180 Degree Capital Corporation (NASDAQ:TURN) Q2 2023 Earnings Conference Call August 15, 2023 9:00 AM ET
Company Participants
Kevin Rendino – Chairman, CEO & Portfolio Manager
Daniel Wolfe – President, CFO, Chief Compliance Officer, Portfolio Manager & Director
Conference Call Participants
James Elbaor – Marlton
Zach Liggett – Financial & Investment Management Group Ltd
Daniel Wolfe
Good morning, and welcome to 180 Degree Capital Corp.’s Second Quarter 2023 Financial Results Update Call. This is Daniel Wolfe, President, Portfolio Manager of 180 Degree Capital. Kevin Rendino, our Chief Executive Officer and Portfolio Manager, and I would like to welcome you to our call this morning. [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 Investor Relations website at ir.180degreecapital.com under Financial Results.
Please turn to our Safe Harbor statement on Slide 2. 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 our business that could affect our actual results. Except as otherwise required by federal securities laws, 180 Degree Capital Corp. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
I would now like to turn the call over to Kevin.
Kevin Rendino
Thank you, Daniel, and good morning, everyone. We’ll start on Slide 3. We purposely waited a little longer to report our earnings this cycle because we wanted some of our portfolio holdings to report and announce some of their own news, news that we were well aware was occurring behind the scenes. You’ll see the news from Arena Group last night of a transformational, game-changing announcement of a strategic investment and elimination of any concerns with their debt. We’ll have more on that later. In fact, I’ll focus most of this call on specific companies that we own and the activism that we have pursued.
For the quarter itself, it wasn’t a good one. Our NAV declined 4.6% on the back of a 5.8% decline in our public holdings. This was led by declines in IVAC, Parabellum, RYAM and Comscore. We did have good quarters from our holdings in Potbelly, Commercial Vehicle Group and Quantum D-Wave, but all in all, it was a very disappointing quarter. As noted in our prior press release, we did purchase 373,679 shares of our outstanding stock at $4.41 because despite what was a challenging quarter and sort of a nothing year through these first 6 months, our share price still trades at a 30% discount for our book value and actually less than the cash and liquid securities that we have on our balance sheet.
Moving ahead to Slide 5. This is a chart of the trend in our cash and securities of public companies. We were able to quadruple the amount from the time we started until November of 2021, but the performance of our holdings through this bear market in the last 18 months has led to a decline in the value of these assets. All that said, our share price, which I have said, traded at nearly a 30% discount to our book value and also trades at a 20% discount to our cash and liquid securities.
Skipping to Slide 6, we had an opposite quarter than our first quarter. To say this has been a trying, frustrating market to wade through was quite the understatement. Despite an economy that hasn’t rolled over, ingenerably favorable news from the majority of our holdings were virtually flat year-to-date, slightly behind the Russell Microcap Index and slightly ahead of the Russell Microcap Value Index. Through June, the Russell Microcap Index has advanced 1.8%. This compares to the almost 40% gain for the NASDAQ 100.
We’re back to a market that focused on 7 companies, companies that — companies like NVIDIA, Meta, Apple, Microsoft and a few others, at the expense of almost anything else. It’s beyond frustrating. That said, just because we haven’t been rewarded for our investments in our holdings doesn’t mean we won’t eventually. We’ve been through plenty of bear markets and soft performance periods to know that when we come out of it, we will enjoy significant price appreciation in the value of so many of our holdings, and our NAV will advance as a result. We aren’t sitting back waiting for things to happen. We have used our activist approach across many of our holdings. Some of the activism you see and some of you don’t, but it might make sense to highlight how and where we have used it.
On Slide 12 is where we started the discussion with many of our names. First, Intevac. After doubling since our initial purchase where we took some money off the table, IVAC decreased from $7.33 to $3.75 this past quarter. The company noted in its Q1 ’23 earnings call that its program with Corning was delayed at least a quarter due to Corning’s customers pushing out adoption of the new glass IVAC’s tool was expected to enable. IVAC had used cash to build inventory for the delivery of its tools with the expectation that the ramp would be faster than it is now expected. Following that announcement, IVAC noted that Seagate canceled over $50 million worth of tool orders that are expected to ship in 2024.
