Safeguard Scientifics Inc (SFE) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Safeguard Scientifics Third Quarter 2012 Results Conference Call. All participants will be in listen-only mode

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to John Shave. Please go ahead.

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 risk of acquisition or disposition of interests in partner companies, capital spending by customers, and the effect of regulatory and economic conditions, generally; as well as the development of the life-sciences and technology markets and other uncertainties that are described in our SEC filings.

During the course of today's call, words such as, "accept," "anticipate," "believe," and "intend," will be used in our discussion of goals or events in the future. Management cannot be certain that final outcomes will be described today.

We encourage you to read Safeguard's filings with the SEC, including our Form 10K, 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 would like to bring you to 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.

Thank you, John. Good morning, everybody. Well, this change comes really at the right time for me, number one, as 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 have 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 post-bubble self; navigating the financial crisis; and then building Safeguard to its current stable and much more valuable self. He's demonstrated that he knows how to scout for value. He knows how to build value. He knows how to realize value. He can manage 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, 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 emeritus, I expect to work with Steve and the team to help enable and facilitate this transition. And I'll 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'll lead. And I'll give you my formal remarks now.

The results for the quarter ended September 30 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 we're opportunistic. We're focused on enhancing the Company's financial strength and flexibility, as well as improving shareholder value. So look no further for signs of progress than 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 at 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 strengths, and to be a long, important activity for us.

With the U.S. Presidential Election a little more than 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 concludes that three out of four U.S. institutional investors now consider the use of alternative investments to be essential to diversify portfolio risk and enhance returns. More than 90% of the survey respondents said they would maintain or increase their allocation to alternative investments.

Based upon responses from more than 150 investment managers with median assets of $30 billion, these findings help to validate Safeguard's business model and explain our growing awareness among institutional investors.

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

In addition, our strong cash position gives us a competitive advantage over other investors who have 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-on-cash returns of 2X. Of course, we can't guarantee that we'll continue to perform in the future as well as in the past, but we come to work every day ready to build companies and enhance shareholder value.

The combination of performance and asset values suggests substantial unrealized value to Safeguard's shareholders. As of September 30, Safeguard's interest in partner companies totaled $188 million of capital deployed. Our net cash, cash equivalents and marketable securities totaled $183 million. The sum 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 in 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 referred to this focused strategy with the acronym "M-squared, C-cubed." In life sciences, we target opportunities in areas of lower technological and regulatory risk; and molecular and point-of-care diagnostics, medical devices, specialty pharmaceuticals and selected health-care services.

In technology, we pursue transaction-enabling applications with a recurring-revenue business model in Internet new media, financial technology, health-care I.T. and other selected business services.

Safeguard's discipline complements our focus. We will not deploy capital or pursue exits simply for activity's sake. If an opportunity clears our strategic growth and return hurdles, we will respond appropriately. 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 a two to five-year time frame for 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 sales of stock in the open market.

Now, execution is how focus and discipline are tested. And that's how Safeguard has distinguished itself. Focus, discipline and execution have served Safeguard. And it's 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 shined 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 at high-traction partner companies AdvantEdge Healthcare Solutions, Bridgevin 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 an initial-revenue stage innovative molecular diagnostics company that has developed more accurate and comprehensive pre-pregnancy 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 inheritable genetic disorders, enabling physicians to help prospective parents make more knowledgeable medical decisions before conception. The company's offering, called GoodStart Select, is a CLIA-approved offering, and it was launched in early 2012. Revenue continues to build as GoodStart Genetics continues to pursue a fast-growing $1 billion genetic-testing marketplace.

Safeguard deployed $10.5 million of capital in GoodStart since September of 2010, and we have a 29% primary ownership position.

Another partner company that presented at Investor Day was NuPathe. Earlier this week, Safeguard deployed $5 million, along with new and existing investors in a $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 assignment Zecuity a PDUFA date of January 17 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'll also note the myriad of announcements that our partner companies have issued during the quarter, highlighting major milestones 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 continued financial strength and flexibility, as well as enhanced shareholder value.

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

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 30. At period end, 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 $183.1 million. During the quarter, primary uses of cash were as follows -- follow-on deployments of $5 million in ThingWorkx; $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 use 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 fund's profits through exits and 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 interests in several ways. First, Penn Mezzanine enables us to provide flexible financing strategies to our current and prospective 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, 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 exists. Safeguard maintains a 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-science 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 to date, 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 personnel resources, and unique opportunities for growth.

Our focus on these processes allow 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.

Thanks, Steve.

Sue, go ahead and take some questions.

(Operator Instructions). Greg Mason, Stifel Nicolaus.

Peter, good luck with your future endeavors. Wish you all the best.

Thanks so much, Greg.

I wanted to chat a little bit about a couple 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 and the rollout of the BD Veritor and what we should expect in terms of revenue traction as that product is being launched?

Yes, 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?

Sure. Greg, so Alverix, as you know, has partnered with Becton Dickinson. They have rolled the product out earlier this year in Japan, and they are 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.

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

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 payers and insurance companies look to migrate more of that business from sleep labs to the home-testing marketplace, for convenience and for cost-effectiveness.

A lot of the sleep labs have realized this 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 a 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.

Is there any kind of color you can get when you think NovaSom may transition from an expansion stage to a high-traction-stage company?

