180 Degree Capital Corp (TURN) CEO Kevin Rendino on Q1 2022 Results - Earnings Call Transcript

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180 Degree Capital Corp (NASDAQ:TURN) Q1 2022 Earnings Conference Call May 12, 2022 9:00 AM ET

Company Participants

Daniel Wolfe - President & Portfolio Manager

Kevin Rendino - Chief Executive Officer & Portfolio Manager

Conference Call Participants

Adam Waldo - Lismore Partners

Jonathan Freedman - Consilience Capital

Daniel Wolfe

Welcome to 180 Degree Capital Corp.'s First Quarter 2022 Financial Results Update Call. This is Daniel Wolfe, 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. [Operator Instructions]

I would like to remind participants that this call is being recorded, and that we’re referring to a slide deck that we have posted on our Investor Relations Web site at ir.180degreecapital.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 are -- 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 the company's business that could affect the company's actual results. Except as otherwise required by federal securities laws, 180 Degree Capital 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.

Kevin Rendino

Thank you, Daniel, and good morning, everyone. Let's start on slide three, which summarizes our Q1 results. Complete opposite day for -- performance hurt our book value, while at the same time, we 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 monetizations that help us nearly complete the transformation in the mix of assets on our balance sheet that we started five years ago.

All in all, in 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, or not see, is 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 expect any day and should be getting. So if you add the proceeds of the Petra sale to match the increase in our holdings, our 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 and some deserved to be down like Quantum. Others like Arena Group and Synchronoss went down predominantly for beta reasons and because the market has been in a risk-off mode since last November.

We'll 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 our NAV, many more up periods than down periods since we initiated our plan to transform our business and turn around our stock off the lows that it sat in 2016. But this quarter, we did have a drawdown to a book value of $9.81. And while never happy with any decrease, our cash and private holdings helped cushion a potentially more significant blow to our NAV. This has been a painful bear market, as you can see on the next slide. And make no mistake about it, it is a bear market with the Russell Microcap Index declining over 30% since the November hives.

COVID supply chain issues, inflation, higher rates and the human tragedy we are living through with the Russia and invasion of Ukraine. This chart depicts our performance every quarter for the 21 quarters we have reported to you since I arrived. Here is what I'd 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 is swallowing up the market on a daily basis.

If I told you in the middle of the 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%, 9.6% and 28.3% over the next four quarters. Would that have been a believable statement to you at the time, absolutely not. I made that declaration or some form of it. I might have even laughed it myself.

All I know is that after this market collapse, 180 own stocks and valuations that are, in many cases, are drastically lower than they were in the midst of the pandemic and/or at generation lows with much more stronger balance sheets. We believe the opportunity for rapid price appreciation of these positions exist, if and when the backdrop for the market changes from its present day, zoom and gloom.

And as I've said to you once I've probably said in 100 times, 180 Degree capital has permanent capital. In each and every period, like the one we are going through, 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 6 shows our cash and public assets on a pro forma basis for the Petra proceeds that we have talked about. $16.19 without it, $7.38 with it -- I'm sorry, $7.30 with it, and we do expect to get those proceeds any day, and they couldn't come at a better time for us given what the market has done. This should absolutely allow for a floor of our share price and doesn't take into consideration our holdings in both D-Wave and AgBiome, two quality companies that, at least for the time being are still privately held.

Slide 7 shows our historical stock price discount to our NAV. While I now know -- when D-Wave closes its SPAC, we will have 83% of our assets in cash and public securities. This should allow for a meaningful improvement in our discount now that the market has greater transparency in the value of our holdings.

We show on Slide 8, our normal sources of change in our NAV. 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 $0.32. We did have $0.05 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, they require us to maintain a book value equal to the year prior. We're obviously not there right now and so we reversed those bonus accruals.

The next Slide shows the sources of change in our NAV since we started -- and this clearly highlights the significant value add to our new strategy that we have had on 180 stock price and obviously on our book value. We've generated over $50 million of gains since we started or nearly $5.45 per share. We've obviously had some headwinds of the private portfolio 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 were 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.