What have we done? We have sent the company a Board-level letter behind the scenes and have spoken with management and the Board highlighting 2 key points. One, while we’re bullish on IVAC’s new glass tool, it was no longer acceptable for the company to continue to invest in inventory and bleed down the cash for the balance sheet, not until the business actually shows up with actual revenues. The company needs to come up with either an operating plan that is self-sustaining in the short term, or find some alternative to restore value.
Subsequent to those conversations, the company has declared it’s running a strategic process and announced it had retained Houlihan Lokey to explore strategic alternatives. The company also initiated a cost-cutting program designed to ensure it remains cash flow positive starting as seemly as this year. All in all, the stock is at a silly price. It essentially trades at near cash, with cash likely to grow from here, and the company is in the final stages of qualification with Corning. We like the stock at this price.
Comscore decreased from $1.23 to $0.80 this quarter. Although SCOR missed top line estimates for Q1 in what was a seasonally slow quarter, it reiterated its guidance for significant free cash flow from operations and exiting 2023 with an EBITDA margin of close to 15%. In fact, EBITDA estimates were met last quarter and exceeded this past quarter. That said, SCOR’s Board and its preferred holders did not take any steps to resolve concerns and ambiguity — I can never say the word.
Daniel Wolfe
Ambiguity.
Kevin Rendino
Thank you. Ambiguity around the potential special dividend and misalignment between incentives for common and preferred holders. We continue our activist campaign, both with public and private lenders, highlighting lack of corporate governance alignment of interest for all stakeholders to increase the price of Comscore’s common stock. SCOR’s preferred holders elected to defer their annual dividend of $15 million for future payments estimated to occur by the end of 2023 to provide additional cash for SCOR to invest in its business.
You’ve seen our activism. It’s been public, and it will continue because there was so much inherent value that has not yet been unlocked by this company. The market continues to discount the same news over and over and over again. Generally speaking, Comscore’s stock has gone from $5 to a 52-week low of $0.63 because its Board of Directors has thus far failed to act on suggestions that we and other investors have independently provided to them that we believe can reverse the trend of the shareholder destruction that has occurred under their watch.
Our activism can be seen in many ways, sometimes in public letters to SCOR and other times behind the scenes. Our intention is always to be constructive and collaborative with the companies that we own. In the case of SCOR, we started with a sense of collaboration regarding our ideas for the company, but came to realize that its Board was being dismissive and unresponsive. We got back the usual, thank you for your letter, and we will share with Board, and then no action or only partial, immaterial action would be taken.
We realized quickly that the Board was either supremely arrogant, confused with how to create value for all stakeholders or incapable of coming together and agreeing to take action given the different perspectives from the different Board members. Unfortunately, SCOR has been instead focused solely on creating value for themselves and the preferred stockholders. Board compensation is entirely too high, especially considering the track record of failed oversight and shareholder value disruption.
The Board has taken us up on several of our suggestions and finally reduced its compensation by an average of 26% in 2023, but they’ve only taken small steps when more substantial action is immediately required. We have told the Board how this would play out for the common stock if they continue along their do-nothing path. We take no solace in having been right in our analysis, because being right has led up to us being wrong for 180. We just never thought they wouldn’t do anything to attack the capital structure and show better alignment amongst all stakeholders.
So should SCOR’s Board continue to ignore their fiduciary responsibility to common shareholders, we’ll resort through a series of fact-based public letters regarding the individuals on the Board who have hijacked what we believe to be SCOR’s valuable collection of data assets from the common shareholders and the employees of the company. If they don’t want to see their names attached to their level of performance they have generated over the duration of their oversight, then they should fix it with a series of actions and improve the capital structure, align themselves with common shareholders and reverse the trend of the stock performance that has collapsed since their investment.
