Q1 2022 180 Degree Capital Corp Earnings Call
[music] Q&A session has started to ask your question. Please press star six the recording had started corp's first quarter 2022.
As a result update call.
Daniel Wolfe President portfolio manager of 180 degree capital, Kevin where deno, 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'd like to ask a question. Please type star six on your phone or click the ask a question icon. If you are participating via your computer I would like to remind participants this call is being recorded.
Referring to a slide deck that we've posted on our Investor Relations website at IR Dot 180 degree capital Dot Com under financial results.
Please turn to slide two that contains our safe Harbor statement. This presentation may contain statements of a forward looking nature relating to future events statements contained in this presentation that are forward looking events.
Our forward looking statements are intended to be made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
People are forward looking statements are subject to inherent uncertainties in predicting future results and conditions. These statements reflect the company's current beliefs and a <unk>.
Number of important factors could cause actual results to differ materially from those expressed herein. Please see the company's filings with the Securities Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the company's business that could affect the companys actual results.
Except as otherwise required by federal Securities Laws 180, recap Corp undertakes 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. Thank you Daniel and good morning, everyone. Let's start on slide three which summarizes our Q1 results complete opposite day for us.
As our public stock performance hurt our book value while at the same time, we've got great news from our private portfolio not only in terms of a markup to the portfolio in the quarter, but also the potential and actual monetization that help us nearly complete the transformation and the mix of assets on our balance sheet that we started five years.
No.
All in all and what has been an absolutely nasty bear market, our NAV declined 8% in the quarter to $9 81.
At the same time and because of weak performance from our public companies, our cash and liquid securities declined to $64 million from $76 7 million that equates to $6 19 per share what you will see we're not see.
In our holdings of Petra, we saw an increase in value on our balance sheet of $4 3 million, but not but our cash did not reflect the transfer of the funds, which we should expect any day and should be getting so if you add the proceeds of the Petro sale to match the increase in our holdings are pro forma.
Cash per share would have equaled $7 31 per share with Petra itself, adding $1 12 per share to our cash. This was as we said a very significant transaction for us as far as the public portfolio. This wasn't our finest quarter after five years of significant outperformance.
We had a number of names down in some deserved to be down like quantum.
Others like Arena group and synchronous went down predominantly for beta reasons and because the market has been in a risk off mode. Since last November we will talk about some of the individual names in a future slide I'd also encourage you to read our shareholder letter for our comprehensive analysis of our performance our holdings and our views of the market.
On the next slide we show a 10 year history of or Nev, many more up periods in down periods. Since we initiated our plans to transform our business and turn around our stock off the lows that it set in 2016, but this quarter. We did have a drawdown to a book value of $9.81 and while I'm never happy with any day.
Greece, our cash and private holdings helped cushion aperture as potentially more significant blow to our N V.
This has been a painful bear market as you can see on the next slide and make no mistake about it it is a bare market with the Russell Microcap index declining over 30% since the November highs COVID-19 supply chain issues inflation higher rates in the human tragedy, we are living through with the Russia invasion of Ukraine.
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This chart depicts our performance every quarter for the 21 quarters, we reported to you since I arrived here is what I like to say to you today when it never ever feels like we're going to get out from under the drumbeat of negative news that are swallowing up the market on a daily basis.
I told you in the middle of the onset onset of the pandemic, let's call. It April of 2000, when we were all at home and watching people be hospitalized and mass and many die that 180 would have gross total returns of 23, 9% 25, 4% nine 6% and 28, 3% over the next four.
Quarters, where that had been a believable statement to you at the time, absolutely not if I made that declaration or some form of it I might have even laughed at myself. All I know is that after this market collapse 181 stocks at valuations that are in many cases are drastically lower than they were in the midst of it.
Diavik.
<unk> generation lows with much more stronger balance sheets, we believe the opportunity for rapid price appreciation of these positions exists if I'm.
When the backdrop for the market changes from its present day Doom and gloom.
And as I've said to you once I, probably said it 100 times 180 degree capital has permanent capital in.
In each and every period like the one we're going three our structure of permanent capital allows us to take advantage of these periods because nobody can take the money away from us or force us to sell we believe we will be winners when the market environment improves and provide significant absolute returns for the 180 shareholder.
Slide six shows our cash in public assets on a pro forma basis for the Petro proceeds that we have talked about $16 19 sense without at $7.38 with it I'm, sorry, $7 30, with it and we do expect to get those proceeds any any day and they they they couldnt comment or a better.
Time for us given what the market has done this should absolutely allow four floor of our share price and doesn't take into consideration our holdings in both Z wave and AG volume two quality companies that at least for the time being are still privately held.
Slide seven shows our historical stock price discount to our LTV.
While I now know what I now know is that when D wave closes its back we will have 83% of our assets in cash in public securities. This should allow for a meaningful improvement in our discount now that the market has greater transparency apparently in the value of our holdings.
We show on slide eight our normal sources of change in our N V and as I said earlier it was an opposite quarter for us our public assets hurt our NAV by $1 12 per share with our private portfolio, adding 32 cents. We did have five cents of expenses in the quarter and that included a reversal of certain bonus accruals, which will.
Not be paid to management if the year ended today those are prior bonuses that were deferred that they require us to maintain a book value equal to the year prior.
