180 Degree Capital Corp. (TURN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I am Kevin Rendino, Chairman of the Board and Chief Executive Officer of 180 Degree Capital Corp, and I'll be chairing this meeting today. I now call this meeting to order and welcome our shareholders and guests to the 180 Degree Capital Corp. 2022 Annual Meeting of Shareholders. Before making introductions, I would like to review the program for the meeting. We will begin by covering the business of the meeting as outlined in the proxy. We will end the meeting with an informal session, during which we will entertain questions from shareholders and attendees of this meeting. We would like to thank our shareholders for observing the precautions we have established for COVID-19 and attending this meeting by webcast or by phone. In light of these circumstances, we will not be distributing or collecting paper ballots at this meeting. If you previously have voted by proxy, you do not need to vote again unless you wish to change your vote. If you would like to vote at this meeting or to change your vote, please e-mail our Inspector of Elections, Alicia Gift, at [email protected] to inform her of your desire to vote or change your vote at this meeting and the votes you would like to cast. We ask that you send any e-mails now to Alicia so that you may be sure to address any request ahead of time the polls are closed -- ahead of the time the polls are closed. We would also like to ask that attendees hold all questions and comments to the designated question and comments period. During the formal portion of this meeting, please restrict questions and comments at that time to the 2 proposals submitted for vote of our shareholders in our proxy materials. Please hold all other questions to the informal portion of this meeting. We ask that all questions and comments be directed to me for response or referral to the appropriate officer or director, that you be brief as possible to allow everyone who wishes an opportunity to participate. Also, please identify yourself before speaking and tell us if you are a shareholder or a proxy for a shareholder. If you are a proxy for a shareholder, please identify the shareholder. I would like to introduce our officers who are present with me today by phone officers Daniel B. Wolfe, President and Chief Financial Officer and Chief Compliance Officer; and Alicia Gift, Secretary and Senior Controller. Alicia Gift has been designated the inspector of election and is present today. The inspector has signed her oath, and the Secretary has been instructed to file the oath with the records of this meeting. I am informed that a quorum is present for the transaction of business. Proper notice of this meeting was duly mailed on or about March 2, 2022, to all holders of record on February 22, 2022, and the affidavit of the mailing agent confirms such mailing. The Secretary will please file the affidavit with the records of the company and a copy with the minutes of this meeting. February 22, 2022, is the record date for the voting of shares at this meeting. As of the record date, the company had 10,373,820 shares of common stock outstanding. We will now proceed with the formal business of the meeting. At this meeting, the shareholders are voting to elect 6 directors to the Board of Directors to serve until the next annual meeting or until their respective successors are elected. The 6 persons nominated by the Board of Directors are: Stacy R. Brandom; Tonia L. Pankopf; Kevin M. Rendino; Richard P. Shanley; Parker A. Weil; and Daniel B. Wolfe. The Board of directors recommends that the shareholders vote for the election of the board's 6 nominees as directors of the company. The second item of business is the approval of the Audit Committee selection of PricewaterhouseCoopers LLP as the independent registered public accountant for the fiscal year ending December 31, 2022. The Board of Directors recommends that the shareholders vote for this proposal as well. We will now take any questions or comments relating to the specific agenda items that the Proposal #1, the election of directors; Proposal #2, the authorization for the Audit Committee selection of PricewaterhouseCoopers LLP as the independent registered public accountant for the fiscal year ending December 31, 2022. Although representatives of PricewaterhouseCoopers LLP are not present in person or by phone, they are available for questions via phone. I ask that you please hold any general questions or comments until the designated question and comment period later in the proceedings. When you are recognized, please address your question or comment to me, and either I or another officer of the company will respond. Also, when you are recognized, please state your name and whether you're a 180 Degree Capital Corp. shareholder or a proxy for a shareholder. The floor is now open for specific questions on proposals #1 or proposals #2.

[Operator Instructions] We have one question. Adam, Do you have a question on the proposals?

I apologize, gentlemen. I hope to put myself in queue for the general Q&A period that would follow the conclusion of the formal meeting.

We'll come back to you, Adam, as soon as we're there.

There are no other questions relating to proposals.

