Mount Logan Capital Inc (MLCI) 2018 Q3 法說會逐字稿

Good morning, and welcome to 180 Degree Capital Corp.'s Third Quarter 2018 Financial Results Call. This is Daniel Wolfe, President of 180 Degree Capital. Kevin Rendino, our Chief Executive Officer and I would like to welcome you to our call this morning. (Operator Instructions) 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 website under Investor Relations website at ir. 180degreecapital.com under News/Events.

Please turn to Slide 2 that contains our safe harbor statement. This presentation may contain statements that are forward-looking in nature related to future events. Statements contained in this presentation that are forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. These statements reflect the company's current beliefs and a number of important factors could cause actual results to differ materially from those expressed herein. Please see the company's filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with 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.

Thanks, Daniel, and good morning, everyone. Please turn to the next slide, the summary of Q3 2018. After growing our book value 10% in the second quarter, we gave some back in the third quarter. Our book value did decline 3.4% this quarter. The majority of that decline took place in our public portfolio with Adesto, Mersana and Synacor contributing the majority of the decline. We'll have more on them later. Our private portfolio was up modestly this quarter with the highlight being the monetization in HZO, which we sold in July for $7 million.

Please turn to Slide 3. This slide is our 5-year historical trend of NAV. It shows, as you can see, since we started our strategy early last year, NAV has grown from the $2.34 level, nearly 20% over the last 7 quarters to our quarter-end NAV growth of $2.81. So not a particularly a good quarter, but certainly a great 7 quarters.

Next slide please. Slide 4 shows our sources of change in our NAV for the third quarter. We started with an NAV of $2.91, we had $0.012 for gains in our private portfolio. The public holdings reduced our NAV by nearly $0.09, at $0.024 of operating expenses and you get to our quarter-end NAV of $2.81.

Next slide, please. Slide 5 is the same chart as the prior one expect it is a year-to-date sorts of change analysis. As you can see, our public holdings have added $0.29 to our year-end 2017 NAV of $2.60, there has been no gains in the private holdings, that's why you don't see a bar here at all, the private holdings are actually flat year-to-date. We have normal operating expenses of $0.06 plus a bonus accrual of $0.02, and we ended up at the same $2.81 Q3 2018 NAV.

Next slide, please. Again, the same slide, but looking at it over the course of our history, which started in the beginning of last year. We've added $0.62 to our NAV from our public portfolio, another $0.08 from our private portfolio. Deducting normal operating expenses and onetime restructuring expenses, our NAV has gone from $2.34 to $2.81 over the last 7 quarters. It's fairly obvious to us and hopefully to you that our strategy change has greatly benefited our shareholders.

Next slide, please. Slide 7 is a snapshot of our public company performance in Q3. Our weighted average return for our publicly -- for our public portfolio declined 8.8%. I'll have more on the specific drivers of the quarter in just a second, when I talk about the individual names. But now turn to the next slide.

Slide 8 shows our year-to-date weighted average return on our public portfolio, led by Turtle Beach, TheStreet and Adesto. Despite the selloff this past quarter, we've had a successful 9-month run of public market investing, you can see the number there, 25.5% year-to-date.

Next slide, please. This is our performance, the weighted average performance of our public holdings during the last 7 quarters, put another way the beginning of 180's history. As you can see, we've had several stocks rise over 100% during our ownership. And in total, our stocks have been up north of 60%.

Please turn to the next slide. Slide 10 encaptures our total return of our public portfolio, which obviously takes into consideration the reinvestment of one dollar into another dollar. This is a gross total return. Although, we struggled the past quarter, you can see our gross total return versus the applicable market indices over a long periods of time. As you can see, from start to finish, we're up 108% versus the Russell Microcap value index being up 22%. Year-to-date, 35% versus 9% for the index. Again, these are gross total returns, which -- our NAV will incorporate a netting out of expenses and allow for people to look at our expense of them, but this is a gross number. We've easily beaten the Russell Microcap index, not only over the year, but certainly since we've started.

Next slide please. This reflects our strategy, our cash plus public securities versus our private portfolio percentages. We have taken a cash and liquid securities to 44% of our assets as [in future] rate, it's up from 27% since we started. As you can see, given the dip this past quarter, the public market exposure slipped from 48% of assets to 44% of assets.