We're obviously not there right now and so we reverse those are bonus accruals.
Next slide shows the sources of change in our NAV since we started.
This clearly highlights the significant value add to our new strategy that we have had on one of your stock price and obviously on our book value. We have generated over $50 million of gains since we started or nearly $5 45 per share. We've obviously had some headwinds of the private.
So for the last five years.
Slide 10 shows the performance of every stock we own through the quarter and not surprisingly it wasn't a pretty picture.
Only synalloy and Potbelly, we're able to offer protection against the many names we own that declined in the quarter. So let's talk about the more significant detractors to our performance this quarter Quant.
Quantum Corp, first while we have successfully traded in and out of quantum a couple of times over the last few years.
We absolutely got caught this time.
We've often spoke about how legitimate supply chain issues have never negatively impacted quantum what started out primarily as an inability of the company to secure enough parts for tape drive products sold to major hyperscale or.
Expanded to almost every part needed to build out their server and storage products. The margin pressure was so severe in Q4 that quantum announced it would need to seek a waiver from its lenders to avoid tripping debt covenants. We were stunned. The fact that quantum is tripping debt covenants three years removed from cutting their debt in half.
Restoring the company from its accounting scandal.
Scandal, and posting revenue of 90 plus million dollars per quarter is in our humble view fairly obscene Quantum's board fell asleep at the wheel and the management build the cost structure like R&D going up $20 million year over year for revenues at a margin profile that doesn't exist today.
It is our view that the weakness in quantum has nothing to do with the stock market and everything to do with poor planning and execution by Quantum's Board and management team. It's our view that the company fell victim to if we build it they will come mentality and they've destroyed their shareholder base in the process.
As a result of these missteps the company was forced to do a rights offering at a price that because of the resulting dilution is killed off the upside to our original price targets, while we acknowledge a difficulty environment actually has been for quantum the company needs to fall on the sword by being completely.
For being completely unprepared to deal with the issues that we're facing.
We expect R&D to be rationalized needless costs to be reduced and for quantum to pay better attention to preserving cash through these difficult times, we will hold quantum's board and management team accountable for restoring value and we will ramp up our activism, which may include a proxy contest. If we don't believe the company is being run for its shareholders.
We think with the rights offering the company now has only $30 million of net debt versus $160 million, just three years ago, and a new set of debt covenants, which should provide ample breathing room, the company's balance sheet is derisked.
And the stock trades at less than one times revenue given these dynamics, we subscribe to the rights offering because we believe the stock still has over 100% upside from here quantum declined 59% in the quarter and reduced our NAV by 50 cents a share of $5 2 million.
Synchronous despite reporting better than expected revenue and EBITDA for Q4, 'twenty, one and the sale of a noncore asset for up to 14 million.
The shares plunged why is that.
To make up a reason and I'm I'm really making went up here as we believe the management team stumbled a little bit on the last earnings call and subsequent conversations with investors. The first issue was how they communicated the rate of growth in the personal cloud business. Additionally, they answered questions about the use of proceeds from our noncore asset and the paid.
Down to the outstanding preferred stock with an erroneous answer they reported two nights ago and did a much better job on the call, but honestly, we're reaching for straws here as the company has posted decent results in each of the quarters. Since the recap. This operating performance should have been more than enough to warrant stability in the equity and certainly should not have been the <unk>.
Clause for the share price plummeting, 29% this quarter and 50% since the recap. This company has 65% of its business in cloud revenues, 85% of its business in recurring revenues and is forecasted to do 55 million to $50 million to $55 million in EBITDA in 2022, well known.
Of the 35 million that we expected when we first initiated our position.
What we need to hear more about it as a clear plan to reduce the $75 million preferred security, but we believe synchronous as poor stock performance is simply the result of a risk off fearful market, unlike quantum which declined because of poor execution by the management team. We believe synchronous as sell off this quarter was more beta rather than.
Alpha for the quarter, the stock declined 29% reduced our NAV by 28 cents.
Finally arena group I'm going to put this quarter's stock weakness for arena predominantly in the beta camp, but note the weakness in the quarter was also caused by a few fundamental factors applicable to the company.
Rina finally listed on a major stock exchange following or following following the filings of all of its financials and continued to show acceleration in this business, including driving better than expected revenues and margins to help fund the acquisition of AMG Parade, the parent company a parade magazine Arena group announced the secondary.
Offer an offering and therein lies the problem for the stock in Q1 'twenty to.
The offering wasn't the best time to announcement in the face of an imploding stock market for an unknown company with an illiquid stock, but it was a buyer's market rather than a seller's market.
Arena stock was walk down to less than $10 from 14 in order to find the clearing price for the secondary offering while it would've been better had the offering and the acquisition being completed and a more favorable equity market landscape. The acquisition itself. A parade is incredibly appealing we're happy they did it and should add a significant amount of revenue and EBITDA.
Arenas income statement.
Under the leadership of Ross Levinsohn is executing incredibly well as traffic and advertising across its many websites has been increasing at an accelerating rate.
Arena has recently said in its earnings call that it currently is at an inflection point, where both inorganic and organic growth can occur without adding any meaningful costs along the way we expect from here material increases in both revenue EBITDA and free cash flow, we believe an arena strategy of rolling.