Thank you, Daniel. The question and comment period is concluded, and the polls are now open. Remember, if you previously have voted by proxy, you do not need to vote again unless you wish to change your vote. Submission of a proxy at this meeting revokes any prior proxies you may have submitted. Can the Inspector of Elections confirm if there were any request to vote at this meeting received via e-mail? Hearing none. If there are no further proxies, I declare the polls closed for the matter voted on. With the agenda items now having been voted on, I will adjourn the formal portion of this meeting. I now have received the preliminary voting report. The results of which will be confirmed later by the inspector. The preliminary report indicates that all of the Board's 6 nominees have been elected as directors. And the company has authorization to retain PricewaterhouseCoopers LLP as the independent registered public accountant for the fiscal year ended December 31, 2022. With that said, the floor is now open for general questions or comments you might have. After I recognize you, please state your name and identify yourself as a shareholder or as a proxy for a shareholder. And I'll assume Adam will be going first.

Adam, the floor is yours.

Okay. A couple of questions. Adam Waldo, Lismore Partners, LLC. We are shareholders. Are you able to update us any further on your progress in the last couple of months since you reported fourth quarter results as it relates to third-party capital raise? And then I have one follow-up question.

Well, Adam, why don't we -- I'll say a couple of things about the year. It's been a little bit of an opposite year for us. Whereas the last 5 years have shown a high propensity for us to create value from our public market strategy. You've seen the performance numbers and they're quite outstanding. If I try and be humble, they're pretty good. And we've done that in the face of -- and we've grown our NAV, obviously, as a result of that. And we've done that in the face of a private portfolio that will struggle to keep up with the public market's performance. This year has been a little bit of the opposite. We've already had a couple of pieces of news on the private portfolio. And my hope is that by the time we report our quarter, we'll have even more significant news on that front. Again, not a promise, but I use my words pretty carefully as you know. So -- and we've gotten a better performance out of our privates this year than we have our publics. Having said that, when I look at our equity price, there's such a disconnect between reality and where our share price is. From my perspective, it is a difficult market. It's been a brutal market for small caps. If you followed our performance for what we held at the end of the year and translated that towards, attempting to predict what our performance is for the quarter, on the one hand, I'll tell you that we'll have proven to have a difficult time as the Russell Microcap indexes have had. But that doesn't take into consideration the private portfolio either. And that doesn't mean that our NAV is going to decline by as much as maybe you think our public markets have declined. And so we'll share all that with folks when we report our results. We've had a couple of wins that we'll talk about maybe more in detail when we report on third-party capital. We're in the midst right now of entertaining opportunities for significant outside capital. We'll see where that goes. And so I'll conclude by saying we're going to report a couple of weeks. Daniel, do we know the date yet?

It will probably be late in around the 13th or so, 12th to 13th of May.

And while it has been a difficult first quarter, like it has been for so many, I don't think it's been as difficult as our stock price believes it has been. And we'll have to show you that when we report our numbers in a few weeks.

No, that's really helpful. And if I could just quickly follow up. I appreciate and look forward to hearing much more in mid-May, obviously when you'll come out of a quiet period. But can you address a little more specifically whether there have been any developments on the private company monetizations previously announced that would cause you to have any different opinion as to the probability of their coming to fruition more or less along the time lines you had laid out in prior press releases?

We've talked about the 2 that we're able to talk about. And if you just listen to what I said, we hope to be able to talk about something else by the time we report.

Thanks, Adam. Next question from [indiscernible]. How are you?

I'm well. Can you hear me?

Yes.

Okay. I never know with this computer. I'm doing well. How about yourself?

Doing okay, bud.

Great. Just a question. Are you able to share your thoughts on the repurchase authorization? I think it was extended for 6 months back in February. Is there a rationale to the 6 months? Is that all you're allowed to do within your structure? Or because accumulating even $2.5 million of shares could certainly take 6 months and probably longer with the times that you guys are subject to quiet periods, et cetera. And then a little bit more specifically, if you can share like what your desired IRR targets for repurchase? And then also how you assess a potential IRR on the same? I'm not looking for forward-looking prediction, just a hypothetical, if you can.

Yes. So I'll take the first part there. So [ Brian ], thanks for calling in. And the 40 Act has rules related to any registered investment fund, whereby you have to have -- the longest you can have a repurchase authorization out is 6 months. And each time that you reauthorize it, it has to be mailed to the shareholders to tell them that it has been authorized. So we've just been as opportunistically and because you can't just put it in place and then start, you actually have to have that mailing done, which is why we include it in our annual reports. And our semiannual report is generally where we put both of them, which makes it easy. That gives us the flexibility over time to be able to execute on a repurchase program, if and when we were to do so. And so that's why you see it being consistent every 6 months that we have to put it out there.