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 negatively impacted Quantum. What started out primarily as an inability of the company to secure enough parts for tape drive products sold to major hyperscalers, 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 and posting revenue at $90-plus million per quarter is in our humble view, fairly its seems. Quantum's Board fell asleep at the wheel and the management built the cost structure like R&D going up $20 million year-over-year. For revenues and 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 is forced to do a right to offering and a price that because of the resulting dilution has killed off the upside to our original price targets. While we acknowledge our difficulty environment actually has been for Quantum, the company needs to fall on the store by being completely -- for being completely unprepared to deal with the issues that we are facing. We expect R&D to be rationalized, needless cost to be reduced and for Quantum to pay better attention to preserving cast 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 de-risked, 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 $0.50 a share or $5.2 million.

Synchronoss, despite reporting better-than-expected revenue and EBITDA for Q4 2021 and the sale of a non-core asset for up to $14 million. The shares plunged, why is that? If I had to make up a reason and I'm really making one up here. It's – 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 proteins from a non-core asset and the pay down of 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 cause for the share price plumbing 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 -- $50 million to $55 million in EBITDA in 2022, well north of the $35 million that we expected when we first initiated our position.

What we need to hear more about is a clear plan to reduce the $75 million preferred security, but we believe Synchronoss' poor stock performance is simply the result of a risk-off fearful market. Online Quantum, which declined because of poor execution by the management team, we believe Synchronoss' sell off this quarter was more beta rather than alpha. For the quarter, the stock declined 29% reduced our NAV by $0.28.

And 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. Arena finally listed on a major stock exchange following the filings of all of its financials, and continue 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 of Parade Magazine, Arena Group announced a secondary offering and there in light the problem for the stock in Q1 '22. The offering wasn't the best time announcement in the face of an including stock market for an unknown company within a liquid stock. But it was a buyer's market rather than the seller's market. And Arena stock was walked down to less than $10 from '14 in order to find the clearing price of the secondary offering.

While it would have been better had the offering and the acquisition being completed in a more favorable equity market landscape, the acquisition itself operated incredibly appealing. We're happy they did it and should add a significant amount of revenue and EBITDA to Arena's income statement. Ross Levenson is executing incredibly well as traffic and advertising across 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 in Arena's strategy of rolling up digital assets and 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 caused our performance to suffer in the case of arena, we're not playing here for a 20% or 30% return. We believe that over time, arena 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 materially higher. Time will tell if we're right. For the quarter, Arena stock declined 24% and reduced our NAV by $0.25.

Slide 12 shows our performance of every stock we have owned 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 have worked, 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% 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 2020 quarter, which was the start of the pandemic. I certainly hope in five years' time, we can be successful as we have in the last five years.

Slides 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 losses with minimal losses when we haven't had a winning position. Our last look of 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 our 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. If D-Wave SPAC closes and taking into consideration the tariff proceeds, which we've talked about and Petra 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%.

We told you five years ago, what we intended to do and we have 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 overtime, if you trade much closer to where our NAV 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. It's 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 or holdings or anything else, but for now, let me turn over the call to Daniel. Daniel?

Daniel Wolfe

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 was confirmed and approved as our auditor for the 2022 fiscal year. The Board and Management of 180 appreciate the overwhelming support of our shareholders that you've had and that you showed through your votes.

Please turn to Slide 19. For the quarter, our private portfolio increased in value by $3.3 million or $0.32 per share. As Kevin mentioned, the biggest positive change in value came from our rights to potential future payments for the future milestones related to the acquisition of Petra 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 '21. 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 that carry both significant risk of not being achieved, as well as being 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. The largest decrease in value of our privately held – legacy privately held companies occurred in Nanosys and HALE.life Corporation.

We've also shared the news with you that TARA Biosystems has been acquired by Valo Health and D-Wave Systems announced its intent to become a publicly traded company through a merger with DPCM Capital, traded under the ticker XPOA, which is a Special Purpose Acquisition Company or SPAC. This event and the potential pending event respectively, were largely incorporated in value as of the end of '21 and did not materially impact value as of this quarter.