Up digital assets in any group integrating them across a single platform. This should allow for better traffic across each individual site. While we're never pleased with owning stocks that cause our performance to suffer in the case of arena were not playing here for 20 or 30% return, we believe that over time marine it can be a $500 million.
Market cap company, which would equate to a $30 stock price at its current shares outstanding. It's the right company with the right management team and a great strategy. It's just a bad stock market and we believe that's why it's down or why the stock is a materially higher time will tell for right for the quarter Arena stock declined 24% and we do.
<unk> N V by 'twenty five.
Slide 12 shows our performance of every stock we have one throughout our history and illustrates the success that we've had in the last five years notwithstanding our performance this past quarter when our investments of work we've had significant returns and for the ones that didn't work out we're able to limit our losses through it all we have achieved the 330.
Percent earn a return and that includes some of the rough quarters, we've experienced through our five years like the one we just had and the March 'twenty 'twenty quarter, which was the start of the pandemic I certainly hope in five years' time, it can be as successful as we have in the last five years slide.
Slide 14, and 15 are another way to look at our performance of each name both in terms of percentage game or loss and also the dollar amount of each gain or loss as I said. This chart shows not only a successful batting average, but more importantly, an even better slugging percentage, we have let our winners run and cut off our law.
Losses with minimal losses, when we haven't had a winning position.
Our last look at performance is on the next slide and this is through various time periods. We certainly are disappointed with the last quarter, but we highlight here are significant outperformance over longer periods of time.
And finally for me, our Pie chart and the transformation 180 degree capital has been a true turnaround based on turnarounds for our investing companies.
V wave spec closes and taking into consideration the terra proceeds, which we've talked about and Petrus cash coming any day, our balance sheet will have been turned completely upside down from where it was whereas only 27% of our balance sheet was in cash and public assets. When we started it will now be 83% wheat.
Hold you five years ago, what we intended to do and we've done it.
That should make the analysis of where our stock price should trade, a clearer and easier exercise than in any time in our prior history and that should be that over time, it should trade much closer to where our N. A V is versus the discount that we have today, we are simply not the same business that we inherited it's a much much better.
Business is a healthier business and while the markets have been difficult hopefully we have set the stage for more faster growth from where we are.
At this time I'll be back to take any questions you have about the markets our holdings or anything else, but for now let me turn over the call to Daniel Daniel Thanks, Kevin. Please turn to slide 18. This slide shows the votes for the proposals put forth to shareholders at our 2022 annual meeting held in April all of our directors were reelected and Pwc.
He was confirmed and approved as our auditor for 'twenty two to 2022 fiscal year.
The board and management of <unk> I appreciate the overwhelming support of our shareholders.
And that you should.
Through your votes.
Please turn to slide 19 for the quarter, our private portfolio increased in value by $3 3 million or <unk> 32 per share as Kevin mentioned, the biggest positive change in value came from our rights to potential future payments for future milestones related to the acquisition of Petro Pharma Corporation by Eli Lilly.
As mentioned earlier, we have sold our ownership in these milestone payments for $12 3 million, which is a $4 $7 million increase to the value of those potential milestones as of the end of 'twenty one.
These proceeds from the sale represent the amount 180 would have received if the first two milestones were achieved the remaining payments would have required the achievement of regulatory and sales milestones. They carry both significant risk of not being achieved as well as being of over a very long timeframe. If they were achieved at all.
Given these dynamics we believe this sale was in the best interest of our shareholders and is consistent with our desire to focus on our public market investing strategy.
Larger decreases in value of our privately held legacy privately held companies occurred in nanosecond and handled out life Corporation.
We've also shared the news with you that Tara Biosystems has been acquired by Valor health.
D wave systems announced its intent to become a publicly traded company through a merger with D. P. C M capital.
Traded under the ticker X P O a which is a special purpose acquisition company or stack. This event and the potential pending event, respectively were largely incorporated in value as of the end of 'twenty, one and did not materially impact value as of this quarter. If the way systems complete this transaction in 83% of our portfolio.
Comprised of cash and public and public related Securities. We will then have one significant private holding remaining AG and.
In AG bio would represent 75% of the value of our remaining legacy private held privately held investments.
Please turn to slide 20.
As we've noted in previous letters, we have dramatically reduced our cost structure under our new strategy in 2016 before our funds changed investment focus as a management team our operating expenses, excluding stock based comp and interest on outstanding debt averaged approximately one 3 million per quarter for Q1, 'twenty two a regular operating expenses equaled approximately.
860000.
On this performance during the quarter the performance during the quarter as Kevin mentioned, we reversed the accrual for certain deferred bonus amounts from 'twenty one in the amount of approximately 390000.
This amount or a portion of it could be reinstated in future quarters, depending on performance at the discretion of the compensation Committee of our board, we will maintain a lean cost structure outside of fixed expenses 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.
Please turn to slide 21, and 'twenty two.
We provide these slides each quarter that enable our shareholders to look at the trend of our total expenses and compensation related as a percentage of net assets. We continue to anticipate the reductions in our operating expenses as a percentage of net assets will be based on growth in our net assets rather than further reductions in our expenses, we remain committed to treating every dollar.