Next slide, please. Now to the specific names that hurt us in the quarter. Mersana reduced our NAV by $0.06. Mersana is a biotech company that produces drugs for the treatment of tumors and cancer. As investors know, there is tremendous volatility for a biotech company that is currently in the middle of clinical trials. In this quarter, 1 patient in one of Mersana's 2 ongoing trials died, possibly, from side effects of the drug. And the stock collapsed to $10 per share, as the trial was placed on a partial clinical hold by the U.S. FDA, limiting the enrollment of new patients. We flagged this event to you on our last quarterly letter and said, we were awaiting news on whether there death was related to Mersana's drug. Two months removed from the partial clinical hold, Mersana announced that the FDA lifted the partial clinical hold on the Phase I study. Good news, right? As a result of that a positive announcements, Mersana stock did nothing, actually it went down another 15%. That is the definition of an inefficient cure for market. Potentially, nothing has changed other than the 2-month delay in the program, and we've witnessed Mersana's stock having gone from $22 in April and May of this year to $8.50. We know biotech companies can be very volatile. And unfortunately, we have seen the negative side of that volatility in the quarter.

Adesto is the name that we've owned for a long period of time. As you know, there's been on a uptrend through Q2. As the stock reached the price that we believe made it fully valued, we actually sold 62% of our position during Q2, on an average price of $8.81.

As we mentioned in last quarter's letter, the company announced 2 separate acquisitions. In May of 2018, Adesto acquired S3 Semiconductors, a developer of mixed-single application specific integrated circuits or what we call ASICs. This acquisition materially increases the total addressable market by 10-fold to our Adesto's products in the industrial Internet of things applications, or IoT. Adesto followed up that acquisition with the purchase of Echelon, a company focused on developing open standard control networking platforms. These 2 deals have completely transformed Adesto from a specialty memory company to a leader provider of -- to a leading provider of innovative applications specific semiconductors and embedded systems that comprise the essential building blocks of IoT as devices. Unfortunately, during this time, they preannounced Q2 revenues of $18.1 million and $18.3 million versus previous guidance of $18.1 million or to $19 million and an average annual estimate of $18.5 million. And they also did an equity share deal to fund these acquisitions at $6 a share. And then, the stock has obviously got caught up in all the trade issues with China, that we'll discuss in just a little bit.

All of this being said, the stock went from, when we were selling it at $8.80, to its current price of $3.50. We've doubled our position in recent days because we do see the upside potential for the stock to double over the next 18 months.

Synacor declined 20% in the quarter. As we've told you previously, our view is that the issue of Synacor isn't the fundamental problem with its overall business, but rather a management credibility issue resulting from the company's historically and consistently overpromising and underdelivering on its results.

Approximately, 40% of Synacor's revenues are recurring and fee-based from its Zimbra e-mail and CloudID business. Investors typically pay a minimum of onetime revenues for companies with such sources of revenue. And in many cases, significantly higher multiples of such revenues are coupled with high margins and growth rates. Synacor has approximately $60 million of recurring and fee-based revenue and an enterprise value of $66 million, which means the market is valuing the rest of Synacor's $80 million of revenue at $6 million. That valuation in our view is absurd.

In the quarter, the company's stock had gone to $2.50 on the back of a decent Q2 and also a new CFO. It declined to a low of $1.6 on the announcement of AT&T's decision not to autorenew its contract, which we think is standard operating procedure. The stock is a back close to $1.80 now, following the management presentation in October 2018.

With that, I'll turn the -- I'll turn it back over to Daniel, who'll talk about some of our new positions and private portfolio and expenses. Daniel?

Thank you, Kevin. Please turn to Slide 13. In a press release in September, we announced 2 previously unidentified positions, an Airgain, symbol AIRG, and an EMCOR, symbol EMKR. Airgain advanced materially during the quarter while EMCOR declined. I'll now take some time to discuss each of these positions in more detail, with 2 new positions established in the third quarter of 2018 in Lantronix, symbol LTRX and PDL BioPharma, symbol PDLI.

Please turn to Slide 14. Airgain is a provider of advanced antenna solutions used to enable high-speed wireless networking across a broad range of devices. Antenna design and functionality are becoming increasingly important, as wireless networks are transmitting data over higher and higher speeds and the number of devices transmitting data increased exponentially. We became interested in the company following a change in management in May of 2018. The new management team led by Jim Sims, Anil Doradla and Jacob Suen, announced a renewed commitment to seeking profitable growth through better management of the operations of the company and focusing on high-value opportunities. The company has a strong balance sheet with $32 million in cash and minimal debt. We believe, Airgain is well positioned to benefit from the secular trend of increasing complexities for wireless data transmission.

