Q2 2023 180 Degree Capital Corp Earnings Call

slightly behind the Russell Micro Cap Index and slightly ahead of the Russell Micro Cap Value Index. Through June , the Russell Micro Cap Index has advanced 1.8%. This compares to the almost 40% gain for the NASDA Q1 00. We're back to a market that's focused on seven companies, companies like Nvidia, Meta, Apple, Microsoft, and a few others, at the expense of almost anything else. It's beyond frustrating. That said, just because we haven't been rewarded for our investments in our holdings doesn't mean we won't eventually. We've been through plenty of bear markets and soft performance periods to know that when we come out of it, we will enjoy significant price appreciation and the value of so many of our holdings, and our NAV will advance as a result. We aren't sitting back waiting for things to happen. We have used our activist approach across many of our holdings. Some of the activism you see and some you don't, but it might make sense to highlight how and where we have used it. On slide 12 is where we started discussion of many of our names. First, Intvac. After doubling since our initial purchase where we took some money off the table, IVAC decreased from $7.33 to $3.75 this past quarter. The company noted in its Q1 23 earnings call that its program's corning was delayed at least a quarter due to Corning's customer pushing out adoption of the new glass IVAC tool was expected to enable. IVAC had used cash to build inventory for the delivery of its tools with the expectation that the ramp would be faster than it is now expecting.

We realized quickly that the board was either supremely arrogant, confused with how to create value for all stakeholders, or incapable of coming together and agreeing to take action given the different perspectives from the different board members. Unfortunately, scores have been instead focused solely on creating value for themselves and the preferred stockholders. Board compensation is entirely too high, especially considering the track record of failed oversight and shareholder value destruction. The board has taken us up on several of our suggestions and finally reduced its compensation.

by an average of 26% in 2023. But they've only taken small steps when more substantial action is immediately required. We have told the board how this would play out for the common stock if they continued along their do nothing path. They take no solace in having been right in our analysis because being right has led them to us being wrong for 180. We just never thought they wouldn't do anything to attack the capital structure and show better alignment amongst all stakeholders. So should SCORE's board continue to ignore their fiduciary responsibilities to common shareholders, we'll resort to a series of fact-based public letters regarding the individuals on the board who have hijacked what we believe to be SCORE's valuable collection of data assets from the common shareholders and the employees of the company. They don't want to see their names attached to their level of performance they have generated over the duration of their oversight. Then they should fix it with a series of actions that improve the capital structure, align themselves with common shareholders, and reverse the trend of the stock performance that has collapsed since their investment. I don't care that we are small and the players on the board are represented by John Malone's Liberty Broadband or folks at Cerberus or Charter Communications.

that the current share price isn't the right price for the business. It would help if the board would actually get a sense of urgency, get some Wall Street smart, some leadership and act like fiduciaries. If it does, the stock will go meaningfully higher from where we are today. It really isn't that complicated. On synchronous, we helped the company fix its balance sheet two years ago in a much higher price.

higher than consensus analyst projections. The result has been synchronous stock goes down. In March of 23, B. Riley presented a nine binding offer to purchase synchronous for $1.15. The offer kick started a full strategic alternatives process. The results on synchronous stock cannot trade consistently above a dollar. Synchronous sells one of its non-core leads contributing assets that nobody even asks about when discussing the performance for the company for up to 14 million with seven and a half million received at closing. The result synchronous stock goes down. In July 23, synchronous successfully negotiated extension of by far its largest contract to run Verizon's personal cloud through 2030, an unbelievable extension of five years. The result synchronous stock increases by 2%. There's always a bear case. In synchronous case, it's reported aggregate revenues which aren't showing growth. With that said, the underlying business with the most value is growing and has the highest margins of all of its businesses. Of course, the company, every company has pluses and minuses. In the case of synchronous, however, the majority of the news has been good, not bad.

And finally, Pop Belly. Sometimes there's nothing for us to do other than see if the activism that we initiated works. In the case of Pop Belly, I think we've succeeded. The company, when we invested in Pop Belly, it was because we thought they had a wonderful brand with great customer loyalty, a terrific product, but one that simply needed better board governance and a new leadership team. Led by Privet and Ancora, the board changed. We filed a 13D in early 2000 and then soon thereafter the board named Steve Cerullos from Panera bred as their CFO , and Bob Wright from Wendy's as the CEO . We were fortunate that the board had already put in place a plan to change the management team. Now, under this amazing leadership team, the business is operating better, the company is growing again, and we should be staring at a multi-year growth trajectory, which would take the stock significantly higher than where it currently is, which is a price much higher than where we started buying it at back in 2020. We think Pop Belly hasn't even started.

to anticipate the reductions in our net operating expenses.

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. 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 by your computer. Give a second to the queue to fill up with any questions that anyone has. Again, if you have any questions, please type star six on your phone or click the ask a question icon. We have no questions in the queue. Okay, with that, we are always available for any questions that you may have vis-a-vis email. We prefer obviously always to be, to get on the phone with you so if you have any follow up or anything that you want to add or ask us. All right, we actually do have a couple of questions that came through. I apologize.