Shareholder money with the utmost caring consideration.
And as we always say is much easier for us to grow NAV when the expense hurdle rate is where it is today.
Turning to slide 23 here.
Here, we present, our annual scorecard based on certain metrics that we track through the year, while the first quarter 'twenty. Two is difficult. We believe we are well positioned to grow value for our shareholders across all of these metrics over time as we have during the prior five years of 180 degrees existence.
Please turn to slide 24.
As of the end of Q1 'twenty two return trade it at 70% of NAV, our security as a publicly traded and related companies cash and other assets net of liabilities were $6 19 per share.
Stock price was $6.84.
We received 100% credit for the value of these assets net of our liability as the market is ascribing a value of approximately 72 cents per share or $7 5 million to our private portfolio.
Given our private assets are valued at approximately $38 3 million. The marketed was discounting the value of our private portfolio by approximately 80% as of the end of the quarter and none of this include analysis actually includes consideration that that $12 3 million, we're going to receive in cash any day for our sale of the Petro milestones, which equates.
And additional direct addition to cash of $1 19.
Her share goes straight onto our balance sheet, including this payment the upfront payment from the sale of star on a pro forma basis as of the end of the quarter. Our remaining private portfolio was being valued at significantly less than zero under these assumptions.
At the end of the day, the private portfolio other than AG.
As currently really irrelevant to our future success.
Given how painful the market has been in 'twenty. Two we think the current construct of our balance sheet has provided true floor for our share price. We would now like to open the line to questions.
You have a question. Please type star six on your phone or click the ask a question icon. If you are participating via your computer.
Cause for a minute.
Latakia Depopulate.
By the way I've said in my prepared remarks, Petra was $1 12, Daniel was correct. It was down 19.
Yes.
And our first question.
Okay.
From.
Adam Waldo Adam Your line is open.
Good day, Kevin and Daniel Nice job in a very tough environment and thanks for taking my questions, Adam Waldo Lismore partners, LLC, where shareholders I'm, hoping we can talk about three topics. The first hedging given the current macro environment in the second act by AUM and a third a third party capital raising initiatives.
On hedging.
You guys have my recollection once maybe twice since we've been shareholders for about four years.
<unk> done some hedging using options on the Russell 2000, rather broad based indices that.
Somewhat mimic your holdings.
You know that the.
The Taylor rule currently suggest the fed funds rate should be in the high single digits to low double digits, depending on the assumption do you want to use for smart inflation. The great man himself was on Bloomberg on less bad data, suggesting the same.
Obviously, that's a lot higher than where it is now at 75 bps 200 bps. So can you comment on your thoughts around some index based hedging or other hedging initiatives.
Given the current backdrop on the one macro backdrop on the one hand, but also leaving room for your.
Individual fact picking alpha outperformance on the other things.
So we've we have hedged in the past.
We haven't hedged during this period.
I'm not looking to do hedges now the market is already down 30 plus percent since November .
And there's been an.
Exorbitant amount of pain.
And I think you know the way, we think about investments the time to diversify with nine months ago.
In our view the time to concentrate is today at this time to take risk off was nine months ago, the time to put risk on us today and in the Big picture and if you think about the ensuing years, Adam I, absolutely am not signing off on 10% fed funds rate.
So I just if you actually think that's where we're going.
Which is in.
You know the stock market as a bunch of opinions right I have when you have one.
If the fed funds rate gets to 10%.
Rock market is gonna be 80 or 90% lower.
And.
That's just not something that were subscribing to at some point.
If the fed raises rates enough and they already may have done. So we don't know yet there'll be incredible demand destruction.
And inflation will fall off a cliff.
And we will we will end up in a severe recession and I think that time is well before we ever get to 10% fed funds rate.
So that's not in our calculus, if we're wrong and you think we're wrong on that.
We respect your opinion, but we're not looking to hedge right now I wish I had hedged in November I Didnt, we didnt.
It would have helped it wouldn't have been able we couldn't hedge enough unless.
We couldn't hedge enough and Russell puts and options to offset the decline we have a we could have shielded some of our.
You know a deteriorating performance along the way so it is a part of our toolkit.
We've used it in the past we didnt use it in the last five months, what's a fair yeah fair enough and look I'm, not suggesting we're going to 10% on the fed funds rate.
There's a reasonable argument to be made.
You know four or 500 basis points higher to get inflation.
Back in the bottle.
That's behind the curve on AG bio obviously, 12%.
For your slide.
19, 12% obviously of your current NAV.
They hired a lot of his senior managers recently in a press release that you typically bring on when you're getting ready for an IPO.
The events in Ukraine, My Turbocharge, the short term.
Story for public offering along with a great long term story is there anything more you can add as to you know prospects for near.
Near term liquidity there other than what you teach in your prepared remarks, Kevin around.
Big private for now.
I'll I'll I'll take this and then I'll shove it over to you the here's what I'd say happy.
Happy we own it.
The AG market, specifically for what they do should be in a tailwind situation for them for the next 10 years.
Cause I do expect a much more robust U S domestic agricultural economy.
Over the next 10 years, I think what's happening in Russia and Ukraine.
Only helps them.
Because we're warm we're now worried about food shortages and the rest.
