180 Degree Capital Corp (TURN) 2017 Q2 法說會逐字稿

Good morning, and welcome to 180 Degree Capital Corp.'s Second Quarter 2017 Financial Results Call. This is Daniel Wolfe, President, Chief Financial Officer and Portfolio Manager of 180 Degree Capital. Kevin Rendino, our Chairman, Chief Executive Officer and Portfolio Manager, 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. We will be referring to a slide deck during the call that we have posted on our Investor Relations website at ir. 180degreecapital.com, under Calendar of Events.

Please turn to Slide 2 that contains our safe harbor statement. This presentation may contain statements of a forward-looking 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 can 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, good morning, and thanks everyone for joining us on our second quarter conference call.

Starting on Slide 3, if I haven't made it apparent to everyone already, let me reiterate an important point. Primary reason I agreed to join 180 Degree Capital, as the CEO, was simply to drive shareholder value. I'm firmly aware of how our stock has performed over the last several years. Many of you have been patient shareholders, and I know many of you are frustrated shareholders. A 30-year professional investor, I've lived in your shoes and expect the same thing from the company that I own, that you have expected from Harris & Harris and now 180 Degree Capital. To that end, you can see our share price advanced nearly 12% in the quarter from $1.45 to $1.62. It's not remotely close to where we want it to be, but it's a good start.

This quarter, despite having nearly $0.025 or nearly $800,000 in onetime nonrecurring restructuring charges, our NAV still increased. I understand $0.01 is not a reason to throw a party, but given the fact that this company has not had 2 quarters in a row of NAV growth over the last 5 years, I'm going to chalk this one up as a win.

We've talked about narrowing the discount of our share price through our NAV. We think this will occur as we convert more illiquid private holdings to cash. In the quarter, our stock price moved from a 40% discount to a 33% discount. In the quarter, our cash plus publicly traded assets rose from $19.1 million to $22.6 million as a result of public market appreciation as well as a private holding, Mersana, concluding its IPO in June. The quicker we can grow our cash and liquid investments as a percentage of our total assets, the faster that discount may narrow. We're essentially done with our restructuring. We've subleased our New York City office, we took onetime charges for severance. In 2 quarters, we have reduced our ongoing quarterly burn by over 50% from our 5-year average. More on this later. Finally, we began 180 Degree's new strategy by putting a stake in the ground when we filed an amended 13D on Adesto Holdings (sic) [Adesto Technologies Corporation] in January. Since then, and in the last quarter, we initiated new stakes in public companies, Synacor, USA Truck and TheStreet.

Slide 4 is a slide we plan on using to show the quarterly sources of changes in our NAV. Starting with our NAV of $2.43 -- I'll just average up, we added $0.062 in NAV from our portfolio holdings. 2/3 of that increase came from the combined performance of our public companies, Adesto, Synacor, USA Truck and TheStreet, a total of $0.041. Mersana added $1 million to our NAV, but a [numeral detracted] by $750,000. The rest of our portfolio added $0.012. On the cost side, we have 2 numbers for you to consider: onetime nonrecurring charges hurt our NAV by $0.025 and we had ongoing costs of $0.02 hurting NAV. As you model this out, the operating expense box, the box on the right, is a good place to start. The restructuring is now behind us. All of this netted out to a gain of $0.017 per share or $0.01 taking into consideration rounding.

Next slide, Slide 5, shows our NAV over the last 7 years. We have a long way to go, but I'm pleased with the last 2 quarters. As I said, we haven't had a back-to-back up NAV quarters in a row in 5 years. In the last 19 quarters, we've had 3 quarters where our NAV rose, versus 16 quarters where our NAV declined. I'm a baseball fan. Over those 19 quarters, our batting average is 157. That kind of batting average is not only going to not get us into the Hall of Fame at Cooperstown, New York -- for many of you that are sophisticated baseball fans, you'll know that, that batting average is not even within shouting distance to the Mendoza Line. We need to do better, we are positioned to do better.