I don’t care that we are small and the players on the Board are represented by John Malone’s Liberty Broadband or folks at Cerberus or Charter Communications. SCOR’s board has a fiduciary duty to represent all stakeholders. This is all just common sense stuff at this point. While it’s patently obvious to anyone that the decline in the stock revolves around the inactivity of the SCOR Board, does that mean that this is the right price for the business? Hardly. In our view, there is no chance this is the right price for Comscore. The Comscore had the same structure 2 years ago when the stock traded at $5. What has changed?
Actually, in spite of weakness in the advertising market and increasing interest rates, SCOR’s fundamentals have materially improved. Two years ago when the stock was $5, SCOR’s EBITDA was $32 million. The consensus analyst estimate according to Bloomberg for this year is $43 million, and next year is $58 million. Somehow, the story has evolved into an incessant, redundant snakepit of shareholder obsession regarding the capital structure and the intention of the preferred holders.
And while we obviously understand the terms of the preferred stocks, we find it hard to fathom how this issue is the reason for the stock to continue to decline every single day. We believe that the current share price isn’t the right price of the business. It would help if the Board would actually get a sense of urgency, get some Wall Street smarts, some leadership and act like fiduciaries. If it does, the stock will go meaningfully higher from where we are today. It really isn’t quite complicated.
On Synchronoss, we helped the company fix its balance sheet 2 years ago at a much higher price by replacing a very expensive perpetual preferred stock that limited the company’s flexibility to streamline its business with materially low cost for financing and equity. Since then, what’s happening? Management has run a much better business, achieving EBITDA estimates consistently higher than consensus analyst projection. The result has been Synchronoss’ stock goes down.
In March ’23, B. Riley presented a nonbinding offer to purchase Synchronoss for $1.15. The offer kickstarted a full strategic alternatives process. The result, Synchronoss’ stock cannot just trade consistently above $1. Synchronoss sells one of its noncore and least contributing asset that nobody even asks about when discussing the performance of the company for up to $14 million, with $7.5 million received at closing. The result, Synchronoss’ stock goes down.
In July ’23, Synchronoss successfully negotiated an extension of by far its largest contract to run Verizon’s Personal Cloud through 2030, an unbelievable extension of 5 years. The result, Synchronoss’ stock increases by 2%. There’s always a bear case. In Synchronoss’ case, it’s reported aggregate revenues which aren’t showing growth. That said, the underlying business with the most value is growing and has the highest margins of all of its businesses.
Of course, the company — every company has pluses and minuses. In the case of Synchronoss, however, the majority of the news has been good, not bad. The action of the common stock is a complete head scratcher to us. I often ask myself what would happen to actually have Synchronoss go and trade up to fair value. Coming up with a cure for cancer? An engine that would enable a plane to go from New York to London in 2 hours? It’s remarkable and frustrating all at the same time.
We have written the Board several notes over the years and are firmly — and they are firmly aware of our views revolving around them. One, generating free cash flow; and two, asking them whether or not this should be a public company. They are running a process. B. Riley has already bid for the business, and as important, they are right at the critical moment where they are moving from using cash to generating cash. That Verizon contract has been extended and the management team has done a very, very nice job. What started out as what it should have been a floor price of $1.15 because of B. Riley’s bid has turned into a bid of a ceiling price. This company, in our estimation, should be worth more than last sale because of its valuable assets.
Arena Group is another one. In a challenging ad environment, Arena Group continues to execute better than its peers with growing revenue and generating $100 million improvement in its EBITDA. The result has been the stock goes down. In July of ’23, The Wall Street Journal noted that Group Black is in talks to buy a stake in the company. The result, Arena’s stock increases briefly, but then resumes its decline. Arena’s largest stockholder, and coincidentally, it’s largest debt holder, purchased over $1 million of Arena’s stock in the open market. The result of that, Arena’s stock goes down.