It is a wonderfully run company, we've seen the value for us increase so it's the one private holding we own in Petro obviously was another one.
But it's the one private holding that over the last five years since I've got here has almost doubled in value.
And I, you know my expectation and by the way, it's the only one V weight specs.
And we get the tax your money in and all the rest Tyra, we get the proceeds from Terrorise I said above 83% of our assets in it.
And the public that assets are set there.
The the only company that matters in our private portfolio is AG volume Daniel I think it's going to represent how much of the private portfolio as of the end of the quarter 75%.
It's almost not worth talking about anything else, we have so little a few other companies there so.
Think AG mine is in a really good spot.
To be honest with you I'm thankful, they're not doing anything right now it's the worst market we've seen in a long time.
<unk> coming public in an IPO or a spec would be a waste of time and they wouldn't get the appropriate value. So.
To some extent I'm disappointed theyre not out yet on the other hand, I'm thrilled theyre not out yet because it will be in a better day for the market and this company is the right company at the right time, So Daniel I don't know.
The other thing I would add to that is.
So everything that Kevin said.
Is that you know they did announce that they raised over 100 million and around the financing last year.
Really happy that they did that they closed that and so they have a really strong balance sheet.
And that should hopefully position them well.
<unk> for the future to be able to take advantage of.
The market opportunity is in the right time, and and it's it's like US right, which is they're not going to be forced to do anything they can actually.
Use the opportunity when it's right, which is a great position to be in.
I mean to me, it's and I listen I'm, a graham and Dodd value investor.
So what I'm about to say is like the antithesis of everything that I I bleed, but it's a it's one of those billion dollar ideas right.
And it's a real company with real products and a real manufacturing presence and it's not like it's a.
You know a pipe dream, but it it's one of those companies.
Like ion Q, or righetti or D wave that could potentially really grabbed the market's attention.
It's I'm not calling a tesla, but you understand my point, it's a big idea.
And it could be a big value it could be a big market cap.
It's Graham and Dodd value Investor I'm, not sure I'll ever be able to understand the valuation put on it but who cares.
If others do in and it works great for us.
No that's right I mean, it looks like a terrific company as we've talked about many times with you Tim Cowen Fidelity mattress zero price matters in there that should really smooth.
And in the public market at the right time for the company and we'll be excited to see it get there as I know you will be at the right time finally on third party capital raising when when we were together you know by phone on April 20th for your annual meeting, which seemed like an attorney to go given the markets but U.
You you pour shattered potentially some developments to announce with respect of third party capital raising and your usual comp very comprehensive reporting taxes like really didn't providing on that I know you like to talk about that more on calls is there anything you can update us on there.
We've gotten drips and drabs in not enough to.
Not enough to to mirror the pension account that we are currently managing which has.
You know, which is significant in dollar amounts and there has been a great.
Great source of of economics for Us for 180, and and obviously, we've done a good job managing the money for the clients. So they're they're happy also.
Nothing necessarily to report on although there there we do we are managing more money today than we were three months ago, because we just opened up another SMA.
For one account and we're debating opening up another SMA for another so I wouldn't call. It one lump sum of $100 million hit our doorsteps, but we are managing more money.
For others are today versus where we were three months ago.
Isn't enough to talk about in our press release, and we will continue I know you ask every quarter, we'll continue to do it as long as it makes sense from an economics perspective from a time perspective and also from a capacity perspective I'll give you. Just one example, we had a recent.
Asian with somebody that we wanted to give us $300 million.
Which was great.
Except for $300 million is going to come at 30 basis points.
And the $300 million would completely destroy our capacity.
In the Microcap world It would be a completely different business for us it's not worth our time, it's not worth your time and it would inhibit and prohibit us from creating the value that we need to create at the holding company with our permanent capital. So those are always the it's not like we're not trying at them it's that we.
Our very disciplined.
Disciplined and focused on attracting money when it truly does make economic sense now for a lot of people $300 million of 30 basis points is awesome.
For us it's not it's just it truly is not and.
And it's it's it's it's just not something that's going to accrue to the benefit of the 180 shareholder I don't because I don't really know how else to say it other than other than that were.
You know, sometimes folks have wanted to give us money and they only wanted to pay us on the alpha created between our performance and the Russell benchmark, Okay, and it's not interesting to US look we get 100% return on the capital that we invest in 180.
And you don't care about what our benchmark is I don't really even care what the benchmark is because you guys just want to make money you want us to grow a N. A V. If I'm up 50% in the Russell is up 60%, you're probably happy if the Russell was down 10, and we're down to you're not happy so.
That but that benchmark game.
As you know because you manage money. That's the game is benchmarking when you're dealing with big institutions, and the pension community and consultants and the rest then.
It's not what we wanted to do and it's not in the money that we're going to want to have to manage so it's complicated sorry.
Sorry, if I didn't answer the question the way you wanted it answered but that is the truth and for no. That's absolutely what I would've hoped I mean, it's absolutely.
So you have to get it on the right tender and the economics to make it worthwhile versus the.
Closed end permanent capital model. Thanks, so much jumps for the great update keep up the great work in the spring well, while spring is here and it's bringing the markets will come in time.
Thanks, Adam No 10, no 10% fed funds rate please.
Please go ahead.