Slide 6. Slide 6 would be an ongoing slide to show where our stock price is trading at relative to NAV. The blue line is the share price, the orange line is the discount. We reached historic lows earlier in the year of nearly 50%. We are now at 66% of NAV. Again, you know our goals, grow our NAV and now the discount [our] stock trades as relative to our NAV.

Slide 7 is a peek at our expenses. We have already seen a dramatic decline in our expense base. Even including the nearly $1 million of these restructuring expenses to change our strategy, 2017 expenses will be down over 20% from last year. But that's not the story. Our new quarterly run rate is already at where our projected 2018 numbers were supposed to be. The restructuring is behind us, and we are now at that 4% rate. From here, we will take a look that making incremental investments in people designed to either grow our assets or to provide analytical help. To get this expense ratio down further, will require us to grow our asset base. We are about as optimized on the expense side as you can get, given the fact that we're a public company.

On Slide 8, after filing a 13D on Adesto, we made investments in 3 public companies: Synacor, TheStreet and USA Truck, all of which provide great upside from a risk-reward standpoint.

We've talked a little bit about Synacor, but on Slide 9, you'll see our thesis. The company delivers modern, multi-screen experiences and multi-platform services to partners. A new CEO joined in August of 2014 and, early last year, Synacor won the portal business from AT&T. When fully deployed, it is a $100 million opportunity. Given the fact that Synacor's revenues were only $127 million in all of 2016, this is a material event, and will dramatically change their profile. If they're able to execute, Synacor is striving to have $300 million in revenue in 2019, with $30 million in EBITDA.

Page 10 is our thesis on TheStreet.com. We all know it is a financial news and information provider to consumer and businesses. They continue to operate the original Jim Cramer financial news service called TheStreet.com. But they also have other valuable businesses, like BoardX, The Deal and RateWatch.

This company has an entirely new senior management team as well as a new Chairman and several new board members. TheStreet is led by Board Chairman Larry Kramer who essentially created MarketWatch and sold it to CBS and then turned around the USA TODAY. Dave Callaway is the CEO of TheStreet. He was with Larry at both MarketWatch and the USA TODAY. Management is turning around the business and it's now cash flow positive. It's a $27 million equity market cap with $25 million in cash. The problem lies with the rest of the capitalization structure. There is a $55 million preferred piece of paper that operates as the most senior liquidation preference in the event the company is sold. It needs to be dealt with -- it should be dealt with. It is an overhang.

Page 11, USA Truck is not a complicated story. It's a trucking company that has been mismanaged. An entire new executive team has shown up in the last year from companies like Swift Transportation and the Interstate Distributor Co. Three years ago, the company did $60 million in EBITDA, 2 years ago it did $55 million. At an average cost, the market cap of the company was barely over $50 million, and the enterprise to those years' EBITDA was 3x. This is a blocking and tackling turnaround. It's a trucking company plain and simple. Make sure your trucks are fully loaded when delivering to a customer and, on the way back, make sure the truck isn't empty. It's a cyclical company. The trucking sector has undergone some supply issues in the last couple of years as well as pricing problems. We think the industry is now recovering. Our average cost was well below $7, roughly $6.58.

Now I'll turn the call over to Daniel, to discuss our product portfolio as well as further color on our expenses. Daniel?

Thank you, Kevin. I want to take this opportunity to walk through some items that we believe are important to have in mind when examining our financial statement.