If D-Wave Systems complete this transaction, 83% of our portfolio will be comprised of cash and public related securities. We will then have one significant private holding remaining, AgBiome. And AgBiome would represent 75% of the value of our remaining legacy private 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 and management team, our operating expenses, excluding stock-based comp and interest on outstanding debt, averaged approximately $1.3 million per quarter.

For Q1 2022, our regular operating expenses equaled approximately $860,000. Based on this performance during the quarter -- the performance rate quarter, as Kevin mentioned, we reversed the accrual for certain deferred bonus amounts from 2021 in the amount of approximately $390,000.

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 22. 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 of shareholder money with the utmost caring consideration. As we always say, it's much easier for us to grow NAV when the expense hurdle rate is where it is today.

Please turn to slide 23. Here, we present our annual scorecard based on certain metrics that we track through the year. While the first quarter of 2022 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 years existence.

Please turn to slide 24. As of the end of Q1 2022 TURN traded at 70% of NAV, our securities in publicly traded and related companies, cash and other assets net of liabilities were $6.19 per share. Our stock price was $6.84. If we received a 100% credit for the value of these assets, net of our liabilities, the market is describing a value of approximately $0.72 per share or $7.5 million to our private portfolio.

Given our private assets are valued at approximately $38.3 million, the market 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 Petra milestones, which equates to an additional direct addition to cash of $1.19 per share goes straight onto our balance sheet.

Including this payment, the upfront payment from the sale of TARA and 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 AgBiome is currently really irrelevant to our future success.

Given how painful the market has been in 2022, we think the current construct of our balance sheet has provided a true floor for our share price.

We would now like to open the line to questions. If you have a question, please touch Star Six your phone or click the, ask your question icon, if you are participating via your computer. We'll pause for a minute to allow the queue to populate.

Kevin Rendino

By the way, I said in my prepared remarks, Petra was $1.12. Daniel was correct, it was $1.19.

Question-and-Answer Session


A - Daniel Wolfe

And our first question this comes from Adam Waldo. Adam, your line is open.

Adam Waldo

Good day, Kevin and Daniel. Nice job in a very tough environment. Thanks for taking my question. Adam Waldo with Lismore Partners as well as shareholder. I'm hoping we can talk about three topics. The first hedging, given the current macro environment; the second, AgBiome; and the third, third-party capital raising initiatives. So on hedging, you guys have, to my recollection, once maybe twice since we've been shareholders for about four years, done some hedging using options on the Russell 2000 rather broad-based indices that somewhat mimic your holdings. The Taylor rule currently suggests that Fed funds rate should be in the high single digits to low double digits, depending on the assumption you want to use for smooth inflation and the great man himself was on Bloomberg on the last Fed day suggesting the same. Obviously, that's a lot higher than where Fed fund is now at 75 bps to 100 bps. So can you comment on your thoughts around some index-based hedging or other hedging initiatives given the current macro backup on the one hand, but also giving room for your individual stock picking outperformance on the other? Thanks.

Kevin Rendino

So 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. There's been an exorbitant amount of pain. And I think you know the way we think about investments, the time to diversify was nine months ago, and our view, the time to concentrate is today, the time to take risk off it was nine months ago, the time to put risk on is today. 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 -- the stock market is a bunch of opinions, right? I have one you have one. If the Fed funds rate gets to 10%, the stock market is going to be 80% or 90% lower. And that's just not something that we're 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 disruption and inflation will fall off a cliff and we'll 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 didn't. We didn't. It would have helped. It wouldn't have been able -- we couldn't hedge enough unless -- we couldn't hedge enough in Russell puts and options to offset the decline we have, but we could have shielded some of our deteriorating performance along the way. So it is a part of our toolkit. We've used it in the past. We didn't use it in the last five months.

Adam Waldo

Yeah. Fair enough. And look, I'm not suggesting we're going to 10% on the Fed funds rate, but there's a reasonable argument to me, maybe we're going 400, 500 basis points higher to get inflation back in the model, even the Feds beyond the curve.

On AgBiome, obviously, 12% of -- per your slide, 19%, 12% obviously, of your current NAV, and they hired a lot of new senior managers recently in a press release that you typically bring on when you're getting ready for an IPO. The events in Ukraine might turbocharge the short-term story for a public offering along with a great long-term story.