Please turn to Slide 15. Where Airgain's antennas help to transmit data wirelessly, EMCOR's lasers enable multiple system operators, or also called MSOs, in this cable TV market to deliver high-speed Internet connectivity to their customers. Its lasers are a key component of the role-out of the new data transmission standard, called DOCSIS 3.1.

We initially purchased EMCOR stock in late 2017 and sold it in early 2018 for a small gain. We became interested in the name again, following a worse-than-expected fiscal second quarter, believing the shortfall was timing related and that recovery would begin in the second half of 2018. We also believed, the company would begin to increase traction for its fiber-optic gyroscopes that are used in high-performance drones and other applications, where precise location and motion measurements are required. Subsequent to our purchases, EMCOR preannounced a better-than-expected revenue for its fiscal fourth quarter driven, in part, by recovery in the cable TV business and also by new customer wins for its fiber-optic gyroscopes. The company also has a strong balance sheet, with $65 million in cash and no debt.

Please turn to Slide 16. Where EMCOR enables MSOs to transmit data across long distances, Lantronix enables local secure transmission of data amongst devices and management solutions for the Internet of Things assets. Clearly, it is important to be able to transmit such data in a secure manner and also to be able to manage large numbers of distributed connected devices seamlessly. These are places within the IoT market that Lantronix provides differentiated solutions and products. The company's CFO -- CEO, Jeff Benck, joined in 2015 after selling his prior company, Emulex, to Avago. He built an impressive management team, repositioned the company and returned it to profitability and growth. Part of the management's vision for growth centers -- in the future, centers on acquiring complementary products in technology. This is the reason the company raised $10 million in a follow-on offering at $4 per share. We precipitated in this offering by investing $1 million.

Subsequent to the offering, Lantronix reported its fiscal first quarter result that beat analysts' estimates with $12.3 million in revenue and adjusted net income of $0.04 per share.

Its stocks sold off following this announcement along with the general market malaise on Friday, and trading -- and is trading in a relatively low multiple of approximately 1.2x analysts' estimated revenues for fiscal year 2019.

You may have noticed the common theme amongst our investments in Airgain, EMCOR and Lantronix. With these investments and our position in Adesto, we have built from the ground up, a bullish position on the Internet of Things market. Just to be clear, we became interested in each company based on the merits of each individual company.

It just happens that each plays an important role in the emergence and growth of the Internet of Things market. We think the fundamental underpinnings and secular trends of the IoT market are sound even though many of the names in this space have been hurt in recent months.

Please turn to Slide 17. We also established a new position in PDL BioPharma during the third quarter of 2018. PDL manages the portfolio of patents and royalty assets in the biotech, pharmaceutical and medical device industries. Our investment thesis have centered on that the company will make good use of its cash resources. The company has a market capitalization of approximately $382 million and a cash of $395 million. PDL also has $150 million convertible debt due in 2021.

The stock trades at approximately half of book value. Given these metrics stick clearly within ones that we look as deemed value investors, we dug into learn why the stock is trading at such a discount to book value and low multiple cash. PDL's recent strategy has centered on acquiring commercial-stage companies and assets rather than solely royalties, with the first being Noden Pharma DAC and its hypertension drug purchased from Novartis. Unfortunately, for PDL's management team and the company's shareholders, PDL was forced to take its 75% white write-down of their Noden stake just 24 months after purchase, due primarily, to an incorrect assessment of the potential for generic competition. They also failed thankfully, in a hostile takeover attempt of Neos therapeutics at a price 3x the level Neos trades at today. Our investment thesis had centered on the notion, that the board and management team will learn from these missteps and instead use the company's cash to buy back stock. Subsequent to our investment, PDL authorized a $100 million stock repurchase program.

Please turn to Slide 18. As we have said and prior calls and letters, we continue to believe our private portfolio contains companies that can generate meaningful returns on invested capital. As of September 30, 2018, our most mature private companies D-Wave Systems, AgBiome, Nanosys and ORIG3N, were valued at $30.1 million in aggregate or over half the value of our total portfolio. There are other private companies within our portfolio -- private portfolio. However, these companies are in early stage of development and the time lines of potential exit values for these companies are highly uncertain.