And on the last question, look, we're a value investor. I think our share price is absurd. But I think the share price for a lot of our holdings are also absurd. So there's no specific IRR target as we look at share repurchase because it's fluid. What is our share price return profile look versus the profile of us buying more Arena group or Quantum or whatever it is that we might happen to own or the things that we're looking at that we don't own? And it's always a process by which we're comparing and contrasting. I'm never opposed to buying back stock. As a matter of fact, many times, we ask our companies to do so. Our one thing is we're an asset management company. We can buy our share price today and it would be accretive clearly because we're trading at a significant discount to what our projected book value was at the end of March. But if we do that, we're also giving back permanent capital, which doesn't allow us to invest in our strategy. So we go back and forth on this. And I know that many of our shareholders go back and forth on this topic. You'll know, in lieu of that, you've seen our management team going through our collective pockets with after-tax dollars and buy the stock in the open market to the point where we're all significant shareholders. So don't think because we haven't bought the stock back for 180 doesn't mean that we don't think it's inexpensive. And the question for us is, and I've said this before, can we get this business to $200 million in assets, which would translate close to a $20 stock in 4 years. So that's kind of what our vision is or our stated goals are. It's not promises, but aspirations, let's call it. It's easier to do that when we have more capital than less capital. And so buying a significant chunk of stock back would reduce our capital. So we go back and forth on this all the time. It's painful to watch our share price trade the way it has. I understand it's been a difficult market, but our cash and public securities is an underpinning for our valuation and our share price. And we're going too far the other direction for my liking. It's one thing when you've got 90% of your assets in private holdings and people do not value them, but people know how to value public holdings. And so the exercise of trying to turn this entire portfolio into 100% of cash in public holdings has always been our stated goal since we arrived in 2017. And when we get there, and we're getting closer and closer every day, the stock -- the NAV discount should narrow. So I just went on a tangent. I hope you understand how we think about share repurchase. We're not opposed to it. But giving that capital back might kill off the potential for us getting this business to a $20 stock in 4 years, which is our aspiration.

And another way to just echo that is the calculus is not as simple as you just buy back what is target IRR because you're -- we could take the stock that we're buying back and look at what do we think the IRR of that could be over time related to 180 stock price. But we can't compound it because we -- once that stock -- once that cash is gone, we can't reinvest it into something else. We can't move it in -- and every dollar that we pull back from an investment, we can reinvest. And we're sheltering most of that from taxes, if not everything, for the foreseeable future. So we really do have a lot of earnings power for every dollar that we have that we invest in the public markets versus buying back our own stock. And we can't replenish that. Whereas operating companies can if they're -- they can issue stock as the stock goes up. Unless we're trading above NAV, we can't do it.

And the one last thing is it is super fluid because your book value changes every single day. Our book value can be 30% higher in 5 days. It could be 27% lower. So we have to -- it's literally analyzing it on a day-to-day basis. So we would love to be able to return capital. I say that as someone that owns 0.5 million shares. I would like to be able to get our cash in public securities to $100 million and then I would like to be able to go to our board and say it's time to reward our shareholders with some sort of return of capital. And we're going to get there under our watch. And so anyway, that's how we think about the whole topic.

That's great. It's really comprehensive and that answers pretty much everything.

Anything else, [ Brian ]? Thanks, [ Brian ].

Hi, Ben, please go ahead.

This is Ben. I'm a shareholder. I wanted to ask, as you guys get closer to that goal of 100% public cash and securities, and hopefully, AgBiome is coming next to you guys there fairly soon, how we should think about contributors to NAV? Like, obviously, you have -- you'll be mostly public cash and security soon. Just also the third-party capital you manage and then I think your SPAC sponsor on Parabellum. So in terms of those contribute years outside the stock picking, is there anything else we should be thinking about here?

