180 Degree Capital - Q1 2023

Transcript

Daniel B. Wolfe (President and Portfolio Manager)

180 Degree Capital Corp's Q1 2023 financial results update call. This is Daniel Wolf, President and Portfolio Manager of 180 Degree Capital. Kevin Rendino, our Chief Executive Officer and Portfolio Manager, and I would like to welcome you to our call this morning.

All participants are currently in a listen-only mode. Following our prepared remarks, we will open the line to questions.

If you would like to ask a question, please type star six on your phone or click Ask a Question icon if you are participating via computer. I would like to remind participants that this call is being recorded and that we'll be referring to a slide deck that we have posted on our investor relations website at ir.180degreecapital.com under Financial Results.

Please turn to our Safe Harbor slide in slide two.

This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are forward-looking statements are intended to be made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. These statements reflect the company's current beliefs, and a number of important factors could cause actual results to differ materially from those expressed herein.

Please see the company's filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with our business that could affect our actual results. Except as otherwise required by federal securities laws, we undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

I would now like to turn the call over to Kevin.

Kevin M. Rendino (Chairman and CEO)

Thank you, Daniel. Good morning, everyone.

We'll start on slide three. Despite continued turmoil in the financial markets, including another quarter that the microcap and microcap value in the indices declined, we managed to achieve a 5.4% increase in the value of our public-related securities, helping our NAV increase over 3% for the quarter. 5.7%. Sorry. While we have a long way to go to recoup the NAV decline from last year, it certainly is better to be up when the market continues to be down. The bulk of our book value now resides in our public assets, where they represent nearly 88% of our book value or nearly $6 per share. In total, our book value increased to $6.52.

Leading the portfolio this quarter were our holdings in Potbelly, Alta Group, Synchronoss, and Intevac. On the negative side of the ledger was Arena Group. We'll have more to say on our holdings in just a little bit. Our private portfolio had a slight decline in the quarter, but in reality, we are left with one name of note, AgBiome, where there was no change to its value.

We have made substantial progress towards our goal of having 100% of our portfolio in easily valued publicly re-related securities. You can see this on slide four, indicated by the green bars representing our public holdings and the gray bar representing the private portfolio. We will depict this for you in a forward slide in a pie chart, but as I said, nearly 90% of our assets are now in liquid assets.

This should, as I've said for six years, lead to a narrowing of the discount our stock trades at relative to our NAV. Slide five shows you the trajectory of our liquid assets from the day we took over. This has been an arduous turnaround, we had very little control on being a forcing mechanism to many of our private holdings.

You'll see in a minute how much of a headwind we have had since 180 was created, and since we took over, and it has not been a pretty picture for our privates, but at long last, they're gone. X AgBiome. On this slide, you see how far we've come in building our assets in liquid securities. Down from our peak in 2021, but up significantly from when we started. Slide six shows our quarterly performance for our public holdings.

As you know, we run a concentrated Graham & Dodd value fund with an activist approach. We have low correlation to the indices, and we intentionally have asymmetrical risk-reward characteristics to our portfolio. Our individual names will determine our success, and our performance will have wide variances quarter to quarter. Fortunately, since we started, we've had many more quarters of excellent performance versus drawdowns. After last year's disappointing performance, we are pleased our Q1 performance in a rough market that seemingly has no end to being a rough market, we were still up 5.7% while the market was down nearly three.

The next slide is a slide depicting our share price as a percentage of our NAV.

Despite a total remake of our portfolio to transparent holdings that are easily valued because they trade in the public markets, we are certainly disappointed that our discount is so severe. We'll always expect some level of discount by and large, but having a stock traded 67% of our book value caused us this past week to take advantage of that dislocation by buying back just over 370,000 shares of stock at $4.41. While our primary goal still stands in finding stocks that have a 100% upside over a 3-year time horizon, we did execute on our $2.5 million buyback.

Returning capital when you have permanent capital is not an easy decision for us.

We thought it was important to show the market that we're very serious about buying stock if opportunities arise like the one this week. Our purchase was accretive to book value, and that will be reflected in our Q2 results. Yesterday, our board of directors authorized a $5 million share repurchase program, which includes the stock bought back this past week. Again, to be clear, our primary focus is unchanged.