Is there anything more you can add, as to, prospects for near-term liquidity there other than what you teased in your prepared remarks, Kevin, around being private for now?

Kevin Rendino

I'll -- Daniel, I'll take this and then, I'll shove it over to you. Here's what I'd say. 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, because 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 now worried about food shortages and the rest. It is a wonderfully run company. We've seen the value for us increase. It's the one private holding, we own, and Petra, 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 my expectation -- and by the way, it's the only -- and when D-Wave packs. And we get the Petra money and all the way TARA. We get the proceeds from TARA. As I said, we'll have 83% of our assets in the public asset sector. The only company that matters in our private portfolio is AgBiome. Daniel, I think it's going to represent how much of the private portfolio.

Daniel Wolfe

As of the end of the quarter, 75% ...

Kevin Rendino

So it's almost not worth talking about anything else. We have so little, few other companies there. So I think AgBiome 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 and coming public in an IPO or SPAC would be a waste of time. And they wouldn't get the appropriate value. So to some extent, I'm disappointed, they're not out yet. On the other hand, I'm thrilled they're not out yet, because there will be a better day for the market. And this company is the right company, at the right time. So Daniel, I don't know if you …

Daniel Wolfe

The only other thing I would add to that is, and I echo everything that Kevin said, is that, they did announce that they raised over $100 million in around the financing last year, really happy that they did that. So, that they closed that. And so they have a really strong balance sheet.

And that should hopefully position them well, for the future, to be able to take advantage of market opportunities in the right time. And 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.

Kevin Rendino

Yeah, to me, I -- look, Graham is our Value Investor. So what I'm about to say is like, the antithesis of everything that I bleed, but it's one of those billion-dollar ideas. And it's a real company with real products and a real manufacturing presence.

And it's not like it's a pipe dream. But it's one of those companies like, IonQ or Righetti or D-Wave that could potentially really grab 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. As a Graham value investor, I'm not sure I'll ever be able to understand the valuation put on it, but who cares, if others do and it works, great for us.

Adam Waldo

No, that's right. I mean, it looks like a terrific company, as we've talked about many times. And with TIMCO and Fidelity Ventures, zero price ventures in there, that should really smooth the movement in the public market at the right time for the company, and we'll be excited to see get there as I know you will be at the right time.

Finally, on third-party capital raising, when we were together by phone on April 20th for your annual meeting, which seems like an eternity ago given the markets. But you foreshadowed potentially some developments to announce with respect to third-party capital raising and your usual very comprehensive reporting package, looks like really didn't provide thing on that. I know you like to talk about that more on calls. Is there anything you can update us on there?

Kevin Rendino

Well, we've gotten drips and drabs in not enough to mirror the pension account that we are currently managing, which has -- which is significant in dollar amounts, and there's been a great source of economics for us for 180. And obviously, we've done a good job managing the money for the clients, so they're happy also.

Nothing necessarily to report on, although 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 today versus where we were three months ago. this wasn't enough to talk about in the press release. And we'll continue -- I know you ask every quarter, we'll continue to do it as long as it makes sense from an economic perspective, from a time perspective, and also from a capacity perspective.

I'll give you just one example. We had a recent conversation with somebody that wanted to give us $300 million, which was great. Except the $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 permitted capital.

So, those are always the -- it's not like we're not trying, Adam. It's that we are very disciplined and focused on attracting money when it truly does make economic sense. Now, for a lot of people, $300 million or 30 basis points is awesome. For us, it's not. It just -- it truly is not. And it's just not something that's going to accrue to the benefit of the 180 shareholder. I don't -- I don't really know how as to say it other than that. We're -- sometimes folks have wanted to give us money and they only want to pay us on the alpha created between our performance and the Russell benchmark. And it's not interesting to us.

Look, we get a 100% return on the capital that we invest at 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 our NAV. If I'm up 50% and the Russell's up 60%, you're probably happy if the Russell is down 10%, then we're down 2%, you're not happy. So -- 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, and it's not what we want to do. And it's not the money that we're going to want to have to manage. So, it's complicated. Sorry if I didn't answer the question the way you wanted an answer it, but that is the truth and for.