Yes.
And it goes back to that idea of growing net asset value with all this money coming in from Petra.
Any thoughts of taking a portion of it and buying back shares I mean, if I look at your book.
Net asset value of 981 year.
35% plus discount what better way to use some of your funds.
And.
That discount will grow automatically.
Great.
Thanks for the question I'm, sorry, what your name is.
Dan Frank.
Thanks, Dan for calling and asking the question.
Another complicated question.
I've always believed that a company should be buying back stock when it.
When it's accretive.
And a stock that trades at.
65% of book value.
Yeah.
Which we think is well run is a good source of good.
Good use of our cash if you can buy enough and actually create more book value by doing it.
We have a spreadsheet.
Which shows how much stock we need to buy in order to grow our book value, we can't do it with smaller amounts of money. It just doesn't work.
I would probably also favor dividends over share repurchase.
And in both cases and in the end the problem lies and by the way you've seen me and Daniel I mean look I'll speak for myself I've gone into my pocket with after tax dollars and bought 500000 shares.
Of what turn stock in the last five years. So if we don't we haven't been doing it with the company cash we've been doing it with our own cash. So we know there's value here and we've we've lived we've lived with.
And shown in alignment with common shareholders from day one.
The only issue is as I said, the best capital in the World to have is permanent capital.
And when we give it back we can't get it back.
And so if we're giving back $12 million of money.
In the form of whatever we better be sure. We don't really have a better opportunity for that money in our invested companies and if you look at our track record over the last five years I forget the last quarter, which.
For this quarter, which are which are difficult.
But if you look at our track record since we started we generated 330% return.
We could have bought back stock or pay a dividend in every single one of those time periods. During during you know that that five year period, and none of which would have equated to a better return for shareholders and doing what we were doing.
And so we will look to return capital to shareholders and we talk about it every quarter with our board.
We will look to do it I would say the last thing in the World I want to do right now is get rid of my permanent capital because if if this market isn't right for opportunities, where the time horizon of a year or two then no market ever will be and we truly believe now and we got more in the definition of a bear.
A market as you run out of money before you run out of good ideas.
And I don't want to run out of money because theres a lot of good ideas and if we can get 100% return on some of these investments over the next cycle and the cycle can be six months, who knows how quickly this market can recover if it recovers.
That's a better use of cash right now than buying back stock and or paying a dividend. So it's it's topical we care we talk about it all the time I totally get your point.
I do.
We would favor dividends over share repurchase and as of right now I would favor doing what we're doing over both.
Because all generate more return for you if you allow six months or a year for me buying quantum and watching it go from a buck and a half to $3. So.
Long winded answer I apologize that's fine.
Got it.
I wouldn't be speaking of the 12 million just a million dollars and you'd have to do it over time.
Cause Vermilion is probably about 90 days of the.
The normal trading in the stock.
Even from a psychological thing.
Buying back.
Taken a million.
Out of that 12 would help your stock price I'm not in the short term I'm more focused on your net asset value because I think it will grow but.
And I think we're doing a great job, it's gotta be more frustrating for you than anybody else.
The discount is as wide as it has warmed up.
Hi.
But there anytime his stock at close to book value He buys it back in Europe .
Wait under book value.
So I hear Ya I do I'm, not arguing against your viewpoint I will say.
If I bought a million a million dollars you said if I bought it we were about a million dollars I know first of all it's an illiquid stock we'd create more liquidity, which maybe it's a good thing not a bad thing I don't know I used to say you know with with IBM. They are buying backs that we bought I B M. In 1990, when Lou Gerstner first got there and we said to ourselves.
Because of the amount of stock they were buying back that we were going to be the last shareholders and because at the end of the day was going to be where we're going to be the only shareholder because we would never sell.
We ended up selling but just so you know if we bought a $1 million of stock, which we can do tomorrow, it's not accretive to book value. It psychologically helpful.
To be able to say youre doing that but a million dollars is not going to help our book, It's just not I literally I'll do the numbers after I'm done here, but it probably might equal a penny a share of increase.
I don't know if we if we found the stock and it went up 50% that would be five cents.
Which then you can reinvest.
Problem is once you I mean.
It's not the one time investment it's the fact that we also have.
Close to a 100 million, an operating loss and capital loss carryforwards that allows us to shelter. These gains that were generating on investments.
She can help us compound and that's how we look at it it's not just you know making that one investment it's the compounding over time that.
And relating that to well if we if we get rid of if we use the capital for a buyback or something else right. Now. It's a one time thing there is no compounding there is no anything so my my commitment.
Is this.
We will talk about it every quarter you can ask me every day I will always have the conversation with you we will return capital to shareholders at some point.
It sounds to me like your favorite share repurchase I favor dividends, but that's just the debate.
And I would like to be able to do it when we when we're when we're closer to $100 million rather than where we are today, but we will look to do it I would love to be in a position where every single year at the end of the year I can offer the shareholders back some sort of special dividend, it's not like I don't want to do that it really isn't.
That is our goal so we're aligned with U S.
And if we don't buy our shares with the company's capital then I'm sure you'll find us buying them in the open market with our personal capital.
So, but keep keep asking the question because I think it keeps us on our toes in the debate is worthwhile.
Thank you for your time.