No, you got all the inputs. We'll have our -- the private holdings that we -- we want D-Wave to conclude. We talked about that. We'll determine how long we want to hold that. We announced TARA, so that cash will come. And as I said, we'll have a few more weeks and hopefully, we'll have an announcement on something else. And then we'll have very few of our assets in the private holdings. The third-party capital allows us to flow through carry to 180, which is offset. 2 out of the 3 years has been a significant offset to our normal operating expenses, so we don't have burn. So we like that. We'd like to have more of that. If I had a couple of hundred million dollars in the holding company, I don't know if I'd want to manage third-party capital. But we're not there yet, and so we have capacity to manage outside capital. And it's been a great relationship that we've had with our partner. And it's flowed -- the capital has flowed through nicely back to 180 because we've had really, really good performance. The only other stuff in there as it relates to what's going to move our equity is, I guess, M&A. We're a public company. If somebody wants to own us, they can own us. If we think about merging with other closed-end funds, that's been a difficult challenge to get people on the phone. People don't like to part with their contracts that they have. So there's M&A stuff that we could think about now that we weren't able to think about 5 years ago either. And look, if our stock is going to trade at a stupid price forever, then it's our responsibility to make sure that we get fair value for what our assets are worth. And we'll do that as a Board and as a management team if required to. So I mean those are all the inputs. It's a closed-end fund. It's not an operating business. The only difference between us and a mutual fund is one is closed and one is open. So you have all the right inputs though, Ben.

Ben, I don't know if you have another question. But I'm trying to unmute you, and then for some reason, it's not working. If you do have another question, feel free to reach out to us. Moving on to our next question. Please go ahead.

It's Bob Little, shareholder. On the TARA Biosystems transaction to Valo Health, have you divulged what the milestones are?

No. We're not -- we're contractually obligated to keep those in our -- at our disposal, unfortunately.

Yes. Bob, it's Daniel. Good to hear your voice. So I mean I think the way you should think about these as well is, oftentimes, milestone payments related to biotech companies are very similar. And if you just look at what was announced rated to Eli Lilly acquiring Petra, there were some clinical milestones that they disclosed and then also some sales milestones. So you can think that, that's generally how these things operate. When Amgen bought BioVex similar story. So I think you can think about it similar in this case as well.

And also, in certain cases, if the milestones are just free money, then they're free money. If somebody wants to buy us out of that, we'll always look at the milestones and ask ourselves what's likely to be paid and what's going to take longer to be paid. And if somebody wants it out of our entire position based on the net present value or future milestones, we're not in the business of being in that business anymore. It wrecked Harris & Harris. It was a failed strategy. We inherited what we inherited. We've tried our darndest to get ourselves out of that without creating NAV decay, selling for the sake of selling. We've been incredibly successful in our public market strategy that's enabled us to hold on to some of these private holdings that the former management team would have sold because they had a -- they were running out of cash. Like it was a real mess. And our success allowed us to have more success monetizing private holdings. But if somebody wants to pay us for those milestones, I'm not waiting 10 years to get paid because that's not our business anymore. It shouldn't have been in our business 5 years ago, but it still was. Thankfully, the Board decided to make a significant change to who we were. And so maybe there's more to come on that. But we're not hanging out here waiting for 9 years with some revenue attached to a drug that has to go through the entire FDA process for the sake of waiting for a home run. That strategy was flawed and failed Harris & Harris and we're not going down that same road. So if someone wants to pay us the right price for the asset that we have, they can have it. But somebody wants to offer us a stupid price for that same asset, we'll throw them out of our office. We're working here for shareholders and we want to make sure that every dollar that we're managing is managed properly for our shareholders. And we're going to take consideration and we're going to take care of the shareholders from that perspective.

And we have the luxury to be able to do so given the balance sheet that is now that exists at the company.

Unmute Ben again.

I tried. Ben, I'm trying. I can't get you unmute for some reason. So feel free to give us a call if you have any other questions. I do not have any other questions in the queue.

Okay. Well, as always, thank you for your questions. We look forward to chatting with you in a few weeks on our results. While it has been a difficult 3 months, it's been a great 5 years and 3 months or 5 years and 3.5 months. And we've always been -- we've always had an eye towards the future, not either through good times or bad times, spend a lot of time analyzing the past and we'll continue to do that. And the opportunities that we're seeing right now are pretty attractive if you have a time horizon of a few years. And our -- we're in a really good position, a position that we weren't in 5 years ago. And we're grateful for the balance sheet that we've built and hopefully for the balance sheet that we're going to build over the next 4 years. These proceedings are now concluded. We'll speak to you when we report. Thank you, and we appreciate your interest and support of 180 Degree Capital.

Thanks, everyone. You now can disconnect.