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Safeguard Scientifics, Inc. (NYSE:SFE)

Q3 2012 Earnings Conference Call

October 25, 2012 09:00 AM ET

Executives

Peter J. Boni - President and CEO

Stephen T. Zarrilli - SVP and CFO

James A. Datin - EVP and Managing Director

John E. Shave III - VP, Business Development and Corporate Communications

Analysts

Greg Mason - Stifel, Nicolaus & Company

Paul Knight - CLSA

James MacDonald - First Analysis Securities Corporation

Nick Halen - Sidoti & Company

Christopher Lewis - Roth Capital Partners

Edward Woo - Ascendiant Capital Markets

Operator

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

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

John E. Shave III

Good morning and thank you for joining us for the Safeguard Scientifics’ third quarter 2012 results conference call and webcast. Joining me on today’s call from Safeguard are Peter Boni, President and Chief Executive Officer; Steve Zarrilli, Senior Vice President and Chief Financial Officer; and Jim Datin, Executive Vice President and Managing Director of the Safeguard Deal Team.

During today’s call Peter will review third quarter highlights as well as other recent developments, then Steve will discuss Safeguard’s financial results and strategies. And then we will open up the call for your questions and answers.

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.

And before I pass the call over to Peter, I’d like to bring your attention to a recent announcement made by Safeguard and that is the retirement of Peter Boni, effective at our May annual meeting. In addition to that, the Board of Directors has named Steve Zarrilli to succeed Mr. Boni as CEO, effective November 1, 2012.

With that, I will turn the call over to Peter.

Peter J. Boni

Thank you, John. Good morning, everybody. Well this change comes really at the right time for me. Number one, Steve is the right person to lead Safeguard going forward. Number two – and this is really the right time to make a change. For me I’m on the edge of turning 67 and after a long marriage and 20 years as an empty nester, I find myself all of a sudden a grandparent of two children, just eight months apart. And my family and I’ve agreed that this is the time for me to stop slaying dragons and start spending some time, spoiling my grandchildren.

Now Steve has been my partner for several years, transforming Safeguard from its pulse of bubble itself, navigating the financial crisis and then building Safeguard to its current stable and much more valuable self. He has demonstrated that he knows how to scout for value, he knows how to build value, he knows how to realize value, he can manage as his way through complex situations in and outside of capital markets, he can lead and he understands the team dynamic. So I have a great deal of confidence that Steve along with the Safeguard team, he can take this Safeguard platform and then reach new heights.

Research has also shown that the most successful managerial transition is actually an internal succession plan. So I really have confidence in the whole team, Jim, Steve, Brian, John, all of this team to take a thoughtful plan, execute it well and realize some outstanding results.

This is also the right time for Safeguard to make this change, a new CEO; Steve can put his imprint now on planning for a New Year instead of taking the helm at mid-year at the annual meeting in May, which is the official date of my retirement. So as a CEO Americas, I expect to work with Steve and the team to help enable and facilitate this transition and I will be available as a senior advisor to the Company through the end of 2013 and will do whatever I’m asked to move the Company forward.

So I’m really pleased now to review with you the progress that we continue to make in Safeguard. This will be the last conference call that I will lead and I will give you my formal remarks now.

The results for the quarter ended September 30th, were distributed earlier today and progress took many forms at Safeguard during the third quarter. Our partner companies continue to grow, mature, achieve financial and strategic milestones combined with Safeguard’s value-added support at the holding company level, our partner companies are well positioned and we remain encouraged by the prospects to realize aggregated results on our target range consistent with our recent results.

In the meantime, the Safeguard team remains nimble and were opportunistic. We are focused on enhancing the Company’s financial strength and flexibility as well as improving shareholder value. So working on further for signs of progress then the continued steady growth of Safeguard’s partner companies. In aggregate, these 16 partner companies have grown their revenues from approximately $30 million just a few years ago to approaching $200 million today. Actually we changed our guidance to be $185 million to $190 million for 2012.

Increasing assets under management remains a key strategic objective with Safeguard and through the partnership with Penn Mezzanine we continue to produce interest income and other fees from a small, but growing Mezzanine lending initiative. We believe Mezzanine lending is a natural extension of Safeguard’s strategic strength and to be a long input and activity for us.