We mentioned last quarter that in early July 2018, we sold our shares of HZO to unnamed investors for an aggregate price of $7 million. While this price was below our cost basis, $9.1 million, it provided a material amount of additional capital for us to execute on our strategy of investing in publicly traded microcap companies with our constructive activist approach. We will continue to look for opportunities to monetize our private portfolio and investments in transactions that we believe, are in best interest of our shareholders.

Please turn to Slide 19. As we have said in prior calls, we have greatly reduced our operating expenses, which will make it far easier to grow NAV than in years past. Also as a reminder, the first quarter of 2017 was the last quarter of operations of our predecessor company, Harris & Harris Group. So the quarterly year-over-year comparisons will no longer show the drastic drop in expenses as those reported previously.

For the third quarter of 2018, our operating expenses were $650,000 versus -- were $720,000 versus $650,000 in the same quarter of 2017, an 11% year-over-year increase related primarily, to us having 1 additional employee and 1 additional director as compared to the same period last year. I note that these figures do not include sublease income.

Please turn to Slide 20 and 21. As we discussed on last quarter's call, we currently anticipate reductions in our operating expenses as a percentage of net access, we based on growth in our net assets rather than further reductions in our expenses. This slide shows -- these slides show that we are making progress on that front with estimated operating expenses as a percentage of the net assets, including and excluding year-end bonus accruals, decreasing from those of last year, primarily, due to increase in net assets.

Last quarter, we also mentioned that we may make investments in our business by adding to our investment staff, which would increase our operating expenses. We will only pursue such a higher, if we believe that investment will help us grow 180 Degree Capital's net asset value. We remain committed to treating every dollar of shareholder money with the utmost care and consideration.

I will now turn the call back over to Kevin.

Thanks Daniel. If you turn to Slide 23 -- I'm sorry, 22, this is our scorecard year-to-date. Obviously, this can change. But through September 30, our stock is up, our NAV is up and we've made meaningful progress in our cash and public portfolio as a percentage of net asset ratio that we've talked about. So through September not a bad year.

Next slide please, is something we put in front of you each and every quarter, it's some of the parts analysis. Our liquid assets, cash and other assets net of liabilities were $1.21 per share, the market paid us a 100% for that value, the market is describing the value of $0.96, with the rest of our private portfolio. Given our assets are valued at $49.7 million, the market is discounting the value of our private portfolio assets by 40%.

Next slide, please. Finally, October has been a rough month for the market, as all of you know. As a matter of fact, it has a potential to be the worst month since March of 2009. While October has been a brutal market for the broad market, the underpinning of the weakness has been evident for few months. While the S&P peaked earlier this month and is down 10% for midsize, the Russell Microcap Index actually peaked in the beginning of July and is down over 15% for midsize. Small caps have been underperforming for a good while. Pick whatever data point you want, interest rates, inflation, budget deficits or trade war with China, investors are panicking over all of them. As it relates to the China trade war, it's a real issue and it's wreaked havoc on technology stocks, semiconductors, in particular, had been hit hard and the SOX index is down 20% of its highs. We are focused on the issue and trying to understand the ramification it has on our company's supply chain and the effects that it may have on the cost of producing those goods. Here's what people forget, the world isn't static, we're paying CEOs and CFOs to deal with change. For instance, Daniel mentioned Lantronix reported last week. They discussed the China trade issue on its call. They said, they would have a onetime 3% hit to its cost of goods sold as they shift their manufacturing to other parts of the world. But that's it, 3%. As an aside, the company beat both top and bottom lines. And despite the small increase in costs, essentially blessed the estimates for next quarter's bottom line and gross margin. As a result of all that, the stock was down nearly 25% from its intraday high on Friday. You know what that is? It's sell first and ask questions later. It says even when we have the answers, the reaction doesn't necessarily match the reality. I recently read that Danaher would have a $12 million hit to its cost basis because of the China trade issue, on a cost of goods sold of $2 billion. What's going on and what went on in Lantronix after they reported, with some investors wanted out of the position, either because their funds had redemptions, their fund was disclosed due to the poor performance, they wanted to sell for tax loss selling reasons, it could've been a myriad of issues. We know that the active investing world has been under duress relative to index and ETFs for some time, and we see indiscriminate selling across the board. This isn't a market that's digesting a macro event and intelligently and carefully thinking through the impact it may have on a specific company or a sector. The world evolves, companies evolve, and the idea that the companies are going to sit around and twiddle their thumbs and hope that China trade issue goes away, is not a reality. Many of them have already managed their business around the issue. And that's what companies do, they manage their business. I don't minimize any of these issues, but I do know what indiscriminate selling looks like and have seen it in many of our names. If the world is ending, the bond market doesn't seem to get it. Credit spreads have remained in check, the yield curve may have flattened, but it doesn't portend a disaster scenario. The 10-year at 3% the high-yield index has yield in a mid- to single digits. I remember vividly sitting in my office during 2008 and 2009, and watching CDS blowout in individual names on a daily basis. Maybe the equity market is right this time and the bond market is wrong, but that's not a bet I'm going to sit here and make. One last item, the Eurozone's third largest nation Italy has plunged into a deep political and economic crisis. You saw what's going on there, it feels like a disaster. You know what the 10-year selling bond trades at? 3.5%. That's not an end-of-the-world scenario in my mind. My point on all of this is, there are certainly macro concerns to be focused on, but many stock prices have overreacted and discounted a lot of bad news. Our job is to stick through all of this and try and create value for you over a longer periods of time. I see such short-termism in the market this month, and that does create opportunities. As one very smart investor told me yesterday, sometimes you just have to act like an investor, that's what we'll do.

