating right now, has actually achieved a lot of great feedback both from the eye care professionals as well as the customers. The challenge that the company is working through is that they one, had a supply chain configuration that wasn’t going to lead to the right level of profitability on a long-term basis that made the financial model unwieldy – and they’re in the process of fixing that.

They had a number of matters that ultimately are getting resolved with regard to the impact to the lenses when they were going through the manufacturing process themselves. They’ll talk about things called voids and hazing that occur in the lenses and they’re in the process of correcting that. So part of the challenge that they had with the first generation of the product was they were able to get these eyeglasses into the consumer’s hands but then about half of those pairs would come back, have to be corrected and then placed back into the consumer’s hands. And we just knew that we couldn’t continue to operate that way.

And then finally they’re working through, because the generation two product which they’re planning to launch in 2013 is going to introduce a couple of key features that they think will actually be better for the consumer: the style of the frames will actually improve and the functionality of the glasses is actually going to be further enhanced by dual batteries and charges on each side of the frames, or each frame if you will. And those improvements should actually provide even a better product for the consumer. So what they’re doing right now is making sure that they are getting through these corrective measures before they in a meaningful way re-launch the product with generation two in 2013.

Matt Dolan – ROTH Capital Partners

Okay, that’s helpful. And then just to tack one on: we didn’t see a partner revenue number, either an absolute number or a growth rate. Did you provide that so far?

Peter Boni

Revenue guidance, Matt?

Matt Dolan – ROTH Capital Partners

No, for the quarter itself. I think you’ve given that in the past, what the growth rate was or what the revenue number might have been for the quarter.

Peter Boni

We did not yet provide that but we can provide that supplementally.

Matt Dolan – ROTH Capital Partners

Thank you.

Operator

The next question is a follow-up from Jim Macdonald of First Analysis.

Jim Macdonald – First Analysis Securities

Hi guys, just a couple small things. So on NuPathe, do you expect to participate in their funding that you talked about?

Peter Boni

Jim?

Jim Datin

So Armando has just joined the team. He’s going to be coming back into Safeguard after they’ve formalized the commercialization strategy and we’ve had an opportunity to look at it. Clearly the company will need to raise capital and we’ll evaluate that based on the revised plan the second half of this year.

Jim Macdonald – First Analysis Securities

Okay. And just a technical question: on the balance sheet you had a big jump in long-term marketable securities in the quarter I believe. Can you describe what that was?

Peter Boni

Go ahead, Steve.

Steve Zarrilli

So as you know, cash actually modestly increased on a gross basis quarter-over-quarter and it’s just the movement of monies from a long-term to a short-term classification of the relatively conservative investments that we’re maintaining this cash in.

Jim Macdonald – First Analysis Securities

So the cash went to a long-term investment – that’s what jumped the long-term?

Peter Boni

Yeah, sometimes when we look at our deployment page, Jim, and we’re able to look at the uses of cash over a certain period of time, we will occasionally move the investments around, if you will, so that we can maximize even in the most conservative model that we use and see if we can actually improve upon the returns that we’re getting while still maintaining that conservative posture.

Jim Macdonald – First Analysis Securities

Okay, that helps. Thanks.

Operator

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

Peter Boni

Okay, thanks very much, Valerie, and thank you all for your continued interest in Safeguard. I’ll remind you that we’re ready to schedule in the first half of October an Investor and Analyst Day in New York City and we’ll be getting back to you with more information on that as the time goes on. So thanks again for your interest and we’ll continue to keep you posted on our efforts to build value.

Operator

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

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