Safeguard Scientifics Inc (SFE) 2012 Q2 法說會逐字稿

Good morning, and welcome to Safeguard Scientifics Second Quarter 2012 Results Conference Call. Please note this event is being recorded. As a reminder, all participants are in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (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.

Good morning, and thank you for joining us for Safeguard Scientifics 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 second quarter 2012 highlights, as well as other developments, and 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 interest 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.

Thanks, John. Thank you all for joining us today for updates on Safeguard Scientifics and our partner companies. Results for the second quarter ending June 30 were distributed earlier today. Our 16 partner companies continue to grow strategically and operationally. 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 as a natural extension 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 technology 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 forming more selectively. We also continued 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, in 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 the Safeguard 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 the 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 relative technological and regulatory risk, and molecular and point-of-care diagnostics, medical devices, specialty pharma and in selected healthcare services. In technology, we pursue transaction-enabling applications with recurring revenue business models 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 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 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 two to five times 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 has realized aggregate gross returns of two times cash-on-cash.

Exit opportunities may arise in any time and in different forms, including privately negotiated sale of stock or assets, or public offerings. In the case of publicly traded partner companies, exits 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 represents 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 Bridgevine, 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 companies 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 the 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 has built a distinguished record as a Division President of Acxiom, a $1 billion leader in marketing and data services and IT infrastructure management. Safeguard has deployed $10 million of capital in Bridgevine in August of 2007 and we have a 23% primary ownership stake.

Second is MediaMath. The company was first to market with a 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 a strong growth this year. We've deployed $16.9 million in New York-based MediaMath since July 2009 and have about 22% primary ownership position.

Now, Spongecell represents one of our newest partner 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 correct 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 AlwaysOn Global 250 Top Private Companies list in the Digital Media category. This list represents the best emerging innovators and disruptors from all 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% from 2011. Safeguard deployed $10 million in 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 is 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 technology has a solid intellectual property foundation. Three recent patents granted bring Alverix's patent total to 23 along with 20 in-licensed 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 and they're 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 30 years of executive, operational and commercial leadership experience in the 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 sixfold to $260 million over his 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 from just under $1 billion in revenue, spearheaded by the 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 to its 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 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 for care of 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 and other limitations associated with multifocus-lenses. Currently, more than 1,000 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 Scientifics recognized an impairment charge during the second quarter 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 relaunch 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 the second quarter 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.

Thank you, Peter. Good morning. I'm going to first start with Penn Mezzanine. As you remember, Safeguard's partnership with Penn Mezz 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 Mezz 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 Mezz 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 Mezz has outstanding an aggregate of $20.9 million in seven companies. Safeguard recognized an impairment charge in the second quarter of about $700,000 related to its Penn Mezz 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 remained focused on building value in partner companies, realizing that value and then communicating our progress concisely, consistently and credibly. We also remained focused on ensuring that we are managing operating cost 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 carrying 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 the second quarter of 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 the second quarter, we received $9 million in additional proceeds from the December 2010 sale of Avid Radiopharmaceuticals comprised of a milestone payment and the release of amounts held in escrow. In addition, during the second quarter, we received $1.9 million in additional proceeds from the July 2011 sale of Portico Systems representing a milestone payment. Lastly, during the second quarter, 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 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 improvement -- 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 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 company 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.

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

(Operator Instructions) Jim MacDonald, First Analysis.

Yes. Good morning, guys.

Hi, Jim.

On your platform expansion comments, could you give any more specifics about a possible timing for a second Penn Mezzanine fund and any new funds and is it possible those new funds could be more equity related?

Jim, let me ask Steve to make a comment.

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 12 to 18 months.

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

We have actually been discussing opportunities with a number of parties, all at various stages of their own fund-raising activities and processes. Part of the diligence is trying 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 regard to a timeline as to when those opportunities may actually end up coming to fruition.

And moving over to the Penn Mezzanine results, and then I'll get back in queue, the impairment charge that relate to a write-down of an investment or what was it, what did that relate to?

It's related to one of the loans that they have and where they believe that there has 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.

And just -- so thanks for that. And so for your P&L, did the Avid and the Portico things run through the P&L because they're sort of hard to see? I guess they were offset by these impairment charges. Is that how it works?

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.

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

You have Penn Mezzanine and Pixel. And you have -- I'm sorry, you have Penn Mezzanine and Pixel as impairments and you have the pickup of the losses and I don't, Jim, know if -- we do -- oh, that's right, somebody just mentioned to me. We also have Tengion running through that, which is going to distort the number that you see there.