Adam Waldo

No. That's absolutely what I would have hoped. I mean, it's absolutely what -- obviously, you have to get it on the right tenor and economics to make it with a while versus the closed-end permanent capital model. Thanks so much for the great update. Keep up the great work and spring will -- while spring is here and springing the markets will come in time.

Daniel Wolfe

Thanks, Adam.

Kevin Rendino

No 10% Fed fund rate, please.

Daniel Wolfe

Hi. Please go ahead.

Unidentified Analyst

Yes. And it goes back to that idea of growing net asset value with all this money coming in from Petra. Any thoughts on taking a portion of it in buying back shares? I mean if I look at your book net asset value of $981, you're at a 35% plus discount, what better way to use some of your funds and buying at that discount will grow automatically grow the NAV.

Kevin Rendino

Thanks for the question. I'm sorry, what your name is.

Unidentified Analyst

Dan Frank.

Kevin Rendino

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's accretive and a stock that trades at 65% of book value, which we think is well run is a good source of -- a good use of our cash. If you can buy in up 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 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 about 500,000 shares of what turned stock in the last five years. So if we don't -- if 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 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 investee companies. And if you look at our track record over the last five years, forget the last quarter, which -- or this quarter, which are difficult. But if you look at our track record since we started, we generated a 330% return. We could have bought back stock or pay a dividend in every single one of those time periods during that five year period, and none of which would have equated to a better return for shareholders than 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 this market isn't ripe for opportunities with a time horizon of a year or two, then no market ever will be. And we truly believe now that we got more -- the definition of a bear market is you run out of money before you run out of good ideas. And I don't want to run out of money because there's a lot of good ideas. And if we can get 100% return on some of these investments over the next cycle, and the cycle could 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 topical, we care. We talk about it all the time. I totally get your points. 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 I'll generate more return for you if you allow six months or a year for me buying Quantum and watching it go from $1.5 to $3. So long-winded answer, I apologize. That's the answer. Go ahead.

Unidentified Analyst

I wouldn't be speaking of the $12 million, just $1 million, and you have to do it over time because $1 million is probably about 90 days of the normal trading in the stock. But I think even from a psychological standpoint buying back taking $1 million out of that $12 million would help your stock price. I'm not in for the short term. I'm more focused on your net asset value because I think it will grow. But -- and I think you're doing a great job. It's got to be more frustrating for you than anybody else that the discount is as wide as it is. I mean warns up hyperbolize a little bit. There's -- any time his stock gets close to book value, he buys it back to you, it's way under book value.

Kevin Rendino

So I hear you. I do. I'm not arguing against your viewpoint. I will say, if I bought 1 million – if the $1 million you said? If I bought a $1 million – I know, first of all, it's an illiquid stock, we'd create more liquidity, which maybe is a good thing, not a bad thing. I don't know. I used to say with IBM, there were buying backs. We bought IBM in 1990 when Luke Gerster [ph] 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, we just -- 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 $1 million of stock, which we can do tomorrow, it's not accretive to book value. It's psychologically helpful to be able to say you're doing that -- but $1 million 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 $0.01 a share of increase. I don't know if we found the stock and it went up 50%, that would be $0.05...

Unidentified Analyst

Which then you can reinvest -- so the other problem is once you -- I mean -- and it's not the one-time investment. It's the fact that we also have close to $100 million in operating loss and capital loss carryforwards that allows us to shelter these gains that we're generating on investments, which can help us compound. And that's how we look at it. It's not just making that one investment. It's the compounding over time that -- and relating that to, well, 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.

Kevin Rendino

So 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 you favor share repurchase, I favor dividends, but that's just a debate. And I would like to be able to do it 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.

Unidentified Analyst

It's our goal.

Kevin Rendino

That is our goal. So we're aligned with you. 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 asking the question, because I think it keeps us on our toes and the debate is worthwhile.

Unidentified Analyst

Thanks for your time.

Kevin Rendino

Thank you.

Daniel Wolfe

Thanks, Dan [ph]. Hi. Stefan, please go ahead.