Please turn to Slide 12, which is the same slide as Kevin discussed earlier regarding sources of change in our net assets. Kevin already discussed the material impact of our publicly traded portfolio holdings on our NAV this quarter. Within the net increase and the value of our investment portfolio, with the increase in the value of Mersana Therapeutics of approximately $1 million or $0.03 per share, following its initial public offering on June 28, 2017. Our valuation of Mersana includes a discount for lack of marketability of approximately 6.5% or the equivalent in value of $0.01 per share, owing to 90-day restriction period for holders of unregistered securities following an initial public offering. Our approximately 294,000 shares in Mersana were valued at $13.07 per share, inclusive of the discount. Mersana's stock closed yesterday at $14.85 a share. We will not be required to apply a discount for a lack of marketability to the value of our holdings in Mersana as of September 30, 2017, as the 90-day restriction period will have expired. I will note, that we will not be able to freely trade our shares or any derivatives related to those shares of Mersana until December 25, 2017, owing to a standard lock-up agreement between 180 Degree Capital and the underwriters of Mersana's public -- initial public offering.

Our privately held portfolio increased in value by approximately $390,000 or $0.012 per share.

On an individual company basis, the largest change in value was an increase of approximately $880,000 in the value of NGX Bio, reflecting the completion of a round of financing during the quarter. The net decrease in value of $490,000 in our other private holdings was comprised of positive and negative changes in value that were individually less than $250,000 in either direction. And we're owing primarily to OPM, option pricing model, and public market adjustment related factors.

As discussed earlier, the change in our NAV from the private prior quarter included expenses related to our restructuring of approximately $780,000 or $0.025 per share. We are pleased to say that these are materially all of the expenses we expect to incur related to this restructuring. Our balance sheet reflects severance-related liabilities that will decrease over time as they are paid out. So these payments will not impact net asset value per share in future quarters.

I also note, we were able to sublease our office space in New York City during the quarter. While we were not able to recover all of the expenses of the lease for that space, we will ultimately save approximately $650,000 or approximately $0.02 a share in rental and related expenses that we would have otherwise incurred over the remaining 2.5 years of that lease.

A reduction of operating expenses include savings across the board, big and small. We have reduced our audit fees by approximately 60% from over $470,000 to $190,000. We reduced our travel and entertainment expenses by 90% from almost $30,000 in the first quarter of 2017 to $2,600 in the second quarter of 2017. A substantial amount of additional expense savings is related to our shift to a registered closed-end fund from a business development company. We will continue to keep a close eye on ways to save shareholder money while seeking to build shareholder value in 180's new business -- our incremental investments in people as Kevin mentioned earlier.

Please turn to Slide 13. Last quarter, we provided this analysis of the value the market is placing on our privately held portfolio assuming our public securities and cash are valued with no discount. While the public markets have increased the value ascribed to our private portfolio, we continue to believe that it is over discounting the potential returns from this portfolio.

Slide 14 shows the value of our 4 most mature companies is substantially similar to the values the market is placing on our entire portfolio of privately-held investments. While we are uncertain of the ultimate return and the timing of returns from this portfolio, we continue to believe it will materially be greater than what the market values it at currently. I will now turn the call back over to Kevin.

Thanks. Before we open up the Q&A, I just want to make a couple of concluding comments. This is our second quarter that we've been in front of you with our new strategy. I think all of you know where our -- where the strategy of this business is trying to take us -- is to a rising stock price. We think a rising stock price will follow a rising NAV and that narrowing of the discount between our stock and our market cap.

This quarter we are going to focus our attention on trying to attract third-party funds, so we are going to go out with an investment deck, and see if we can raise some money in third-party funds. We're excited about tough talking to people about our strategy. We think it's a sound strategy and one that has asymmetric risks -- reward-to-risk potential as we think about the investments that we're making in new public companies.

With that, I will turn the call back over to Daniel and we'll open up the Q&A.

(Operator Instructions) Our first question comes from Adam Waldo.

Adam Waldo from Lismore Partners, LLC, in Chicago. I wanted to ask you guys for an update on a couple of key initiatives going forward. First, I was hoping you could update us a little bit more on the pipeline of potential liquidity events in the private securities portfolio over the next 12 months? I know that's a bit of roll-the-dice, but do you see any potential IPOs, or private trade sales coming in the portfolio company, especially that more mature 4 you list in the presentation? And then, I guess, on a related point, are you thinking about engaging a secondary sales agent to monetize some of the private company securities positions over the coming quarters, perhaps the more mature ones?