With the U.S. presidential election a little more than what a week, two weeks away, volatility remains the watchword across the global political, economic and investment landscape. Despite these challenging and unpredictable conditions Safeguard is well positioned as a source of growth capital and expertise as well as a good investment choice for shareholders.

As an investment opportunity we’re encouraged by the July survey of Institutional Investors published by Natixis Global Asset Management. The survey includes that three out of four U.S. institutional investors now consider the use of alternative investments to be essential to diversify portfolio risk and enhanced returns. More than 90% of the survey respondents said they would maintain increased allocation to alternative investments. Based upon responses from more than 150 investment managers with medium assets of $30 billion, these findings help to validate Safeguard’s business model and explain a growing awareness among institutional investors.

Now Safeguard’s deal pipeline is full of exciting opportunities in our targeted markets in the life sciences and technologies sectors. We know it is more important than ever to remain vigilant and disciplined in pursuing new deployments with Safeguard. Our bar is set high deliberately. We remain firm in the valuations that we paid for stakes in new partner companies and in expectations for growth in value creation.

In addition, our strong cash position gives us the competitive advantage over other investors, who have a trouble raising new rounds of capital. For all non-legacy capital deployments since January 2006, that have been realized or written off, Safeguard has realized aggregate gross cash and cash returns of 2x. Of course we can’t guarantee that we will continue to perform in the future as well as in the past, but we come to work everyday, ready to build companies and enhance shareholder value.

The combination of performance in asset value suggests substantial unrealized value to Safeguard shareholders. As of September 30th, Safeguard’s interest in partner companies totaled a $188 million of capital deployed. Our net cash, cash equivalents and marketable securities totaled $183 million, but some of those components is $371 million or $17.76 per share.

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 to improved shareholder value. For the benefit of those of you who are new to the Safeguard story, let me review the hallmarks of our strategy, 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 and specific segments of life sciences and technology industries that exploit five strategic growth driving themes: maturity, migration, convergence, compliance, and cost containment.

At our recent Investor Day event, in New York City, I refer to this focus strategy with the acronym [M2C3]. In life sciences, we target opportunities in the areas of lower technological and regulatory risk and molecular and point of care diagnostics, medical devices, specialty pharmaceuticals 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 activities sake. If an opportunity clears our strategic growth and return hurdles, we will respond appropriately.

Our deal teams evaluate more than 1,000 proposals every year. We typically deploy up to $25 million in growth capital per company and then endeavor to time our exits from ownership positions in these companies to achieve aggregate targeted risk adjusted returns of capital within the 2 to 5 year timeframe for a two to five times.

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 publicly traded partner companies, exits can involve the sales of stock in the open market. Now execution is how focus and discipline are tested and that’s also how Safeguard has distinguished itself.

Focus, discipline and execution have served Safeguard and had served its shareholders well. By any measure, this Company is fundamentally stronger today; better positioned for continued growth and value creation, not only for 2012, but for 2013 and we believe well beyond.

Let’s move on and highlight some progress at some of our partner companies. At Safeguard’s Investor Day event, in New York City, in early October we shine the spotlight on eight of our partner companies. Four from life sciences and four from the technology side of our house. We detailed some impressive revenue growth rates and high traction partner companies advantaged healthcare solutions, Bridgevine, and MediaMath as well as at the expansion stage partner company Putney.

Don Hardison, the CEO of GoodStart Genetics presented at Investor Day. Based in Cambridge Mass, GoodStart is in initial revenue stage, innovative molecular diagnostics company that has developed more accurate and comprehensive pre-pregnancy generic test – genetic tests based upon proprietary next generation gene sequencing technology, these tests are designed to replace single-disorder-only tests currently on the market. The product allows improved identification of carriers for a heritable genetic disorders enabling physicians to help perspective parents make more knowledgeable medical decisions before conception.

The company is offering called GoodStart Select is the CLIA approved offering and it was launched in early 2012. Revenue continues to build as Good Start Genetics continues to pursue a fast growing $1 billion genetic testing marketplace. Safeguard deployed $10.5 million of capital in Good Start since September of 2010 and we have a 29% primary ownership position.

Another partner company that presented at the Investor Day was NuPathe. Earlier this week Safeguard deployed $5 million along with new and existing investors in the $28 million private placement of securities by NuPathe, a publicly traded developmental stage life sciences partner company.