Unidentified Analyst

I was curious, so what are you guys looking at? Now you're going to get the -- hopefully, get the Petra payment soon 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 you're seeing come across the table? Any idea of thinking about convertibles? I'm just curious about what your thoughts are on that.

Kevin Rendino

Yes. The more capital we have, the more opportunities there are to truly help companies enhance their own balance sheets, either by enhancing them with cash or turning debt into equity and making them more safe havens balance sheets, rather than stretch balance sheet. So we've done a few of those, as you know, TheStreet.com was one. Turtle Beach was another. They were wildly successful. We actually did Sonim. It worked for everybody, but us because we went on the board and we couldn't 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 are going to be -- are going to -- 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's just having more capital allows us to provide more solutions to the companies in our universe. And we always wanted to be in a position where we could be, AWM 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 would have always loved to be one of those companies that are able to do that. I mean, given our size, we picked and choose where we could do that, having more capital would allow us to be a better partner for some of these investee companies.

So other than that, it's truly -- 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 looking to make a 100% return on our money over a three-year cycle. And that we'll continue to do that as well as try and pick and choose where we can help a company do raise equity vis-à-vis pipes or converts or the rest.

Unidentified Analyst

You're not -- so you're looking at once the money comes in, are you guys looking at adding to your the stock you currently have, or are you looking to maybe do another -- add another one or two to the portfolio holdings?

Kevin Rendino

I think it'd probably be a combination of both. Obviously, I can't tell you what we're looking at, but there's -- yes, we would expect to be adding to the names that are down that we own, that we still believe in 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 looks like any -- I don't -- it's like how do you manage your cash, it's the same way. We're not going to look to deploy it, because it's here. We're only going to deploy it when the opportunities arise.

The biggest mistakes that money managers make use -- 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, you become a 5 Star fund. The money would come in by the billions at the exact time that they didn't want it. And when they wanted it the most, they took it away, because of either bad performance or because the market was so weak. It's just you know the way technology 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 going to be a tenant to the market. It's been a 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're all lower as of today. So although Arena group is up and pop belly is up, too. So we'll get the money and then we'll figure out what we want to do with it. But -- and we have ideas, but I'm not going to just shove it in the market for the sake of shoving into the market.

Daniel Wolfe

The beauty of permitting capital.

Kevin Rendino

For better or for worse, yes.

Unidentified Analyst

And anything you can add about Paragem that you're doing? I know you guys aren’t report everything, but I think you can...

Daniel Wolfe

Yeah. We can't obviously really speak too much about the -- what's going on over there. I think the only thing I'd say is that as stacks are, we're out there looking at what we believe are interesting opportunities, and we'll continue to pursue those.

Unidentified Analyst

Okay. All right. Thanks guys. Appreciate it.

Daniel Wolfe

Thank you.

Kevin Rendino


Daniel Wolfe

Hi, Ben. Please go ahead.

Unidentified Analyst

Hey guys. This is Ben Bastos [ph]. Sorry, give you another question on Jerry purchase. But I wanted to ask, assuming you grow assets to a level you're comfortable with, what's like the right discount level to think about? I mean, right now, it seems like 30%. Is there a specific level when you get to a certain asset size that you'd be interested in buyback sound so you have a date of the special dividend you're talking about? How should we think about the size of that special dividend, assuming you guys get to a level where you're comfortable with the size of the company, I don't want to -- don't need to grow assets as aggressively anymore.

Kevin Rendino

I mean, I'm speaking out of TURN here, okay? So no fund intended on the TURN part. So -- and these are conversations that we have with our Board. There is zero reason why our equity should trade at 65% of book value, with 83% of our assets in public in cash. It 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 generated a greater return than every single one of these closed-end funds, which is true. We have. We just look at our performance, and our NAV growth, but it still hasn't helped or at least it hasn't helped up until today. We think we should trade closer to percent 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 e-mail 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.

Daniel Wolfe

There's seven total, but actually equity and focus, I think it's sort of similar styles, it's like four or five.