Thank you thanks, Dan.
Hi, Stephanie Please go ahead.
Okay.
I was curious so what are you guys looking at you know now you're going to get the hopefully get the Petro payment. Soon you know any day now all these opportunities in the market and everything. So what are you guys actually looking at for opportunities I mean beyond general stock picking is there like recaps that youre seeing.
Come across the table any idea maybe about convertible I'm just curious about what your thoughts are on that.
Yeah.
Yeah, the the more capital we have the more opportunities there are to truly help companies.
Enhance their their own balance sheets, either by enhancing them with cash or you know turning that into equity or and you know, making them more safe havens balance sheets, rather than stretched balance sheets. So.
You know we've we've done a few of those as you know the street Dot Com was one turtle Beach was another they were wildly successful we actually did sign them at work for everybody, but us because we went on the board and we Couldnt sell although we didn't lose a lot of money and now the stock doubled right. After we did it and like I said, everyone else made money except for us So we.
Would love to be able to do more but we haven't been able to do more of those because we just haven't had enough cash to do that.
This will help that there's many of these companies, especially in this environment R.
Our are gonna be arrogant or their cash needs are going to be significantly higher than they were.
And so our ability to do some pipe deals would be enhanced.
Converts we haven't really done would we do them yes.
It just having more capital allows us to provide.
More solutions to the companies in our universe, and we always want it to be in a position where we could be you know AWS is one of those b Riley has been one of those throughout the years, where they've really provided companies holistic solutions for their capital needs and we will we would have always loved to be one of those companies that are.
We're able to do that given our size, we we've picked and choose where we could do that having more capital would allow us to be a better partner for some of these investing companies. So other than that it's that it's truly you know the fund that I used to run at Blackrock and Merrill Lynch was called the basic value fund.
It's really just that we're still just Graham and Dodd value managers.
You know looking to make 100% return on our money over a three year cycle and we hope that that will continue to do that as well as try and pick and choose where we can help a company do a raise equity visa V pipes or converts or the rest.
Youre not so youre looking at once the money comes in.
Are you guys looking at adding to your you know the the stock do you currently have or are you looking to maybe do another add another one or two.
To the portfolio holding.
I think it'd probably be a combination of both.
Hmm.
Obviously I can't tell you what we're looking at but there's yeah. We were we would expect to be adding.
Adding to the names that are down that we owned that we still believe in.
And and finding some new names I wish this money came in three weeks ago.
But we can't control when the money comes in so it is just like any I don't you know it's like how do you manage your cash it's the same way.
Not going to look to deploy it because the tier.
We're only going to deploy it when the opportunities arise the biggest mistakes.
That money managers make.
I think back in my days at Blackrock, where.
We would have a great three year run after nobody was paying attention to us and then all of a sudden become a five star fund the money would come in by the billions at the exact time that they didn't want it and when I wanted at the most they took it away because of you know either bad performance there because the market was so weak.
You know the way psychology works with investors, so with us I'm not going to invest the money day, one because it's here we're going to continue to be very picky about what it is that we own and we're gonna be attentive to the market it's been a good.
Brutally painful bad market and by the way anything that I've added to in the last three months I wish I didn't because they were all lower as of today. So although arena group is up in Potbelly is up too. So yeah, we'll get the money and then we'll figure out what we wanted to do with it but and we have ideas, but I am not going to just shove it in the market for the sake of shoving into the market.
The beauty of permanent capital.
For better for worse Yep.
For more.
About parabolic.
I know you gave around the board.
Yeah, we can't obviously really speak too much about.
And what's the what's going on over there I think the only thing it says is that.
As facts are you know.
We're out there looking at what we believe are interesting opportunities.
And we will continue to pursue this.
Okay, Alright, thanks, guys appreciate it.
Thanks.
Hi.
Hi, Ben Please go ahead.
Hey, guys. This is Ben if I could give you another question on share repurchases, but I wanted to ask you know assuming you grow at the field level youre comfortable with.
What's the right discount level, but think about I mean, right now it seems like 30%.
Typical level when you get to a certain asset size that you'd be interested in buybacks.
The special dividend, you're talking about and how should we think about the size of that special dividend, assuming you guys get to a level, where youre comfortable with the size of the company.
You don't need to grow assets and congrats away anymore.
I mean.
I'm speaking out of turn here, Okay. So no no pun intended on the turn part so.
And these are conversations that we have with our board. There's zero reason why our equity should trade at 65% of book value with 83% of our assets in and publicly with cash just doesn't work that way now.
We then the board says well why is that and I'll say well most of the companies that we compete against all closed end funds have yields we don't.
And then they can say or we can talk about well, we've we've generated a greater return than every single one of these closed end funds, which is true we have just look at our performance and our NAV growth.
But it still hasnt helped or at least it hasnt helped up until today.
We think we should trade closer to when it's 85% of book.
Something like that that gets us in the range of where we think is normal I mean I could show you. The list of every closed end fund if you email us afterwards, and I'll show you the list of where the discounts are but also where the yields are we're one of two equity funds Daniel that don't have yields.
There's seven total.
But it actually equity and focus I think it's.
Similar styles, it's like four or five.
So again I'm talking out of turn here.