In conjunction with the financing, Safeguard’s Jim Datin, Executive VP and Managing Director and Brian Sisko, Senior Vice President and General Counsel were appointed to NuPathe’s Board of Directors. In addition, Safeguard’s Gary Kurtzman, Senior VP and Managing Director, resigned from the Board.

Use of capital will be focused on gaining FDA approval for its lead product candidate Zecuity, securing commercial partners and select pre-launch activities. If approved, Zecuity will be the first and the only transdermal patch for the treatment of migraine. And the FDA has assigned Zecuity a PDUFA date of January 17th, early next year, 2013.

Overall our partner companies continue to demonstrate positive momentum as evidenced by our increased aggregate partner company revenue guidance for 2012. In addition, you will also note that Myriad have announcements that our partner companies have issued during the quarter, highlighting major milestone such as customer wins, strategic partnerships, additions in Board level and senior management as well as award recognitions and regulatory advancements.

Steady growth and expansion at our partner companies despite a fragile state in the macro economy continues to validate Safeguard’s strategic focus, building value and realizing that value with well timed exits remains the path for a continued financial strength and flexibility as well as enhanced shareholder value.

I will stop now and turn it over to CFO for the next few days and coming CEO, Steve Zarrilli, and he will update you on Safeguard’s financial strategies and performance. So take it away, Steve.

Stephen T. Zarrilli

Thanks, Peter, and we wish you all much success in your future endeavors in retirement. I’m going to first start with financial highlights and some key metrics for the quarter ended September 30th. A period in we had $229 million in cash, cash equivalents, and marketable securities. This amount includes $3.4 million that we received from escrow during the quarter related to our 2011 sale of Portico Systems. This amount does not include an aggregate of $14.1 million of restricted cash and cash held in escrow.

The total carrying value of debt outstanding was $46.2 million, resulting in net cash of a $183.1 million. During the quarter, primary uses of cash were as follows. Follow-on deployments of $5 million in ThingWorx, $4.6 million in PixelOptics, $1.7 million in MediaMath and $400,000 in Alverix. Deployments of $1.7 million into Penn Mezzanine loan participations, and finally net cash used in operating activities was $3 million compared to $3.2 million in the same period in 2011.

We have several term sheets outstanding, which could close during the fourth quarter of 2012 or possibly spill over into the first quarter of 2013. Based on capital deployments year-to-date and our expected pace of deployments for the rest of 2012, we now expect aggregate annual 2012 uses of cash to be between $65 million and $85 million which is below our original projected range of $100 million to $150 million.

Our priorities for the uses of cash remain unchanged, capital deployment to new partner companies follow on funding for current partner companies as well as Penn Mezzanine corporate expenses and the expansion of our platform.

Cash used in operating activities for 2012 is projected to be within the range of $17 million to $17.5 million. Safeguard’s partnership with Penn Mezzanine formed in 2011 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 initiative is already producing interest income, in time we expect to participate in the funds profits through exits in other transactions. In 2012 we expect to receive $1.1 million from our Penn Mezzanine participation.

Managed by a team of experienced Mezzanine lenders, this platform serves Safeguard’s interest in several ways. First, Penn Mezzanine enables us to provide flexible financing strategies to our current and perspective partner companies as well as other potential lower middle market borrowers.

Penn Mezzanine closed its first fund in 2011 after raising more than $64 million including $30 million of capital from Safeguard. Planning is underway for a second fund. As of September 30, Penn Mezzanine had outstanding an aggregate of $24.5 million in eight companies. Safeguard had outstanding an aggregate of $15.3 million in Penn Mezzanine and in Penn Mezzanine capital deployment participations as of September 30.

We intend to continue to deploy capital into Penn Mezzanine up to $30 million that we have committed. Rolling over this capital into any future funds if we believe an appropriate opportunity exits. Safeguard maintains 36% ownership position in Penn Mezzanine. Safeguard partner companies remain well positioned for continued revenue traction and value creation. To reiterate we have increased our guidance on 2012 aggregate partner company revenue to the range of $185 million to $190 million. Recall that in 2011 aggregate partner company revenue was $139.2 million.