Why is that the case? The only reason we can possibly come up with is that Arena has had a material amount of debt on its balance sheet that technically comes due at the end of ’23. The debt is held by Arena’s largest shareholder, B. Riley, who has been purchasing common stock in the open market during this period of price weakness. Does anyone think that B. Riley would be purchasing common stock if it did not plan to renegotiate the debt and be the continued strong supporter of Arena and its common shareholders as they have always been? Are investors that naive? The stock has cost us nearly $1 drop in our NAV over the last year and currently trades at a price that makes little sense to us.
We have seemingly been over the wall and firmly aware of what was happening for the last few months. Last night’s announcement is a game changer for Arena Group. First and foremost, the stock has precipitously declined because of the debt due at the end of this year. We can take that off the table now because B. Riley extended the terms 3 years and have taken a straight 10% interest rate on their debt, and this market couldn’t be more supportive than B. Riley has been through Arena, and that alone should allow for the stock to double or triple.
Then, we have a new sponsor. A wildly successful billionaire who started 5-Hour Energy, who has media assets vis-a-vis local TV stations as well as Bridge Media Network assets, NEWSnet and Sports News, run over the top of streaming sites like Roku and Apple TV. Last night, the story for Arena changed for the better. We don’t have to worry about the balance sheet anymore, and the new sponsor is a successful billionaire who wants to own the business and make significant inroads in media. Arena is now part of this platform.
And finally, Potbelly. Sometimes there’s nothing for us to do other than see if the activism that we initiated works. In the case of Potbelly, I think we’ve succeeded. The company — when we invested in Potbelly, it was because we thought they had a wonderful brand with great customer loyalty, a terrific product, but one that simply needed better Board governance and a new leadership team. Led by Privet and Ancora, the Board changed. We filed a 13D in early 2000, and then soon thereafter, the Board named Steve Cirulis from Panera Bread as their CFO, and Bob Wright from Wendy’s as the CEO.
We were fortunate that the Board had already put in place a plan to change the management team. Now under this amazing leadership team, the business is operating better, the company is growing again, and we should be staring in a multiyear growth trajectory which would take the stock significantly higher than where it currently is, which is a price much higher than where we started buying it at back in 2020. We think Potbelly hasn’t even started yet in terms of its own growth.
Finally, on Slide 22. While this has been a painful period, we remade our company around our new strategy. It isn’t new anymore. Nearly 90% of our book is in cash and liquid securities, and as I look at the NAV, I view it more as a bear market book value. Most of our names have nearly 100% upside, which means so does our NAV, which means so does our share price, and that is the reason why I am the second biggest holder of TURN stock and Daniel is the sixth. We plan on making a bunch of money alongside all of our shareholders over the ensuing years, and while this has been a painful year, a painful 18 months actually, we’re not deterred in our focus for where we want to take 180 down the road. Daniel?
Daniel Wolfe
Thank you, Kevin. Please turn to Slides 23 and 24. 180’s remaining private portfolio has only 1 material position, and that’s AgBiome. The total remaining value of our remaining legacy private portfolio is approximately $8.6 million, of which $6.1 million is AgBiome and approximately $1.3 million is cash, the proceeds that we expect to receive in April ’24 from the sale of TARA to Valo.
This past quarter, we had a markup in AgBiome based on market adjustment factors derived from comparable public companies. In total, the private portfolio raised our NAV by $0.06. There’s really not much more to add regarding the legacy portfolio. As Kevin mentioned, it represents approximately 14% of our net assets, and we’ve taken a business that was headed to 0 and created a new business with a real future and a stable balance sheet.
Please turn to the next slide. For Q2 ’23, our regular operating expenses were approximately $879,000 versus $741,000 the prior year — $741,000 in the prior year. We will maintain a lean cost structure outside of fixed expenses for being a public company and focusing our expenses on activities solely designed to enhance our investment performance or increase our revenues from managing outside capital. The increase in operating expenses this year was primarily due to the addition of Matt Epstein to our investment team late last summer, and we are pleased to have him aboard.