Let me attack the second part, Daniel, before you can go ahead and attack the first. The goal here is to create as much value as we can out of every asset that we have. I think there are a number of people that think we're walking away from our private portfolio, given the fact that we are off running a new strategy. That could not be further from the truth. We will look at every asset we have, including the private assets, and if there is a place to monetize those assets at a level that we think is commensurate with the future value of that asset, we will do it. If bids come in for certain assets and they're far below where we think those assets will trade longer term, then we're not going to sale those assets. It's really looking at that investment portfolio in the same manner that you and I would look at any stock that you own in the public markets. If somebody wants to bid us for the entire portfolio, they are free to bid us. There are certain things that we may own, that we may not own, that we thought we were going to own for the next 3 to 5 years. And there's other things that we may own for even longer than we thought we would own them. It all depends upon the price that people are willing to pay for the businesses that we have. Daniel, do you want to talk specifically about any other NAVs.

Yes, of course, we can't go into detail about what's going on in companies with respect to potential liquidity events or progress towards those. What I can tell you is, that we have a number of companies in the portfolio that are at stages of maturity that options potentially open to them. You can go to the store at Best Buy or any of the electronics distributors -- Amazon, wherever, and buy televisions enabled by Nanosystems' Quantum Dot Enhancement Films. There can -- you can see that that product seems to be making continued traction. You've got D-Wave Systems that continues to make progress in bringing its quantum computing capabilities to market. They just announced Oak Ridge National Lab signing up to use their systems through the so-called quantum cloud where there -- it's just like AWS, but instead using D-Wave's computers. So these companies are making progress. Since the markets remain open, hopefully, they're opportunities to see. But we can't go on any specifics.

I would say to Daniel's point and just to reiterate, this is not -- in many cases, this is not an early stage portfolio anymore. And there may be opportunities for monetization and/or some of these companies to come public and it's not going to take 3 to 5 years in some cases. We don't know how it's going to play out, but that's our hope. And our conversations with these companies are a little different than the conversations that we've been having. We want them to monetize as quickly and as efficiently, but most importantly, at the maximum value that they can. And so if we can help them get there, faster rather than waiting a longer period of time, then, hopefully, that's where those companies will take us. We'll see where it all goes out, where it goes, but it's not, in many cases -- especially our larger holdings -- it's not an early-stage company.

If I may, just one follow-up then on the third-party funds management business. It's exciting that you guys are going to be going out and seeing prospective investors in a formalized process during the third quarter. Are you guys going to be targeting an open-end mutual funds or closed-end mutual funds business, separately managed accounts? All of the above? Can you give a little more color on that? And do you feel comfortable that the current run rate of net expense base of about $3 million annualized would be able to absorb those initiatives?

What was the last part -- the $3 million in expense rates would what?

I'm sorry -- would be able to absorb those third-party asset gathering initiatives.

Well, a lot is going to go into the pricing, how we're going to charge people for doing what we're doing, and it will not be a mutual fund. It will be...

It will be under separate managed accounts. We have a vehicle that allows us to basically issue interests in an LLC, that we'll use as the vehicle for raising these third-party funds. They could be special purpose vehicles or one specific investment opportunity or they could be issued for a fund that is in terms -- it's open-ended in terms of what investment and the timeframe in which it invests.

Obviously, anything that we do will help towards alleviating the burn, but -- and that's where we're going to manage either $100 million dollars or we're going to generate returns of 40% and 50% in any one given year. I am not sure we'll be able to completely offset the burn. But anything that we can do will help and it's important to reduce the burn even further, either by having greater assets or by doing something like this. So we'll see where it goes. We've worked on our investment deck in the quarter. We've been spending the first part of the early days, at least for me, in being here and getting our costs down from a much more manageable level, getting our new strategy up and running by making investments, and I think, we've got a good handle on our business. Now it's going to be a matter of trying to grow our business from here.