For the Technology Group this represents an increase of between 30% to 32% year-over-year. For the Life Sciences Group this represents an increase of between 49% and 58%. As we have stated previously, Safeguard partner company revenue is reported on a one quarter lag. Our partner companies continue to execute aggressively, use their cash to grow and make strategic and opportunistic acquisitions. Year-over-year partner company growth certainly bears this out.

We work with the management teams of each partner company to evaluate levels of existing and required capital, strength of personal resources and unique opportunities for growth. Our focus on these processes allows Safeguard to assist partner company management teams in unique ways to drive value creation and maturity.

Now it’s time for Peter to lead us through the question-and-answer segment of this call and I’ll turn it back to Peter.

Peter J. Boni

Thanks Steve. [Chou] go ahead and take some questions.

Question -and-Answer Session

Operator

Okay. We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from Greg Mason of Stifel, Nicolaus. Please go ahead.

Greg Mason - Stifel, Nicolaus & Company

Great. Good morning and Peter good luck with your future endeavors, wish you all the best.

Peter J. Boni

Thanks so much, Greg.

Greg Mason - Stifel, Nicolaus & Company

I wanted to chat a little bit about a couple of companies that you didn’t get a chance to highlight at your Investor Day, Alverix, NovaSom and Spongecell Could you talk a little bit about Alverix in the rollout of the BD Veritor and what we should expect in terms of revenue traction as that product is being launched?

Peter J. Boni

Yeah, sure Greg. Actually Jim Datin who runs all of our capital management activity is here with me today, and why don’t I ask Jim to make those comments.

James A. Datin

Sure Greg. So Alverix, as you know has patterned with Becton, Dickinson. They have rolled the product out earlier this year in Japan and they’re now rolling that out in the U.S. We do not have firm revenue numbers to share at this point but a lot of it will be based on the flu season. The flu season this year appears to have come early. That could be a benefit for Becton, Dickinson and Alverix. The partnership is very secure and they’re looking to expand it beyond the markets that are currently in play today.

Greg Mason - Stifel, Nicolaus & Company

All right. And then on NovaSom, I see there is a new kind of partnership that began this quarter. Could you talk about that business and the traction its getting into this and new development in that business to start partnering with the sleep centers?

James A. Datin

Sure. So NovaSom as you know has the only FDA cleared wireless device to detect obstructive sleep apnea. They have launched it in the U.S., they have had good success with it and it’s certainly a great improvement over what's been done traditionally both at home and in the sleep labs. The sleep labs are going to see their business contracting over the next couple of years as if payers and insurance companies look to migrate more of that business from sleep labs to the home testing market place for convenience and for cost effectiveness.

A lot of the sleep labs have realized the shift taking place and are looking for a partner. So NovaSom has been at the forefront to establish partnerships with the sleep labs where NovaSom can provide devices and provide the service for the sleep labs creating the win-win for both the sleep labs, NovaSom and the patient. They have just started rolling this out in the past quarter and have good success and a very strong pipeline of sleep labs that would like to partner with NovaSom.

Greg Mason - Stifel, Nicolaus & Company

Is there any kind of color you can give, when you take NovaSom may transition from an expansion stage to a high traction stage company?

James A. Datin

It’s progressing as we speak. There is, NovaSom has been successful in signing up a lot of the large insurance companies and payers. It’s believed today that they have over a $170 million covered lines that now are eligible for a NovaSom test. Obviously, this is a large and growing market place. I am not sure as to the timing when they would be getting that traction but we expect some impressive revenue gains in the future.

Greg Mason - Stifel, Nicolaus & Company

Okay, great. And then lastly with Spongecell, could you give us an update on that business and how that’s growing?

James A. Datin

Sure, happy to. Spongecell as you know has continued to exceed expectations, they have done well. There’s certainly, their pipeline is growing quickly. We believe that like a lot of companies in this space that they will be expanding rapidly. There’s been tremendous shift as you know from offline to online advertising and that’s benefited companies like MediaMath and Spongecell. We expect a strong Q4 from Spongecell and we’ll be happy to share feedback with you next quarter on their results.

Peter J. Boni

Interestingly enough, Greg. Inc. Magazine put Spongecell on its Inc. 500 again this year. They ranked at number 27 and that’s up from number 76 last year and they’ve achieved an over 6000% revenue growth between 2008 to 2011. So, this company is on a [tier].