With that Daniel, why don't we open it up for questions?

Certainly. (Operator Instructions)

Sam Rebotsky. I'm reviewing the values at 9:30 of your public company and plugging in the prices as of the close yesterday. And I believe you said you bought some Lantronix at 1 million shares -- other than the $2.50. How many shares did you buy other than the $2.50 that you had in the public...

Whatever you see -- Sam, whatever you see in the quarter is what we're willing to talk about on and answer that.

Okay. In essence, the market declines can be an opportunity. You had $0.35 a share in cash. Did you -- as of now, did you add to your portfolio during this decline?

In the month of October?

Yes.

Yes, yes. I mean, as I said, we're not going to sit around here and -- look, we have to analyze what's going on, and a lot of what's going on is real. We know the market is up a lot off the lows from 2008 and really, the bottom in March of 2009. So we're not Pollyannaish, right? I understand there's issues out there. But I think, as the market always does, it gets incredibly optimistic, when it should be concerned and it gets incredibly pessimistic, when it doesn't see the opportunities. And so you can expect us to be putting money to work with a time horizon of -- that lasts longer than tomorrow's lunch. So we view this -- as I've said earlier, my friend who said it to me yesterday, we were talking about all of this, China, interest rates, inflation, Europe, the political discourse, he was like, "You know what, at some point, you just have to act like an investor." And that's what we're going to do in this environment. It's not to say, we're going to ignore the realities. We're going to try and understand what's going on. But we do think that a lot of stock have discounted a lot of the bad news.

Yes, clearly, I approve your approach. Do you have flexibility to do any margin or...

Yes, we're never going there, Sam. That's how companies end up putting a for-sale sign on their front door.

It only depends on limitations in the discount valuation. I mean, like in 2007, '08, when there were substantial discounts, per se, and everything was really knocked down and the value of the balance sheet was substantial, I mean, there is an opportunity, I'm not saying this is what you should be doing, but that's one way to look at it. And you had indicated, you didn't expect any events to occur on your private investments, would you say in the next year or what kind of time frame would you say there is?

Let me say two things on the private, first. And I'll have Daniel chime in here. In terms of monetization, there's nothing -- although, things are being worked on, there's nothing eminent. That doesn't mean that in the fourth quarter, you won't see valuations move around, if companies do successful financings. And so we could see a positive impact in the fourth quarter from some of those, if certain financings get done. But as you know, most of that is, the private holdings and the speed at which some of these things take place, it feels a little bit like molasses at some point. Dan, do you want to comment on anything else?

Yes, I think the only thing I want to say is -- or going to add is, we never provide guidance on the private portfolio. It's -- look, there's -- we say that we think that there are opportunities for companies to build value for us and our shareholders, but the timing and the amounts and exit values, it's all highly uncertain.