Kevin Rendino

So again, I'm talking at a TURN here. Would I like to get to $100 million of assets and give back investors $0.50 to $1 per share of capital, yes, I would like to be able to do that. Would I actually recommend to our Board that we do, do that? Yes, I think that's a great starting point. Will the Board -- will we get there? I don't know.

We haven't had that 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 patients. And I don't mean they're patients with us for the last five years, because humbly put, I think 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 85% to 90% of book value, if we have some sort of yield, if we can get to $100 million in assets, is it going to kill us if we give back $5 million or $7 million or $10 million to our shareholders. It's not.

Unidentified Analyst

That’s helpful.

Kevin Rendino

Okay. You’re welcome.

Daniel Wolfe

Hi, Jonathan, please go ahead.

Jonathan Freedman

Yes. Hi. Just a quick -- this is Jonathan Freedman with Consilience Capital. Just a question on -- 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 -- excuse me, at a very high rate.

So as a shareholder, in this particular case, I would, both know. I think the permanent capital is super valuable, and that should be hoarded, not given 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 -- I'm less familiar in the case of a closed-end fund, is there anything special or different if you have an investment position that you monetize, does that provide a tax shield against capital gains?

Daniel Wolfe

Yes. 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 short answer is, we can -- there are ways that we can use both our operating loss and our capital loss carryforwards to shelter our gains from taxes for a significant period of time.

Our operating losses don't start rolling off until 2023. And 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.

Jonathan Freedman

Okay. Yes. I'd like to follow up with you offline on that, because I'm just curious to learn, I meant, I operate like you do and in small and micro cap turnarounds and often the NOLs are a tremendous 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 additional incremental NAV or equity or shareholder value.

Switching to idea generation. I'm curious that you describe yourself as value investors and that's easy to see. But what's your -- how would you describe your idea generation, idea funnel sort of the parameters that you look for in general, are you -- you’re on screens, do you -- you just have a base of knowledge. Just give me some quick comments on that, please.

Kevin Rendino

Okay. And by the way, kevin@180degreecapital or daniel@180degreecapital.com and just e-mail afterwards, and 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 and doing this for a living. And so idea generation comes from buy siders that we know, sell siders that we know, screens that we run on Bloomberg, Reuters, whatever, obviously, knowing the industry basically putting an encyclopedia of knowledge in your brain because you've been doing this for as long as we've been doing it.

Now we wake up every day and we're reading the cell -- we deal with the different sell side than the sell side used to deal with. Back then, it was Goldman and Morgan and whatever, and we were covered by institutional salespeople, and they bang our doors down with their own version of ideas. We have names Blake Street, B. Riley, Craig-Hallum. I mean, they're different companies, but they're still banging on our doors because we pay them commissions and the rest.

So we run screens. We have a four-pronged process to our fundamental requirements. The stock should trade at two-thirds of the market on either price to earnings or price to cash flow, half the market on price to book, have an above average yield of less than 1x of enterprise value to sales. You start with that funnel at the top and you narrow it down based on your select parameters, and you started -- you kind of go from there. You end up with only seven to 10 names. We run a very concentrated portfolio. So you have to be -- you have to really want to own what you own. And we spend a ton of time with the management of the companies we own, meeting the boards of the companies we own. This is not ETF passive investing over here, this is really bottoms up oriented investing. So...

Daniel Wolfe


A – Kevin Rendino

We currently -- it's active with an active has bent to it. So -- and the active part is just making sure that we understand and are talking to the companies and the businesses that we own. So if you called us up and had a good idea, told us to look at XYZ, we probably do it. It just kind of being alive and awake and being aware of what's happening in the macro world and being able to run your screens and talking to as many people as you can.

And like I said, this approach that we're utilizing at 180 is actually the same approach I use in Merill, BlackRock. The only difference is the market cap are different. Back then, it was -- we owned Exxon [ph] Procter & Gamble, J&J and GE and the rest, and now we own Quantum, Synchronoss, comScore. But we apply the same lessons, the same financial parameters that we required when we were at Merrill and BlackRock.

Q – Jonathan Freedman

Okay. Great. Thank you. I'd love to follow up offline. So...

A – Kevin Rendino

Feel free.

Daniel Wolfe

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.

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