The best use of our capital is investing in mispriced equities, and we haven't altered our strategy. It should also be noted that our purchase was only less than 3% of our cash and liquid securities, so that has not prevented us from continuing to do what we've done for the last six years. Slide nine shows our normally quarterly sources of change in our NAV.

We added $0.31 from our performance in the public market and had an $0.08 detractor from our NAV for our privates and our normal operating expenses. We landed at an NAV of $6.52. The next slide shows the sources of change since inception and highlights our success in our public holdings to the tune of adding nearly $4 in NAV. On the other side, and I've talked about this before, the headwind of fighting through our private holdings has been brutal. In total, in the last six years, we've had losses of $2 in NAV from our privates, showing just how broken our former company was.

I'm not sure we would even be on this call had our shareholders not voted to change our strategy in late 2016.

Let's talk about our individual holdings and provide updates on the ones that mattered this quarter. Potbelly increased nearly 50% as the company announced good earnings for Q4 of last year and pre-announced better results for this past quarter. The company has had success with its newly formed strategy of franchising and refranchising in its efforts to grow its store base from 400 units to 2,000 over the next 8-10 years. The company announced a refranchising deal in New York with plans to expand behind the current number of restaurants in that area.

It also announced many new franchising deals, most of which are in Florida. The turnaround is in full force, the management team of Potbelly is knocking the cover off the ball. Alta Group also announced strong results along with positive guidance for 2023.

The stock advanced sharply throughout the quarter, and we did end up selling 92% of our holdings near $18 a share. Since then, the stock has retreated to roughly $13 or $14 a share, through no fault of the company, just a rash of selling against fears of a looming recession. It is a name we would love to own again, given our confidence in the management team and the overall positioning of the company to be able to take advantage of market share gains as they grow dealerships, not only in the geographies they reside in, but in new ones.

Synchronoss increased 50% in the quarter as B. Riley sent a notice to the company offering a purchase of up to $1.15 per share. Right now, the company has hired UBS to not only evaluate the B.

Riley offer, also to evaluate other buyers of the company or its assets. The company is indeed in an inflection point for free cash flow to the positive side. We expect the company to throw off a good amount of free cash flow this year with significant free cash flow next year. We believe the stock should be meaningfully higher from its current $0.88 price based on its own fundamentals, not even taking into consideration the price offered to buy the whole company is 30% higher from B. Riley.

We will see how it plays out. Intevac increased 13% as the company entered into a partnership with Corning to utilize its new TRIO coating for use in mobile phones. We did sell 29% of our holdings just above $7 a share.

On the negative side, Arena Group declined 60% in the quarter, not because of its earnings, which actually were quite good, but because of its capital structure and its need to refinance debt due at the end of the year due to B. Riley. Given B. Riley is the biggest equity holder and has been a great partner to Arena Group throughout the years, we highly doubt they're not going to be friendly with regards to restructuring the debt. We did participate in the registered direct offering at $3.80, we do think the tide will turn at some point once clarity is reached regarding its capital structure.

One last name to note. We filed a 13D on Comscore as we began a campaign to offer the company suggestions for how the governance of the company can be improved.

You can find the public letters we have written showing how inept we think and self-serving we think the board has been, as well as highlighting the egregious compensation paid to the board, specifically the lead independent director, Brent Rosenthal, who's been on the board for too many years and who has presided over shareholder value destruction under his watch. We will not stop shining a light on how pathetic the Comscore board is. We will continue to offer suggestions for how the board can better align itself with common shareholders.

It's absolutely a great company with real data assets and a new management team that is improving the operations of the business. By any measure, the share price is woefully mispriced. We continue to think it has meaningful upside. We will not stop shining a light on the poor governance at Comscore.

Skipping ahead to slide 18, here's a snapshot of our performance for our public holdings for every period. We had a 5.7% positive return versus a 2.9% decline for the Russell Microcap Index and a 5.2% decline for the Russell Microcap Index. Our 1-year numbers are slightly behind the indices, while our 5-year and inception to date numbers show extraordinary outperformance. To be exact, we're up 243% since we started versus 31% for the Russell Microcap Index. Finally, the pie chart of our assets that we talked about earlier. 88% of our assets are now in our new strategy, and that's up from 20% when we started.