Please turn to Slide 26 and 27. We provide these slides each quarter to enable our shareholders to look at the trend of our total expenses and compensation related as a percentage of net assets. This year, the percentage has increased primarily because of the decline in net assets. We continue to anticipate the reductions in our net operating expenses and will — our operating expenses as a percentage of net assets will be based on growth in our net assets rather than further reductions in our expenses. We remain committed to treating every dollar of shareholder money with the utmost care and consideration.
We would now like to open the line for questions.
Question-and-Answer Session
A – Daniel Wolfe
[Operator Instructions]. We have no questions in the queue.
Kevin Rendino
Okay. With that, we are always available for any questions that you may have vis-a-vis e-mail. We prefer, obviously, always to be — to get on the phone with you. So if you have any follow-up or anything that you want to add or ask us…
Daniel Wolfe
All right, we actually do have a couple of questions that came through. I apologize. Let’s go right here.
James Elbaor
It’s James Elbaor of Marlton. Can you talk a little bit about the share buyback program and how you’re thinking about that and return of capital in general?
Kevin Rendino
Sure. Thank you for asking. We — generally speaking, we — you would always want to buy back stock when your stock trades at such a significant discount to NAV. That’s just Graham and Dodd value investing that we’ve always believed. Having said that, our business is one of investing capital in other businesses, and at 180, the fortunate thing for us is that we have permanent capital in our closed-end funds.
And so once we return that capital vis-a-vis either a dividend and/or a share repurchase program, capital is gone forever, and that is the most precious capital. And by doing that over a long period of time or if you do that too often, you’re not going to have a lot of capital to invest in the companies that we want to invest in. So while it’s counterintuitive, buying back stock actually hinders our business over the long term because we won’t have that capital to invest.
So we’ve stated from time to time if our stock trades at such a wild discount to our NAV, then we certainly — we’d be willing to support it, but that’s not really part of what — we don’t want to be in a position, especially where our assets are today, that we’re buying back stock. We’d much rather — especially where we are in this cycle of investing, where the upside for many of our holdings far exceeds the upside of just buying our stock at a discount.
So we viewed what we did in Q1 as a one-off. We don’t view what we do personally as one-offs. You’ve seen the management team consistently in the market buying stock for our personal accounts. You’ll see that again, I’m sure, this quarter once the restriction is taken. But share repurchase is really not something that’s going to be a consistent part of our strategy. We’ve got to find companies, have them perform like they did in our first 5 years of existence, then our NAV will grow, the discount will narrow, we’ll have more assets, and that’s really the strategy for 180.
Daniel Wolfe
Please go ahead.
Unidentified Analyst
Long-time shareholder. You guys are obviously really smart guys and well experienced, and you saved the old 180 Degree or pre-180 Degree Harris & Harris from bankruptcy. But the small cap environment right now is something that’s really off radar to most institutional investors. It’s unfortunate that this is the sphere of influence that you’re involved in right now.
And as you mentioned, the mega cap tech stocks are where most dollars are flowing at this point at the expense of many very good companies that are undervalued. So I wonder what is your projection as a Dodd — I’m sorry, a Benjamin Graham value investor, in this sector of microcap stocks, some of which are even selling well below intrinsic value. Do you see any trend that would justify a continuation of even working in this area?
Kevin Rendino
I think one of the — good to hear from you again, Jonathan. Thanks for the question. There’s a lot of things to think through there. I guess, number one, it wasn’t a really good environment for small caps when we started in 2017, but we generated off-the-charts performance in the first 5 years of our — of doing this, and you can see that in our slide deck. So I think just because — and but we haven’t done well in the last 18 months. I own that. I’m the first person to admit that. I’m the second biggest shareholder. This has been painful for me.