Yes. Now again, a positive finance to one of our holdings could be a good thing and maybe we -- that happens this quarter, that would be nice. The other thing is, it relates just backwards. This is a -- look, we've have to close then funds with permanent capital and -- which is a highly valuable dollar, as opposed to just a dollar, a permanent capital dollar probably has more value to it than a regular dollar. We're just never going to -- Sam, we're just not the kind of investor or the kind of CEO that's going to do esoteric things with these portfolio's assets. We're literally going to do what we've done over the last 7 quarters. And we're not going to put any -- no margin, no debt, no none of that, it's going to be a very boring simple story. But I think a boring simple story could be very accretive for shareholders over great -- a longer period of time, just like we've seen over the last 7 quarters. So keep it simple and stupid is one of my models in life and that's what we're doing here.

I complete -- a 100% approval of what you're doing, keep it up, and then things will work out. It's just, today's losers could be tomorrow's winners. Okay. Good luck.

Daniel, this is [Drew]. You sort of asked the question that I was going to ask. Basically, I've been around these markets long enough, especially in microcap. And you think something's cheap, and you get into a down market and they can get ridiculously cheap. And I have a lot of faith in you guys that you'll make good decisions during this period of time. Like he was asking what's the chances that we're going to have more liquidity to invest in some of the opportunities that start to occur, as this continues on. I don't think, it's going to end anytime soon, but it'll end soon, sooner or later.

I hope you're right, I think you're right. One of the -- if you've read our shareholder letter that was attached -- it's on our website, that will go out to shareholders, we -- it was on cnn.com and they had a Fear & Greed Index and I put the chart in the shareholder letter, I think as of October 23, on a scale of 1 to 100, 1 being most fearful and 100 being more greedy, the fear index was at 7 or the index was at 7 showing heightened fear. The most interesting part about that chart was 1 month ago, it was like 75 or 80. I think 75 is the chart -- is where it was at 1 month ago. And so we went from life couldn't get any better to the world is ending, in literally 25 days. Adesto has gone down 50% or so -- 45% in literally 16 trading days on no news. Mersana -- look, I mean, when they have the -- when the initial partial hold was put on, the stock was $17. Then they have to halt the trial, the shock was listed $10. I get it. Then the halt comes off and the stock was $15, today it's $6. That's not normal, that's not a rational market. Now I understand, Mersana needs capital next year, and the biotech company, I get all that. But I also know fear and greed and...

Well, I've worked with a lot of clients and I deal with them on a day-to-day basis. And the amazing thing is that a large hunk of the money in the market right now is Baby Boomers. And Baby Boomers are getting to be late 50 and 60s years of age. And they are thinking back to 10 years ago and thinking I lost 40%, 50% of my money. And now they're freaking out that this market is going to do it again. So you got a lot of that kind of attitude going on. And especially, if you're a stockbroker, a Baby Boomer calls you up and he's scared that the market is going down, he'd be more than happy to trade you out into something else. So you're going to get irrationality in these markets right now. But you're going to get incredible opportunities too.

Yes, you just have to have -- the fortunate thing for us is, we don't manage to a clock. Look, I want to make money for everybody yesterday, you know that. I mean, I'm a significant shareholder, so is the rest of the management team and is our board. I think the one thing that I know is, we don't have to sell. So we know that there was a seller of Adesto of 700,000 shares in the last 2 weeks. I'm not going to say who it was, but it was a Page 1 or 2 shareholder. Because the fund got closed. We don't have to do that. That's the beauty of permanent capital. So we could take advantage of that. If it's just for selling at any price without any, sort of, rationale for fundamental weakness, right? Like, we also recognize we're going to get things wrong, and if you buy a stock and it goes down because the company misses, then it went down because of fundamental reasons, not just forced liquidation. So kind of, like the position that we're in from a permanent capital structure and just looking forward to November 1. And maybe the passing of the midterms next week.

Yes, I think that would help to some degree. Interesting companies, that you purchased. That PDL BioPharma looks really interesting, but certainly, management hasn't done anything to impress you that they're going to do good things with the $375 million. Hopefully, you feel that's going to change, like you said, you feel they've learned their lessons. Hopefully, that's correct.

They did, after we bought it. They did initiate $100 million share repurchase program. They're under duress from an activist investor, who is very thoughtful, smart and long-term thinker. So they have -- the board and the management team have listened for sure. So out of that $375 million, I think in September it was, not in October, September they did announce $100 million share repurchase program, which literally is 50 million shares. And hopefully -- they're probably in their quiet period, and hopefully once they report their quarter and they get out of their quiet period, they'll start buying back stock and hopefully, the stock will trend towards $3, and hopefully, even higher than that.

