Q1 2023 180 Degree Capital Corp. Earnings Call
Speaker 1: Q&A session has started. To ask your question, please press star 6. The recording has started.
Speaker 1: 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 will be referring to a slide deck that we have posted on our investor relations website at IR.180 degree cap.
Speaker 1: 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 explained.
Speaker 1: 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. Thank you, Daniel, and good morning, everyone. We'll start on slide 3. Despite continued turmoil in the financial markets, including another quarter of the micro Half.
Speaker 2: and micro cap value in the indices decline, 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. While we have a long, 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 in the month.
Speaker 2: were our holdings in Potbelly, Alta Group, Synchronous, and IVAC. 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, Agbiam.
Speaker 2: where there was no change to its value.
Speaker 2: We have made substantial progress towards our goal of having 100% of our portfolio in easily valued publicly related securities. You can see this on slide 4 indicated by the green bars representing our public holdings and the grey bar representing the private portfolio.
Speaker 2: 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.
Speaker 2: Slide 5 shows you the trajectory of our liquid assets from the day we took over. This has been an arduous turnaround and we had very little control of being a forcing mechanism to many of our private holdings.
Speaker 2: 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's been very and it has not been a pretty picture for our privates But at long last they're gone
Speaker 2: Exact volume. 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.
Speaker 2: Slide 6 shows our quarterly performance for our public holdings.
Speaker 2: As you know, we run a concentrated Graham and Dodd value fund with a 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.
Speaker 2: Fortunately, since we started, we've had many more quarters of excellent performance versus drawdowns.
Speaker 2: After last year's disappointing performance, we were pleased our first quarter 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 3.
Speaker 2: 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 will always expect some level of discount.
Speaker 2: 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.
Speaker 2: While our primary goal still stands in finding stocks that have 100% upside over a three-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, but we thought it was important to show the market that we were very serious about buying stock if opportunities arise like the one this week.
Speaker 2: Our purchase was accretive to book value and that will be reflected in our Q2 results. Yesterday our board of directors authorized the five million dollar 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.
Speaker 2: and we haven't altered our strategy, but 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.
Speaker 2: Slide 9 shows our normally quarterly sources of change in our NAV. We added 31 cents from our performance in the public market and had a 3 cent and 8 cents detractor from our NAV for our private and our normal operating expenses.
Speaker 2: We landed in an NAV of $6.52.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: I'm not sure we would even be on this call had our shareholders not voted to change our strategy in late 2016.
Speaker 2: Now let's talk about our individual holdings and provide updates on the ones that mattered this quarter. PopBelly increased nearly 50% and 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 re-franchising.
Speaker 2: in its efforts to grow its store base from 400 units to 2,000 over the next 8 to 10 years.
Speaker 2: The company announced a re-franchising 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 and the management team of Pop Belly is knocking the cover off the ball.
Speaker 2: ALTA group also announced strong results along with positive guidance for 2023.
Speaker 2: 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 bond
Speaker 2: Right now the company has hired UBS to not only evaluate the B. Reilly offer, but also to evaluate other buyers of the company or its assets.
Speaker 2: The company is indeed at an inflection point for free cash flow.
Speaker 2: to the positive side and we expect the company throw off a good amount of free cash flow this year with significant free cash flow next year.
Speaker 2: We believe the stock should be meaningfully higher from its current 88 cent price based on its own fundamentals. Not even taking into consideration the price offered to buy the whole company is 30% higher from B.Reilly. We will see how it plays out.
Speaker 2: Intevac increased 13% as the company entered into a partnership with Corning to utilize its new trio coding for use in mobile phones. We did sell 29% of our holdings just above $7 a share.
Speaker 2: 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. Reilly.
Speaker 2: Given B-Reilly 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, and we do think the tide will turn at some point once clarity is reached regarding its capital structure.
Speaker 2: we think and self-serving we think the board has been.
Speaker 2: As well as highlighting the egregious compensation paid to the board Specifically the lead independent director Brent Rosenthal has been on the board for too many years and who has presided over shareholders value destruction Under his watch we will not stop shining a light on how pathetic the com score board is and we will continue to offer suggestions
Speaker 2: continue to think it has meaningful upside. We will not stop shining a light on the poor governance at Comscore.
Speaker 2: 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 Micro-Cap Index and a 5.2% decline for the Russell Micro-Cap Index. Our one year numbers are slightly behind the indices.
while our five-year and inception of date numbers show extraordinary outperformance. To be exact, we're up 243% since we started versus 31% for the Russell Micro-Cap Index.
And 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? 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 Eisner Amper 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 in the last quarter and remains true, as of the end of Q1 23, 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.
And I know that 1.3 million are payments that we expect to receive in April 2024 from the sale of Tara that was due to be paid on April 1, 2023.
This past quarter we had a small markdown in ag biome based solely on option pricing model inputs. Nanosys negatively impacted our NAV by 4 cents per share or approximately 400,000.
Please turn to the next slide.
For Q1-23, our regular operating expenses equal to approximately $910,000 versus $859,000 in the prior year quarter. We will maintain a lean cost structure outside of the fixed costs for being a public company, focusing our expenses on activities solely designed to enhance our investment performance or increase our revenues for managing outside capital.
Our management 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 surplu- surplu- surplu- surpluforates, that 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, that brings fresh perspective and complementary skills to the team and we are pleased to have them aboard.
As you may have noticed in our most recent proxy materials, our audit committee and board of directors approved the appointment of Eisner Amper as our independent auditor for fiscal year 23. While we greatly appreciate the opportunity to work with PWC, PricewaterhouseCoopers, as our auditor in past years, the simplification of our business provides...
three independent members. We thank Tonya Pankoff for her service as a member of Tern'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 percentage 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.
shareholder money with the utmost care and consideration.
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