At the end of the day, our NAV will now closely track our public stock performance instead of being held hostage to a private portfolio that we did not have any control over. I'm proud of the work we have done in remaking this company. Daniel?

Daniel B. Wolfe (President and Portfolio Manager)

Thank you, Kevin. Please turn to slide 20.

We thank all of our shareholders who voted on the proposals presented for this year's annual meeting that was held this prior Tuesday. We are pleased to report overwhelming support from our shareholders for our board nominees and the selection of EisnerAmper as our auditor for the 2023 fiscal year. As in prior years, we were able to secure votes from 66% of our outstanding shares without having to spend significant shareholder capital to facilitate calls or other means to secure votes. This speaks to our active and involved shareholder base, and we appreciate such involvement and attention.

Please turn to the next slide. As mentioned last quarter and remains true as of the end of Q1 2023, 180's remaining private portfolio has only one material position, AgBiome.

The total assets of our remaining legacy portfolio are approximately $8 million, with $5.5 million of that being from AgBiome. I know that $1.3 million are payments that we expect to receive in April 2024 from the sale of TARA Biosystems to Valo Health. We did receive the $1.1 million from the sale of TARA that was due to be paid on April 1, 2023. This past quarter, we had a small markdown in AgBiome based solely on option pricing model inputs. Nanosys negatively impacted our NAV by $0.04 per share, approximately $400,000.

Please turn to the next slide. For Q1 2023, our regular operating expenses equaled approximately $910,000 versus $859,000 in the prior year quarter.

We will maintain lean cost structure outside of the fixed cost for being a public company, focusing our expenses on activities solely designed to enhance our investment performance or increase our revenues from managing outside capital. Our management and board are acutely aware that we are in business to serve shareholders. Kevin personally owns 640,000 shares. I personally own over 220,000 shares. If you have come to know us since we took over the firm, we are not interested in wasting shareholder money on surplus activities. Excuse me. The primary change from the prior year is the addition of Matt Epstein to the team.

As mentioned in our last letter, Matt brings fresh perspective and complementary skills to the team, and we are pleased to have him on board.

As you may have noticed in our most recent proxy materials, our audit committee and board of directors approved the appointment of EisnerAmper as our independent auditor for fiscal year 2023. While we greatly appreciate the opportunity to work with PwC, PricewaterhouseCoopers, as our auditors, the simplification of our business provided an opportunity to revisit who we engage as an auditor. We currently estimate the choice of switching to Eisner will lead to cost savings of at least $100,000 in 2023 and likely more in future years.

We have also reduced the size of our board of directors from four to three independent members. We thank Tonia Pankopf for her service as a member of TURN's board during the past three years and her understanding for us taking this cost-saving step. Lastly, we continue to look for opportunities to reduce our operating expenses further.

Although, as we have said historically, meaningful reductions in operating expenses as a % of net assets will come from growing our net assets rather than further material cost reductions. Please turn to the next two slides. We provide these slides each quarter that enable our shareholders to look at the trend of our total expenses and compensation related to expenses as a % of net assets. This year, the %s increased primarily because of the decline in net assets. We continue to anticipate that reductions in our operating expenses, as I mentioned before, as a % of net assets, will be based on growth in our net assets. We remain committed to treating every dollar of shareholder money with the utmost care and consideration. We would now like to open the line for questions.

If you have a question, please type star six on your phone or click the Ask a Question icon if you are participating via computer.

We'll give a moment to allow the queue to populate.

Kevin M. Rendino (Chairman and CEO)

This is a superfluous presentation.

Daniel B. Wolfe (President and Portfolio Manager)

Superfluous. Thank you. It's.

Yes.

Operator (participant)

Q&A session is over.

Q&A session has started.

To ask your question, please press star six.

Daniel B. Wolfe (President and Portfolio Manager)

I am not seeing any questions in the queue.

Kevin M. Rendino (Chairman and CEO)

With that, we look forward to reporting on our Q2 results. I hope everyone is able to navigate what's obviously been a very difficult market, especially for microcap stocks. We will speak to you after we report our Q2 results in June.

Daniel B. Wolfe (President and Portfolio Manager)

Thank you very much, everyone.

Have a good weekend. We look forward to speaking to anyone at any time. You can now disconnect.