But we don’t necessarily need the microcap stocks to outperform the large cap stocks for us, 180, to do well, because we did do well through that first 5 years when really, the only focus was large caps. So I think that’s number one, and our stock picking is going to determine whether or not we’re successful. And we have an activist approach. We tried to highlight how we’re using that for our current holdings. And hopefully, we’ll be able to recycle through some of our holdings which, quite frankly, have become stale.
I think to some extent, we’re — we’ve become stockholders waiting for exits which we think will occur, and then we can recycle that into newer names. We have a lot of reasons why microcaps have been lousy. Number one, it’s been a risk-off environment. And who wants to own Comscore when you can own NVIDIA and feel safe about what it is that you own? Even though the valuation discrepancy is a joke, right? Like NVIDIA is incredibly expensive and Comscore is quite , but everyone’s worried about their shadows and why do I want to take any risk in owning stock?
So let me just own what I perceive as safe and are going to be companies we don’t have to worry about. So that’s going on. We need a better macro backdrop in order for the microcaps to do well. And until we get there, you’re going to — I mean, this level of performance is so dramatic. It’s mind-boggling. I’ve never seen an environment where one group of companies is up 40% and another group of companies is up 1%. That’s just absurd. So the environment needs to get — we need to get back to a little bit of a risk-on environment where investors are willing to invest more of their assets in companies outside of the Magnificent 7.
Because the world isn’t ending, the economy isn’t holding, interest rates have stopped going up, and therefore, I could be more diversified in what I own. So we think we’re at the point where that’s going to happen. The economy has had sustained resilience. We haven’t imploded. Interest rates are probably at or near their cycle highs. The next move for the Fed could well be down, not necessarily up. We’ve seen earnings hits this year, and we see earnings growth going forward. We’re out of the pandemic, the supply chain has eased.
Like there’s a lot of reasons why things are getting better, not worse. And as they do get better, not worse, and as the environment and the headlines get better and not worse, then the market will, we think, diversify itself outside of just being in the hands of 7 stocks that basically dictate whether or not the market is going to go up or down. Small caps do well in inflationary environments because they’re able to pass through those price increases a lot faster.
Many of them are domestic. They don’t have to deal with the global supply chain issues that have occurred, so I mean, there’s a lot of — and then, of course, activism, that’s part of the reason why we use it is because many of these companies probably shouldn’t be public to begin with, and that’s really where we could step in and try and hopefully engineer some sort of conclusion for some of these companies so that the value that actually is inherent in their business can actually occur, and sometimes it occurs vis-a-vis a sale.
And like I said earlier in my prepared remarks, you’ve seen our activism behind the scenes, as I think, led to or at least been part of some strategic alternative process being led by some of the companies that we own. So I don’t know if that is a really succinct answer. We believe in what we do. We don’t necessarily need the microcap index to outperform NVIDIA for us to be successful, I think we’ve proved that in the last 5 months or 5 years. But we’ve just got to do a better job of picking stock than we have in the last 12 months, and that’s part of just investing.
You’re going to win some years and lose other years. And for those people that want to criticize us or think we’ve lost our way or think we don’t know how to invest anymore, I mean, that’s your perspective. You’re entitled to it. We just know that at the end of the day, we’re going to be able to create value for our shareholders because some of the stock prices that we’re investing in are at these crazy prices, and one day, that will change. And I hope that day starts today, but it will change, I promise. Sorry for the long-winded answer.
Unidentified Analyst
Well, using your own term of some of your investments in companies, they don’t deserve to be public to begin with. If I look at 180 Degree Capital and others in the group, I ask the same question, Safeguard Scientifics and others, you’re not the only one in this space that has suffered a share price.
In fact, you’re probably the only one where you have insider buybacks and company buybacks, and it’s — the discount to NAV is also consistent even in good times. And then there’s an expense ratio, which I’m not begrudging salaries and even with clawbacks in place and all that. And I wonder, have you ever considered liquidating the company and returning the cash to shareholders? Maybe not at this time, but maybe when things recover a little bit?