Greg Mason - Stifel, Nicolaus & Company

Great. And then, I wanted to talk a little bit about the pipeline of new opportunities. Your guidance of deploying $65 million to $85 million of capital, what does that range assume in terms of some of these term sheets outstanding. Does it assume that the low end none of them closed and the high end all of them, or what factors into that $65 million to $85 million?

Peter J. Boni

At the low end it assumes one closes at the high end, it assumes that three closed.

Greg Mason - Stifel, Nicolaus & Company

Okay. And then, Jim maybe you could – could you talk about any, is there any strategic interest in any of your companies? I am sure you don’t want to give specific names, but one of the things we have highlighted is, we think catalysts for this stock are exits. What's the opportunity for strategic or other types of exits from any of your portfolio companies?

James A. Datin

Greg as you know we’re looking to put capital to work. One of our diligence task is to meet with strategics that would be buyers in the future to make introductions to see what their interest level is and to see if it will fit with their strategic thrust three to five years out. We’re able to develop relationships with many of these strategics whether it be healthcare or technology.

I would say at any one time there’s a multitude of interest in many of our companies in ongoing discussions for either partnerships or acquisitions, Safeguard is in a good position as Peter and Steve outlined based on our partner company performance. The revenue growth is impressive. It looks to be very strong moving forward.

And so we’re going to be in strong positions with our partner companies as to when the right timing would be to have these companies take on more of those discussions or look to realize value.

Operator

The next question comes from Paul Knight of CLSA. Please go ahead.

Paul Knight - CLSA

Hi. Could you talk a little bit about Penn Mezzanine and this current rate of return on interest income we saw in Q3? Is that a continuing level we should expect and what's your goal on where you want to get your co-investments with Penn Mezzanine?

Stephen T. Zarrilli

So Paul, this is Steve. So, our strategy remains unchanged first of all. We expect that over the course of 24 to 30 months that up to $26 million will be deployed in loan participations. The balance of the $30 million to get to $30 million, a $4 million was used in connection with our acquisition of an equity stake in the management company.

The environment is still conducive to subordinated debt structures that Penn Mezzanine offers though I'll acknowledge and as I mentioned in the last call a quarter ago there is some additional competition from senior commercial lenders as they tend to pursue opportunities to put some of their capital to work in the market place.

But we're seeing a good pipeline where Penn Mezzanine is using the same level of diligence that we would use in evaluating opportunities to ensure that they have got the right companies to be involved with. As we deploy more capital the interest income will go up and we expect that on a steady state basis once that $26 million is fully deployed, it will produce somewhere between $2.5 million to $3 million a year in steady state income.

So, we’re very bullish about the prospects for Penn Mezz. Once they get through the deployment of some additional capital, they’ll begin the process of beginning the raise of fund two.

Paul Knight - CLSA

And then you’re doing co-invests with them correct? I see here it’s a $11.4 million.

Stephen T. Zarrilli

Well every time a opportunity gets presented and we have participated our 100% on every opportunity. We deploy our pro rata share of the capital required for that loan and we call it a loan participation. So the accounting is such that it shows up on our books and records as a loan participation. But in a lot of respects, we operate as if we’re a limited partner in a capital management platform.

Paul Knight - CLSA

So the co-invest and NOI is along with your committed capital?

Stephen T. Zarrilli

Our committed capital is the co-invest as you put – as the terminology you’re using. So if a $1 is lend by Penn Mezz, roughly speaking because 46% of that dollar or $0.46 is our participation in that loan and that’s what shows up on our financial statements and that’s what – I hope that’s clear?

Paul Knight - CLSA

Yeah. And then Putney, can you give us a little color on where we’re with that strategy?

Stephen T. Zarrilli

Yeah, I’ll let Jim answer that.

James A. Datin

Sure Paul. Steve and I had a chance to be at the Putney Board meeting last week and the company is performing well above plan. They’re introducing a multitude of new products starting in this quarter through the end of next year and onward. Their financial numbers have been impressive. They’re ahead of plan in terms of revenue and margin. There’s a lot of interest for extended partnerships. So from our expectation Putney is performing well above plan and the future looks great for them.

Operator

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

James MacDonald - First Analysis Securities Corporation

Yeah. Good morning guys and congratulations Steve and good luck Peter. Just a quick on the escrow release which escrow did that come from, the $3.4 million?