Is that Renaissance Technologies you're referring to?

No, it's company called 7Seas Capital. I think they're in Chicago. We've read their public letters...

They are available online, you can search for them. And they've put out I think, 2 or 3 of them, at least.

It's not rocket science, but honestly, what they're asking this board and management team to do. Unfortunately, for the company it was a very successful royalty stream business for many, many years. They decided they wanted to buy product companies. The first one they bought, literally they had to write off 75% of it in 18 months. And they also tried to do hostile takeover of another product company called Neos at $12 a share, Neos' stock is $3. Thank God, they didn't get it, because they would've destroyed PDL forever. And so their track record in doing product deals is checkered at best, and we've told them that. Like, why would you do something you haven't been successful at? Why wouldn't you do something that you're successful at? You've done nice royalty deals over time, do more of those. And your stock is trading at half the book value, why don't you buy it back? You've got -- I'm not asking to deploy your cash on the share repurchase, but a portion of it. So they're listening. I mean, we can't argue with what they've done since we've been an owner.

What about TheStreet. I noticed that a fairly big holder sold his shares just recently. I can't remember who it was?

Yes, we -- TCV. Remember, when we did our deal with TCV and the company. TCV had a $55 million senior liquidation preference, and we took them out for $26 million, $20 million of cash and $6 million of shares. The fund that, we think he -- the TCV operates that the TheStreet was in has been closed. So we always knew he was trying to monetize this position. I don't think he cares about it. I think it's not something that's meaningful to him or the fund. I think he's just trying to get it off his balance sheet. And so he did sell stock last week. I think that's been reported and filed. I will say that I'm on the board, so I have to be careful about what I can say. TCV is not on the board. I don't think they've listened to our calls. I don't think they're very engaged in the business in terms of being hands-on. And we -- I don't think we've spoken to them in the last year. So I don't think there's any -- I know there's no knowledge there. It's just a -- again, going back to my earlier comments, Drew, it's just a fund that wants out. And when you want out you don't care about what price you're getting or the valuation or the yield or the book value, you just say, I want out. And so that's what's happening.

All right. Well, I thank you for what you guys are doing. I think that there is incredible opportunity coming up. I'll never forget the 1987 crash, but a month later, I'm looking at small microcap companies and I found one that was trading for 70% of cash on the book and no debt whatsoever with substantial revenue that wasn't going away anytime soon, positive cash flow, but yet they were selling it for 70x -- 70% of just the cash sitting on the books, got taken over for $8 or $9 a share about 6 months later. That's the kind of crazy things that happen in these kind of markets. And that's why I'm looking forward to you guys having the liquidity to take advantage of these things, when they happen in this microcap space. I got the faith in you, you're going to do a good job there.

Thanks, Drew. Appreciate it.

Thanks very much.

This is [Al Shand]. First of all, I think you guys are doing a great job. We're doing exactly what we should be doing. I'm very, very comfortable with the approach you've guys have taken. So you really have my support. I think the idea of not going into leverage, that is also another great idea. If you don't owe anybody any money, they can't put you out of business, not supposed to. One comment or question, with regard to PDL -- the biotech company, PDLI. There's 2 very smart guys I think that recently came on the board, followed by the name Sam Saks, another guy Harold Selick. Do you have any insight to those guys? And have you had any discussions with the board?

We've not had -- no, I don't know them. I -- we obviously, any time we invest in something, we look at the board. To be honest with you, it's too big of a board. I'm sure those guys are great. I'm glad they are there.

I think Sam Sacks...

They have 9 members on the board, it's too big. The expense base there is out of control. They probably have like $400,000 to $500,000 worth of fees, director fees and the rest.

It's insane. I have never seen it that high for that -- for this type of company. I think the other thing that I'd say, the 2 directors you mentioned, I think they've been on there for a little while. The -- probably the most notable one that they brought on was the former director -- the former CEO of Teva Pharmaceutical, who was actually nominated by 7 Seas and they decided to bring him on without knowing the proxy context because he has an incredible background and brings a lot of expertise. So I think that's an interesting one to also pay attention to.

We've not had -- we've not talked to the board. We -- our discussions have been with the management team.