Kevin Rendino
Yes. We’re not here to clip coupons for ourselves. We’re here for shareholders, which is why we’re significant ones. The answer to your question is yes. But the answer to your question is no, that’s not something that we should consider now at the bottom of the cycle. Like can we liquidate everything that we own today and return it back to shareholders and get people close to the $6.22 that our book value is? Yes. But is there an opportunity to do that at a much higher price? Yes. Will we do that at a higher price? We will.
So Jonathan, the answer to your question is yes. At some point, this company will not exist anymore. We will liquidate it, we will hand the assets back to shareholders, and we will move on. But doing that at this point in time or even having this discussion at this time is pointless because we think there’s a path to creating a lot more value because of what we own at a much higher price. So let’s see if we can get to the other side of this, get a much higher NAV. The discount will either narrow or won’t, and at some point, we’ll liquidate and hand the money back to shareholders.
I don’t want to be doing this — and by the way, the Board of Directors has to agree with my thesis there, and I’m not saying they will or they won’t. That is my thesis. The Board has to agree with it. I think Daniel agrees with me. We talk about this all the time. I just think there’s a time and a place for that discussion, and the time isn’t today. But I don’t own 700,000 shares of the stock that I bought with my own money out of my pocket — after-tax dollars because I want the stock to go up a lot, first, and then we’ll liquidate.
We need a happy ending for this company. This company has had a checkered history. As Daniel said, it was on its way to 0 before we got here. We created a business. We grew it for 5 years. We’ve struggled in the last 18 months. We’ll grow it again and then we’ll make a good strategic decision for all the shareholders, which probably will lead to a liquidation of the assets that will narrow inevitably the discount that exists, and then we’ll all move on to our next lives. That’s the plan.
Unidentified Analyst
No, no. But in fairness, to me, I said not at this time. I said in the future.
Kevin Rendino
Okay. Thank you for that. There’s others that want us to do it today, so I appreciate that. We’re going to — everything that we do is for shareholders. It really is. I don’t sit around here and…
Unidentified Analyst
No, I mean there’s a real vote of confidence from you buying back shares personally.
Kevin Rendino
Yes. So like I said, we don’t…
Daniel Wolfe
We’re going to keep doing it.
Kevin Rendino
We’re going to keep doing it. I just know the last 18 months has been — if you invest for as long as I’m sure you have and I have, you’re going to go through these periods. You just do. You are. We’re not as smart as we were 5 years — 1.5 years ago after that 5-year performance run. We’re not as dumb as everyone thinks we are today. Reality sits somewhere in between. We know what we’re doing and we’re going to get there for all of our stakeholders and shareholders over the next 2 or 3 years.
Daniel Wolfe
Thanks, Jonathan. Did you have anything else? Good to hear from you. Zach, go ahead.
Zach Liggett
I was wondering if you could give us a quick autopsy on the Parabellum. Just walk through why you guys invested in that, and sort of any lessons learned. And then the other question I had is just on the D-Wave, and if you guys — I can’t remember. Do you still have restrictions on that? Or what’s the overall game plan with D-Wave? That doesn’t really seem to fit with your overall philosophy.
Kevin Rendino
Do you want to take that?
Daniel Wolfe
Yes. So D-Wave real fast. We are unrestricted on that. The restrictions came off February 5. We have sold a little bit as it ran from the bottom. I think as we look at D-Wave, you’re right, it’s not a traditional company that we would invest in today. We do have a lot of knowledge behind it, and as you think about AI, et cetera, there is a significant place for it in the market, we believe. It’s a small part of our assets, but it has — in this area, it has the opportunity to run.
I think one of the things that — one of the worries around it has always been can it survive because of its balance sheet, and they’ve been resolving that through their line of credit. And so I think we’re opportunistic around sales of that position, but it’s also not a core position. I don’t know, Kevin, if there’s anything else you want to add to that?