Would I like to get to $100 million of assets and give back investors 52 cents to a dollar per share of capital yet so I would like to be able to do that what I actually recommend to our board that we do do that yeah. I think that's a great starting point will the board will we will we get there I don't know we haven't had the spin.
Specific conversation, but that's the kind of thing that I'm thinking about and we want to be able to return and reward our shareholders for their significant patience and I don't mean their patients with us for the last five years, because I humbly put.
We've done a pretty good job given what we inherited and what we've been able to accomplish especially given the horrific five years prior to where we got here.
But those are the kinds of things I'm thinking about we should trade at <unk>, 85% to 90% of book value. If we have some sort of yield if we can get to a $100 million in assets. This isn't going to kill us if we give back 5 million or $7 million or $10 million to our shareholders. It's not.
Thank you.
Okay, you're welcome.
Hi, Jonathan Please go ahead.
Yes, Hi, just a quick.
This is Jonathan Freedland, Wisconsin Lyons capital just a question on or.
Or a comment rather on the share repurchases.
Just doing the math quickly in my head I wouldn't see that it wouldn't make any sense to do that if you have the opportunity to.
Compound returns yet.
Yeah.
Excuse me had a very high rate.
So as a shareholder in this particular case I would I would vote no I think the permanent capital is super valuable.
And that that.
That should be awarded not.
Given.
I'll skip them back so that's just my take on that.
A couple of quick questions in general the tax Nols can you just walk me through the.
Oh, Yeah, I'm less familiar in the case of our closed end funds is there anything special or different or if you. If you have an investment position.
You monetize.
Does that provide a tax shield against capital gains.
Yeah. So.
Jonathan it's a little bit more involved than I can go into on this call and I'm happy to walk you through it in detail. If you want to give me a call at any time. The the short answer is we can there are ways that we can use both our operating loss and our capital loss carry forwards to shelter our game.
<unk> from taxes for a significant period of time, our operating losses don't start rolling off until 2023.
Our.
Our capital loss carryforwards, we've been actually using some as we've been making.
Gains on our investments so that fluctuates, but the short answer is yes.
Okay, Yeah, I I'd like to follow up with you offline on that.
Curious to learn it.
Operating like you do in an.
In small and micro cap turnarounds and often the Nols are tremendous.
You know swing factor I guess, when you're losing more money. It's you could say, it's worthless, but when you if you're successful in turning around now you have abundant cash flow.
It's a really big pop on the AR on the additional incremental.
And a v or or or equity or shareholder value.
Switching to our idea generation I'm curious.
Scribe yourself as value investors.
Easy to see but what's your.
How would you describe your idea generation.
<unk> idea funnel.
You know sort of the parameters that you look for in general are you. If you were on screens do you just kind of a base of knowledge.
Give me some quick comments on that please.
Okay and by the way Kevin at 180 degree capital or Daniel at 180 degree capital Dot Com and just email afterwards.
We'll take you up on that conversation you want to have.
I mean I've been doing this for.
How long has it been 34 years now so it's a combination of waking up every single day in.
And doing this for a living and so idea generation comes from bi.
Buy siders that we now sell siders that we know screens that we run on Bloomberg Reuters whatever.
Obviously, knowing the industry.
Putting an encyclopedia of knowledge in your brain.
Because you've been doing this for as long as we've been doing it.
No we wake up every day and we're reading.
The shelf and we deal with a different sell side and the sell side I used to deal with them go back then it was Goldman and Morgan and whatever and we recovered by institutional salespeople and they bang our doors down with with their own version of ideas.
We have we have we have names you know Lake Street, B Riley Craig Hallum, I mean different companies, but theres still bang in R&R doors, because we pay them commissions and the rest. So we run screens, we have a four pronged process to our.
Fundamental.
The requirements the stock should trade at two thirds of market on either price to earnings or price to cash flow half the market on price to book, having above average yields less than onex of enterprise value to sales.
You start with that funnel at the top when you narrow it down based on your select the parameters and you started you kind of go from there you end up with only seven to 10 names you run a very concentrated portfolio. So you have to be.
You have to really want to own what you own and and we spend a ton of time with the managements of the companies we own are meeting the boards of the companies we own this is not.
You know ETF passive investing over here. This is really bottoms up oriented investing so active and incredibly it's active with inactive is bent to it so and the active part is just making sure that we understand and they're talking to the companies of the businesses that we own so.
If you call us up and had a good idea and told US look at X Y and Z, we'd probably do it just kind of being alive and awake.
And being aware of what's happening in the in the macro world in and being able to run your screens in talking to as many people as you can in and like I said I.
This approach that we're utilizing and 180 is actually the same approach I use the Maryland Blackrock. The only difference is the market campus or different back then it was and we own Exxon Procter and Gamble J&J G and the rest and now we own quantum synchronous comscore and but we apply the same lessons the same financial parameters that we required when we were in Maryland.
Brock.
Okay, Great Alright, Thank you Lee I'd love to follow up offline so feel.
Feel for it right.
Thank you everyone really appreciate you taking the time today and feel free to reach out as Kevin said, if you have any questions any time, we're here and we look forward to speaking with you again next quarter if not beforehand. You can all now disconnect. Thank you.
Yeah.
Post has disconnected the.
The conference will now end.