It's progressing as we speak. NovaSom has been successful in signing up a lot of the large insurance companies and payers. It's believed today that they have over 170 million covered lives that now are eligible for a NovaSom test. Obviously, this is a large and growing marketplace.

I'm not sure as to the timing when they would be getting that traction, but we expect impressive revenue gains in the future.

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

Sure -- happy to. Spongecell, as you know, has continued to exceed expectations. They've done well. 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 a tremendous shift, as you know, from offline to online advertising. And that's benefitted companies like MediaMath and Spongecell.

We expect a strong Q4 from Spongecell and will be happy to share feedback with you next quarter on their results.

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. They've achieved an over 6,000% revenue growth between 2008 and 2011. So this company is on a tear.

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 close; and the high end, all of them? Or what factors into that $65 million to $85 million?

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

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

Greg, as you know, when we're looking to put capital to work, one of our diligence tasks 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 health care or technology.

I would say, at any one time, there is a multitude of interest in many of our companies, and ongoing discussions for either partnerships or acquisitions. Safeguard's 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.

Paul Knight, CLSA.

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?

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 -- $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 will 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 marketplace.

But we are 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've got the right companies to be involved with. As we deploy our 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.

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

Well, every time an opportunity gets presented -- and we have participated 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.

So the co-invest amount will rise along with your committed capital?

Our committed capital is the co-invest, as you put -- the terminology you're using. So if $1 is lent 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.

Okay. Yes.

And then Putney -- can you give us a little color on where we are with that strategy?

Yes. I'll let Jim answer that.

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 this quarter, through the end of next year and onward. The financial numbers have been impressive. They are ahead of plan in terms of revenue and margin. There is a lot of interest for extended partnerships.

So from our expectation, Putney is performing well above plan. And the future looks great for them.

Jim MacDonald, First Analysis.

Good morning, guys, and congratulations, Steve; and good luck, Peter.

Thanks.

Just a quick -- on the escrow release -- which escrow did that come from -- the $3.4 million?

Portico.

Portico? Okay.

And any progress on your other platform ideas?

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

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?

We have high hopes for Pixel. And we have acknowledged that they are behind getting to market. They are working very diligently on bringing to market their Gen 2 product, which is intended to not only enhance features of Gen 1, but actually provide some new capabilities that weren't necessarily envisioned in Gen 1.

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 are 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.

Jim, I think it's worth noting that $25 million is a guideline as opposed to a hardline, as well.

I understand. And on MediaMath -- obviously, they're on a tear, growing rapidly. And I guess they're 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 major infusion of cash?

Jim, they have continued to outperform. I was talking with Erik Rasmussen this morning, who was at their Board meeting. And they continued to hit the ball out of the park -- impressive top-line numbers. They have fluctuated in and out this year with being cash-flow neutral. They are making some significant investments in the business to be able to grow it and provide infrastructure there.

And I think they'll have a decision to make in in the future if the current growth can support that or if they'll be looking for further capital to increase it even that much more. But there's no signs of slowing. They're one of the fastest-growing companies, and really at an inflection point at this point.

Okay. Thanks very much.

Hey, Jim, just one follow-up comment to the escrow -- Avid recently announced -- or Lilly announced that they are 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.

Nick Halen, Sidoti & Company.

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

We are excited about that space. And we're proactively targeting areas of that opportunity that could be complementary to what our platform is with GoodStart today. We don't have anything to announce, but I can tell you we're very proactive in that space because we believe that certainly is going to be the future for health care, to reduce costs and provide better results.

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

From our perspective, our deal flow is as robust as it's ever 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're 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 health-care 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 health care today, where current venture capitalists have not had the bandwidth or dry powder to be able to support those companies. The technology space still continues to be very competitive, particularly at the earlier -- the 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 quarters.

Great.

Matt Dolan, ROTH Capital Partners.

This is [Chris Lewis] on the line, for Matt. Thanks for taking the questions. I think I might have missed it -- what was the total cash used during the quarter?

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

Okay, great. Thanks.

And then just kind of moving towards these term sheets, opportunities -- can you give us an idea or shed any light on what sectors or areas those opportunities may be in?

I'll let Jim answer that question -- focus of the term sheet?

Focus in terms of stage?

Stage and areas of --

In terms of sectors or certain areas.

Sure. Within the health-care group, we continued to like diagnostics, medical device. And we're also expanding a tremendous amount these days into health-care services and health-care I.T. -- to be able to leverage both the health-care expertise within Safeguard and the technology group at the convergence there. So we've seen a significant increase in deal flow in health-care I.T.

In the technology space, our strategy has remained 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 shape the future of that company's progression.

Okay, great. Thanks a lot, guys.

Ed Woo, Ascendiant Capital.

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

I'll take that one.

Valuation has never been more tricky for us than today. As I mentioned, there's a lot of recaps out there. And you have to get a willing buyer, willing seller. So you've had companies where they've been capitalized either by strategics or venture groups. Valuations sometimes in those companies continue onward -- flat rounds where 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 out a couple 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.

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

Well, on the health-care 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 health-care companies require syndication partners. It's more common in health care to have more venture capitalists or other strategics putting capital to work. So in many of those cases, we've seen more recaps.

The technology marketplace, particularly in the financial services enterprise, even some of the new media companies, have become frothy with valuation becoming competitive. And we're not seeing the recaps that we've seen there, as we have seen in the health-care area.

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

What we're going to do, going forward, in next quarter -- we'll 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.

Great. Thank you and good luck.

(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.

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.

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