Okay. The Tengion I thought was impaired, was that impaired last quarter or this quarter?

No, remember, Tengion's marked to fair value, and as the stock value of Tengion moves, we take that change through our P&L as well.

Thanks. I'll get back in queue.

Paul Knight, CLSA.

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

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

Sure. Paul, this is Jim. Good Start recently launched their product in Q2. They are gaining widespread customer acceptance. There'll be a national launch this quarter. They now appear to be -- 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, but a majority of cases have been reimbursed by insurance. So look for further updates on this, but we're pleased that they're on plan year-to-date.

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

Jim, go ahead.

Paul, the sequencing market continues to be hot. We see a lot of deals there, since we've had 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 diagnostic 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.

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

Why don't we do this in two pieces, Paul? I'll answer that question and 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 were -- the consolidation going on within the venture community and actually there were 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 IT deployment strategy in our thesis. Anecdotally, we had three deals that we're in the term 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 a 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're looking at, that we will pay for new opportunities.

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

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

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 regard to supply chain and some other elements of the go-to-market strategy. Brett Craig has now been on board 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've 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. But Pixel is a work in process, and we continue to feel bullish, but recognize the practical matters that have to be addressed in order for it to be in market in 2013.

Greg Mason, Stifel Nicolaus.

Great, thanks. And, Steve, just a 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?

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 and augment the -- 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 [it] 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.

Great. And then a question on the Penn Mezz, the slightly lower guidance $1 million to $1.1 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?

It's actually both. There's some impact from the non-accruals scenario that's impacting that projected amount of income and there is also a recognition that they deploy 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 plan. 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.

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

Jim, why don't you take that question?

Sure, 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 that would like to work with Alverix in this area and we expect further announcements to be made on other collaborations with Alverix.

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

Yes, Greg. That's correct. The expansion stage companies are $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.

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?

Jim, would you take that?

Sure. Jane Hollingsworth, the former CEO, is an advisor to the company. The company is nearing commercialization and it is hopeful that the product will be approved by the FDA next year and that they'll be in a position to launch soon. I worked with Armando at GlaxoWellcome. 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, he built up a business that he commercialized and launched a new product. So he has a lot of expertise in this area, yet the company had evolved to a stage where Armando's talents are well suited to take it to the future.

Great. Thank you, guys.

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 and we moved on to Greg. So let me just back up and just ask you to talk about the pipeline and so forth.

Sure. Well, our pipeline continues to be strong, as Peter noted, and we in an average year will see over 1,000 different business opportunities. [Minute] 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 the near future. We certainly spend a lot of time building value in our current companies, but we are in late stages, with term sheet stages with several different opportunities both in technology and healthcare and are planning to get several of these completed in the near future.

Okay. Thank you.

Matt Dolan, ROTH Capital Partners.

Hey guys, good morning.

Hi, Matt.

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

Steve, go ahead.

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

A good deal --

And they wanted to --

I'm sorry, Matt, a good deal of the revenue right now is being produced by our technology businesses and you 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 revenue are seeing that growth as well.

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?

Jim, why don't you make a comment first? And Steve, if you have something supplemental go ahead.

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, 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 term sheet negotiations.

Okay. And then, the first part of the question was, have you had any deals that you didn't do because of this lack of exits issue?

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

We already asked 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.

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 the, as you said the exit-ability of the target investment. Is that what you're saying?

Exactly, Matt. Thank you.

Okay. And then last one, just to finish on Pixel. Is this purely a supply issue? And, Steve, maybe you could just go through what the demand side of the equation is. I know you mentioned there is some interest at 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.

Well, and that's what keeps us excited. The demand still is there. The Gen I 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 consumers' hands, but then about half of those pairs would come back, have to be corrected and then placed back into the consumers' hands. And we just knew that we couldn't continue to operate that way.

And then finally, they're working through, because the Generation II 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 side -- 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, relaunch the product with Generation II in 2013.

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

Revenue guidance, Matt?

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

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

Thank you.

Jim MacDonald, First Analysis.

Hey, guys. Just a couple small things. So on NuPathe, could you -- do you expect to participate in their funding that you talked about?

Jim, [go ahead].

So Armando has just joined the team. He's going to be coming back into Safeguard after they formalized a commercialization strategy and we've got 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.

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

Go ahead, Steve.

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.

So the investments went to -- cash went to a long-term investment. That's what jumped the [cash], the long-term --

Yes, sometimes when we look at our deployment pace, 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, see if we can actually improve upon the returns that we're getting, but still maintaining that conservative posture.

Okay, that helps. Thanks.

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

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.