We don't view what we do personally as one-offs. You've seen the management team consistently in the market buying stock for our personal accounts. You'll see that again I'm sure this quarter once the restriction is taken. But share repurchase is really not something that's gonna be a consistent part of our strategy. We've gotta find companies, have them perform like they did in our first five years of existence. Then our NAV will grow, the discount will narrow, we'll have more assets, and that's really the strategy for 180. Understood, thank you. Thank you. Thanks for your question. All right, please go ahead. Hi, Jonathan Rothschild. Hey Jonathan, how are you? Good. You guys are obviously really smart guys and well experienced and you saved the old 180 degree or pre 180 degree Harrison Harris from bankruptcy. But the small cap environment right now is something that's really off radar to most institutional investors. It's unfortunate that this is the sphere of influence that you're involved in right now. And as you mentioned, the mega cap tech stocks are where most dollars are flowing at this point at the expense of many very good companies that are undervalued. So I wonder what is your projection as a God, Frank?

has had sustained resilience. We haven't imploded.

Interest rates are probably at or near their cycle highs. The next move for the Fed could well be down, not necessarily up. We've seen earnings hits this year and we see earnings growth going forward. We're out of the pandemic, the supply chain has eased. There's a lot of reasons why things are getting better, not worse. We're out of the pandemic, the supply chain has eased.

The board of directors has to agree with my thesis there, and I'm not saying they will or they won't. That is my thesis. The board has to agree with it. I think Daniel agrees with me. We talk about this all the time. I just think there's a time and a place for that discussion, and the time isn't today. But I don't own 700,000 shares of this stock that I bought with my own money out of my after tax dollars, because I want the stock to go up a lot first, and then we'll liquidate. We need a happy ending for this company. This company has had a checkered history. As Daniel said, it was on its way to zero before we got here. We created a business. We grew it for five years. We struggled in the last 18 months. We'll grow it again, and then we'll make a good strategic decision for all the shareholders, which probably will lead to a liquidation of the asset that will narrow the events, inevitably the discount that exists, and then we'll all move on to our next lives. That's the plan. Fair enough. But in fairness to me, I said not at this time. I said in a future date. Okay, thank you for that. There's others that want us to do it today, so I appreciate that. Everything that we do is for shareholders. It really is. I don't sit around here and... No, I mean, there's a real vote of confidence from you buying back shares personally. Yeah, so like I said, we don't... But I keep doing it. We're gonna keep doing it. I just know the last 18 months has been... There's no... If you invest for as long as I'm sure you have and I have, you're gonna go through these periods. You just do.

position, but it's also not a core position. I don't know, Kevin, if there's anything else you want to add to that. No, I would agree with that. On Parabellum, never again. We invested in a management team from Adesto that we had a lot of respect for. Really, really, we made a lot of money in Adesto, as you know. We told them they should do us back. We found the target company. Found two. We found two target companies. They were real businesses. We spent a ton of time on it. We loved the opportunity. We actually think one of our companies is going to own one of the businesses that we targeted. And we're that good of a business. We unfortunately ran into a situation where we had a lot of respect for our company.

We couldn't get funding. I mean it was simple as that the market just shut down for SPACs You know we bought out Alta group Which was a B Riley SPAC right in 19 beginning part of 20 a very successful SPAC a very successful company And it was a real business, and so we felt as though We can do this with with a by investing in Ron and Narbay And they'll find a business and and we'll invest just like we did in Alta Alta is one of the best performing SPACs there has been

led to a great investment, but our inability to raise money around that investment was the reason why we had to shut it down. So I think the lesson learned there was just going to focus on what we started to focus on in 2017, which is small public companies, user activist approach, Graham and Dodd value, and it was a mistake. It didn't cost us what, Daniel, $2.5 million? Daniel Bock Yeah, about that. I mean, it wasn't catastrophic by any stretch of the imagination. I mean, it was just a mistake.

ARENA group's gone down four times the amount that parabellum cost us. So you know, in com score has gone down four times more than parabellum cost us. So it was a mistake, it was disappointing, it didn't cost us a ton of problems from that perspective. It was time consuming and we just, we're not going to do it again. I mean, lesson learned, just do what you're doing. We thought we were doing the right thing there, but as it turns out, we just did not get the market right in terms of understanding that the SPAC market would just fall apart. It seems that every SPAC would be looked at the same way, not just, that they wouldn't be differentiated amongst the ones that had lousy businesses and the ones that had good businesses. So that was the lesson learned there. Great. Thanks for the color. And one more for me, on potbelly, which is, you know, you sound enthused about the go forward, but how are you thinking about concentration within?

Within your portfolio and maybe limits there Yeah We're probably at the high end there of where we would like it to be I mean we run a concentrated portfolio, but because it's up and everything else that we own is down It's we haven't been adding to it. It's gotten there based on its own performance So I would say that We have to be mindful of not falling in love With something so much that it's going to take up a ridiculous amount of our assets. So We're probably at the upper limit We've just got to figure out what that means. We don't have any this is not BlackRock or Vanguard where we have You know, we have risked people and and parameters around and guidelines and rules and regulations I mean we're that's not who we are But we also don't want to have all our eggs in one basket even though that one basket is It is doing really doing really really well we have to figure this this one out from that perspective It's 20% of where where it is right now So we're going to be doing a lot of work on that and we're going to be doing a lot of work on that So we're going to be doing a lot of work on that and we're going to be doing a lot of work on that

And with Potbelly, you know, they put out metrics a few years ago that they were targeting to reach in 2024. They actually have reached those about a year early. And now it's where, you know, what are the next set of targets that they're going to be going towards.

And that's something they have to figure out. We have our models for how we think about where this business can scale, and we continuously look at that as we think about size of positions. And so it is something that we look at every day. Thanks bring Scout on

All right, thanks guys.

All right, thanks guys. All right, thank you. Thanks, Zach.