Stephen T. Zarrilli

Portico.

James MacDonald - First Analysis Securities Corporation

Portico, okay. And any progress on your other platform ideas?

Stephen T. Zarrilli

Nothing that we can announce, but there is a lot of activity.

James MacDonald - First Analysis Securities Corporation

Okay. And then on Pixel you’re well above your $25 million kind of normal, maximum investment, any thoughts on that and how far you’re willing to go in Pixel?

Stephen T. Zarrilli

We have high hopes for Pixel and we’d have to acknowledge that they’re behind getting to market. They’re working very diligently on bringing to market their Gen2 product which is intended to not only enhance features of Gen1, but actually provide some new capabilities that weren’t necessarily envisioned in Gen1. That’s supposed to take place in the second quarter of 2013.

Peter and I sit on that Board and Peter is actually going to continue to chair that Board from a Safeguard perspective. We're going to need to determine the best capital structure for them going forward. So we’re spending a fair amount of time with management and some external advisors. Ultimately that process will allow us to determine at what level we may participate in continued funding and what structure that funding may ultimately take.

Peter J. Boni

Jim I think its worth noting that $25 million is a guideline as opposed to a hard line as well.

James MacDonald - First Analysis Securities Corporation

I understand. And on MediaMath, obviously they’re on a [tier] growing rapidly and I guess they’re at cash flow neutral, but you’re continuing to put in cash here to support their growth. Do you expect that to continue or at some point do they start growing so quickly they need a major infusion of cash?

Stephen T. Zarrilli

Jim they have continued to outperform, I was talking with Erik Rasmussen this morning who was at their Board meeting. They continued to hit the ball out of the park, impressive top line numbers, they have fluctuated in and out the share with being cash flow neutral. They’re making some significant investments in the business to be able to grow it and provide infrastructure there. And I think they will have a decision to make in the future if the current growth can support that or if they will be looking for further capital to increase it even that much more. But there is no signs of slowing. They’re one of the fastest growing companies and really had an inflection point at this point.

James MacDonald - First Analysis Securities Corporation

Okay. Thanks very much.

Peter J. Boni

Hey Jim just one follow-up comment to the escrow. Avid recently announced, Eli Lilly announced that they’re in market now with the technology of Avid and if you recall we do participate from a continued return potential as they hit certain sales and revenue goals over the course of the next five years.

Operator

The next question come from Nick Halen of Sidoti & Company. Please go ahead.

Nick Halen - Sidoti & Company

Good morning guys.

Peter J. Boni

Hi, Nick.

Nick Halen - Sidoti & Company

So you mentioned in the past that you guys were looking at some opportunities in the sequencing and genetic space and you seem pretty excited about something you came across there. I was wondering if you had any updates on that.

James A. Datin

Nick its Jim. We're excited about that space and we’re proactively targeting areas in that opportunity that could be complementary to what our platform is with Good Start today. We don’t have anything to announce, but I can tell you we’re very active – proactive in that space because we believe that certainly is going to be the future for healthcare to reduce cost and provide better results.

Nick Halen - Sidoti & Company

Okay. And just one more from me; I was wondering if you could talk a little bit about both, I guess the quantity and the quality of inbound deal for that you guys are seeing and also if you could, I guess talk a little bit about pricing and what part that’s playing and the fact that you guys now expect to put a little bit less money to use in 2012 than previously expected?

James A. Datin

Nick, its Jim again. From our perspective our deal flow is as robust as its every been since I’ve been here. We continue to see a lot of opportunities. We’d like to think that the majority of those are where we are proactive using our relationships, our network. We're also highly referenced from our partner companies who continue to provide good deal flow to us for opportunities that they see related to them.

We believe that there are going to be several good deals closed whether they happen this quarter or spill into next year that will expand our platform. I think the venture business continues to contract particularly in the healthcare area. A lot of these companies have needed more capital. They were not as efficient as they should have been or there could be delays with the FDA.

So, we’re looking at a lot of recaps in healthcare today where current venture capitalists have not had the bandwidth or dry power to be able to support those companies. The technology space still continues to be very competitive and particularly at the earlier to growth equity stage. But from our perspective our deal flow is as high as it’s been since I’ve been here and we feel very confident about getting transactions closed the next couple of quarters.