I think Sam Sacks, in particular, has made a tremendous amount of money. I forgot what companies he was involved in, but a very smart, astute, prestigious and wealthy guy. And I think Barry Selick is also a pretty sharp guy. Maybe, doesn't have as much money as Sam, but still very, very sharp. Okay, well, look, let me -- one final question. I got on a few minutes late. How were we doing in the area of raising additional outside capital?

Well, we're not actively raising outside capital, as it relates to setting up a fund. What we've done is, raised capital around individual ideas. We're set up to do it, but we're not actively in negotiations or -- to do that, I don't think you will see -- maybe you will, but it's not something that we're pursuing aggressively right now. What we're pursuing aggressively is fortunately, we do have a bunch of cash on the balance sheet from sales that we've made in the last 6 months, positions that have done well, and what we're focused on right now is making investments in the market on behalf of our own balance sheet. And then we have the systems in place, Rob Bigelow, obviously, joined us. So we're ready to go. By the end of this year, we'll now have a 2-year track record, and as we get towards a 3-year track record, hopefully, towards the end of next year, we actually think we could set up a fund that we want to because our -- provided our numbers hang in with what they've been for the last 7 quarters. So let's see where that goes.

Well, so keep up the good work. Got great confidence in you guys. I know we're doing exactly the right thing. Can't be too worried about short-term quarter-to-quarter performance, but we're doing the right thing for the long term. So...

Right.

Thanks a lot.

This is (inaudible). Just wanted to ask, if you can comment on the construction on HCO during July?

So can't really comment too many specifics except for we were presented with an opportunity to monetize the position and sell it to undisclosed buyers. And so we took advantage of that opportunity. And it provided, obviously, meaningful amount of cash prospects in our public company investing strategy. All right. Please go ahead.

This is [Michael Morley]. I'm a private investor. I joined the conversation a bit late. My question is about Adesto. I've owned turn for a lot of long-term Adesto, more recently, and I noticed, like everything else, the stock has plunged. And I was wondering about the fundamentals. Are they still the same? And how is the integration of Echelon going with that company?

So you might have missed my comments. But we -- what I said was we had sold 62% of what we owned at an average price of $8.80 in Q2, on our way to exiting position entirely, until they did these 2 acquisitions that, kind of, preannounced the soft quarter and did and equity deal at $6. We didn't participate in the equity deal, and the stock subsequently went lower. Because a lot of investors now are worried about execution risk, they're worried about China trade wars, and how that's going to impact the semiconductor supply chain, so there's a lot of reasons why the stock has declined. I'm not sure I get why it's declined $3.50, which is 1x revenues, for a company that is transforming itself away from being, sort of, a memory-based company with lower margins to a higher ASIC business with higher margins. So they report next week. We -- I mean, I don't know what they're going to say, but I don't think there's any -- I don't think we're all that worried about either Q3, Q4 or next year, in terms of integrating these 2 assets during the middle of integrating them. So I guess my point is, I'd love to sit here today and tell you about their fundamentals because we just listen to their conference call, I need a week to hear what they have to say. I'm not -- I don't think we're going to be negatively surprised. If we were, I certainly wouldn't be buying the stock. And I think, as you look out next year, you're talking about a business that can do $120 million selling revenues and have double-digit EBITDA margins with 50-plus percent gross margins, and companies like that in a normal market don't trade at the valuation that Adesto is currently traded. So I think it overshot on the upside, which is why we were selling it, earlier in the year. My guess is, it's overshot the downside. I don't -- I can't conclude on that yet because I haven't seen the next 6 months. But that's what we think today and we are -- we've doubled our position here in the last 3 months.

Thank you. And there are no further questions in the queue.

Okay. With that, I wish everybody -- firstly, I thank everybody. I -- this is your business, we're trying to manage it on behalf of you. It's your money and we're trying to take good care of the money that you've entrusted in us over the years. We hope that the month of October turns into a very different market environment here over the course of the next 2 months. We'll control what we can always control, which is our expenses. We hope to have some positive things take place in our portfolio, both on the public side and the private side this quarter. Time will tell, if we're going to be right there. But we hope we have a much improved fourth quarter, given -- certainly us as well as the rest of the market is off their choppy start here in October. So a month is not a quarter, it takes 3 months to an active quarter and we look forward to reporting on not only the last quarter, sometime in late January or February, but our total yield results. So thanks, again, for everyone's comments and questions. If you need to reach us, you know where to find us. And we thank you and have a good day.

Thank you, everyone. You can now disconnect.