Sam Rebotsky, SER Asset Management. You've done very well for the short time since you've joined the company. The addition of Parker Weil, could you sort of -- he's not going to be involved in day-to-day operations, but will he help you get this $100 million or what do you expect him to do to contribute to 180 Degrees?

So Parker is a 30-year veteran of Wall Street. As I said in the press release, he's a thought leader, very client-oriented and he is a relationship guy. He knows many family offices, knows the whole [RA] community and has spent the better part of his career generating good relationships with either its clients or our shareholders or the rest during his banking career. He's not part of the day-to-day. But we have a small business, we have a small management team, we also have a small board. And so I think Parker is going to be able to help us with getting our foot in the door at some of these family offices that are looking for different sort of asset classes to invest in other than investing in -- the same thing that everyone seems to be investing in these days which are FANG stocks and ETFs. So Parker, has an inner understanding of all of Wall Street, he is going to help us from that respect. We also have an NOL, a $70 million or so NOL. And Parker is a structure guy. So he might help us think about some of the things we can be doing with our NOLs as opposed to just generating capital gains and using our NOLs to support -- to offset those capital gains. So I'm quite pleased that we were able to attract somebody of the caliber of Parker. We had our first board meeting earlier this week. He was a great addition to the meeting. He had a lot of value-add already, and I'm excited for what he's going to be able to help us with going forward.

Well, that's sounds good. Now the other, hopefully, within the next 6 months, we could do some transaction to your Mersana -- will come off of the inability to sell. And hopefully, by the end of the year, you'll sort of be able to get some more cash. Do you have a dollar amount of more cash that you expect to raise from your private-owned holdings?

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No. As Daniel said, Sam, unfortunately, we're not allowed to talk about any specific instance that's happening with any of our private holdings as it relates to them, either coming public or selling themselves. We hope to be able to have some news on that front between now and at the end of the year. Unfortunately, at this time, we're not at liberty to discuss any of that. Our goal is to have as much cash at the holding company that we can have. Mersana will be free to trade at the end of the year, it depends upon the price -- where it is, at the time that it's free to trade. It may be a buy; it may be a sell. We don't know. So there's almost nothing that we can do right now. We just have to wait for that time period to elapse and then we'll at least be able to make a decision based upon the value of that holding at that time. We also have other holdings, as you know -- Adesto, our biggest one, who we think is performing very well, and we hope it's performing very well. They're going to report earnings next week. But we had a conference shortly thereafter. We can gain a lot of cash from Adesto itself. If it performs the way we hope and think that it can perform and, quite frankly, the way it has performed over the last 6 months.

Kevin and Dan, you've done a good job. Hopefully, this is the beginning and you achieve your goals.

Thanks, Sam. As we said in our shareholder letter and by the way, our shareholder letter and our full filing is up on the website and I think a copy of that is going to be sent out to everyone vis-à-vis the mail. Correct?

Yes. Sorry -- go ahead, Sam.

Yes, one other thing is the -- if you look at the pinksheets.com or OTC, you could pull up all the information of your filings and everything and see everything that you filed.

That's -- yes.

That's right.

And by the way, (inaudible) actually reports tomorrow, I apologize.

But thanks, Sam. I appreciate it. It is a -- we are running as fast as we can. I'm an impatient person by nature. But this is going to be an evolution rather than a revolution. It's a marathon, not a sprint. We're off to a good start. That's all it is, is a good start. We want to continue to execute and perform the way we have in the last couple of quarters.

(Operator Instructions) Seeing no other questions. I'll turn it back to Kevin to conclude the call.

Well, thanks everyone for your participation. As always, if there are further questions or comments that you have post this call, feel free to reach out to us vis-à-vis either e-mail or call the office. We're happy to talk to you about our business. And we look forward to chatting with you next quarter when we will review our Q3 numbers. Thanks very much. Everyone, have a good rest of the summer and we'll speak soon.

Thank you. You may now disconnect.