Nick Halen - Sidoti & Company

Great.

Operator

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

Christopher Lewis - Roth Capital Partners

Hey guys this is Chris Lewis on the line for Matt. Thanks for taking the questions.

Stephen T. Zarrilli

You’re welcome Chris.

Christopher Lewis - Roth Capital Partners

I think I might have missed it. What was the total cash used during the quarter?

Stephen T. Zarrilli

Total cash used during the quarter was broken up into actually three primary components. There was roughly $12 million of follow-on deployments. There was $1.7 million of Penn Mezz, and there was $3 million of operating expense.

Christopher Lewis - Roth Capital Partners

Okay, great. Thanks. And then just kind of moving towards these term sheets opportunities, can you give us some idea or shedding a light on what sectors or areas those opportunities may be in?

Stephen T. Zarrilli

Yeah, I’ll let Jim answer that question, focus of the term sheet.

James A. Datin

Focus in terms of stage?

Stephen T. Zarrilli

Stage and …

Christopher Lewis - Roth Capital Partners

In terms of sectors or certain areas.

James A. Datin

Sure. Within the Healthcare Group we continue to like diagnostics, medical device. We’re also expanding a tremendous amount these days into healthcare services and healthcare IT to able to leverage both the Healthcare expertise within Safeguard and the Technology Group but the convergence there, so we’ve seen a significant increase in deal flow in healthcare IT.

In the technology space our strategies remain the same to look at enterprise opportunities and internet new media. Our deal flow is balanced both at an early stage where we see revenue, early revenue and we can validate the opportunity along with growth equity. We are also opportunistic for later stage recaps or high traction companies where we can take a lead in helping to shape the future of that company’s progression.

Christopher Lewis - Roth Capital Partners

Okay, great. Thanks a lot guys.

Operator

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

Edward Woo - Ascendiant Capital Markets

Yeah. Thank you for taking my question. In terms of reduced outlook for cash used for deployment and investing in new companies. How much of it is due to valuations versus possibly finding good opportunities?

James A. Datin

It’s Jim. I’ll take that one. So, valuation has never been more tricky for us than today. As I mentioned there’s a lot of recaps out there and that you have to get a willing buyer, willing seller. So you’ve had companies whereas they’ve been capitalized either by strategics or venture groups, valuation sometimes in those companies continue onward flat rounds for the current providers continue to fund the company and that’s been more difficult recently with the contraction in the venture industry.

So from our perspective, we’re proactively looking at a lot of opportunities. Not only now, but we put things on a watch list to be able to look at a couple of years as to when it could be the right opportunity for Safeguard to put capital to work. The trickier issue to your question often comes in valuation and we’re having several of those discussions as we speak today.

Edward Woo - Ascendiant Capital Markets

Has there been a difference between your healthcare investments versus your technology investments in terms of how the market has been trending on valuation?

James A. Datin

Well on the healthcare sector we’ve seen valuations coming down, particularly those companies that need a high amount of capital for either commercial launches or getting products approved or through the FDA. More of the healthcare companies require syndication partners. Its more common in healthcare to have more venture capitalist or other strategics putting capital to work.

So, in many of those cases we’ve seen more recaps. The technology market place, particularly in financial service or enterprise, even some of the new media companies have become fluffy with valuations becoming competitive and we’re not seeing the recaps that we’ve seen there and as we have seen in the healthcare area.

Edward Woo - Ascendiant Capital Markets

Great. And the last question I have is; your cash balance obviously is very, very healthy. Is there a targeted range yet, maybe you would like to see eventually after you do all your deployments or you feel comfortable for the cash balance that actually point up?

Stephen T. Zarrilli

What we’re going to do going forward in next quarter, we will give you some perspective of what we think the pace of deployment and use of cash will be for 2013. And that will help you kind of understand where we think the cash balances should be for Safeguard.

Edward Woo - Ascendiant Capital Markets

Great. Thank you and good luck.

Stephen T. Zarrilli

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. I would like to turn the conference back over to Peter Boni for any closing remarks.

Peter J. Boni

Thanks so much [Chou]. It’s been a great pleasure for me to preside over Safeguard and build shareholder value and I have great confidence that this team going forward will continue to build on this platform and produce some stellar results on a going forward basis. Thanks again.

Operator

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

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