Kevin Rendino
No, I would agree with that. On Parabellum, never again. We invested in the management team from Adesto that we had a lot of respect for. Really, really — we made a lot of money in Adesto, as you know. We told them they should do a SPAC. We found a target company.
Daniel Wolfe
We found two.
Kevin Rendino
We found two target companies. They were real businesses. We spent a ton of time on it. We loved the opportunity. We actually think one of our companies is going to own one of the businesses that we targeted, it was that good of a business. We unfortunately ran into a situation where we couldn’t get funded. I mean, it was simple as that. The market just shut down for SPACs.
We bought Alta Group, which was a B. Riley SPAC, right end of ’19, beginning part of ’20. A very successful SPAC, a very successful company, and it was a real business. And so we felt as though we can do this with — by investing in Ron and Narbeh, and they’ll find the business, and we’ll invest just like we did in Alta. Alta is one of the best performing SPACs there has been.
We just ran into a situation where the funding — we couldn’t get funding, and we weren’t alone. And the stain from the other SPACs, the plethora of ones that came to the market, the lousy businesses that they became, the underlying businesses, cast a stain on the entire group, and we got lumped into that.
So unfortunately, our diligence led to a great investment, but our inability to raise money around that investment was the reason why we had to shut it down. So I think the lesson learned there was just going to focus on what we started to focus on in 2017, which is small public companies, use our activist approach, Graham and Dodd value. And it was a mistake. It didn’t — it cost us what, Daniel, $2.5 million?
Daniel Wolfe
Yes, about that.
Kevin Rendino
I mean it wasn’t catastrophic by any stretch of imagination. I mean, Arena Group’s gone down 4x the amount that Parabellum cost us. So — and Comscore’s gone down 4x more than Parabellum’s cost us. So it was a mistake. It was disappointing. It didn’t cost us a ton of problems from that perspective. It was time consuming, and we just — we’re not going to do it again. I mean, lesson learned. Just do what you’re doing.
We thought we were doing the right thing there, but as it turns out, we just did not get the market right in terms of understanding that the SPAC market would just fall apart at the seams, and every SPAC would be looked at the same way, not just — they wouldn’t be differentiated amongst the ones that had lousy businesses and the ones that had good businesses. So that was the lesson learned there.
Zach Liggett
Great. And one more for me. On Potbelly, which is — you sound enthused about the go forward, but how are you thinking about concentration within your portfolio and maybe limits there?
Kevin Rendino
Yes. We’re probably at the high end there of where we would like it to be. I mean, we run a concentrated portfolio. But because it’s up and everything else that we own is down, we haven’t been adding to it. It’s gotten there based on its own performance. So I would say that we have to be mindful of not falling in love with something so much that it’s going to take up a ridiculous amount of our assets.
So we’re probably at the upper limit. We’ve just got to figure out what that means. We don’t have any — this is not BlackRock or Vanguard where we have risk people and parameters around and guidelines and rules and regulations. I mean, we’re — that’s not who we are, but we also don’t want to have all of our eggs in one basket even though that one basket is doing really, really well. We have to figure this one out from that perspective.
20% of — where it is right now is at the upper end of where we’re comfortable. We’ve had other positions that have gone to this point, and we’ve taken money off the table. It’s not a signal, but we just need to be mindful. It’d be nice actually for Potbelly’s weighting to go a lot lower, not because it goes down, it’s because the rest of the portfolio that we own goes up. If we can get the rest of the portfolio back to valuations that make sense, Potbelly’s weighting will be considerably lower than it is today, so…
Daniel Wolfe
And I think the only thing that I would add that is we continuously look at our investment thesis around each of our names. And with Potbelly, they put out metrics a few years ago that they were targeting to reach in 2024. They actually have reached those about a year early, and now it’s where — what are the next set of targets that they’re going to be going towards, and that’s something they have to figure out. We have our models for how we think about where this business can scale, and we continuously look at that as we think about size of positions, and so it is something that we look at every day.
We have no further questions.
Kevin Rendino
Thank you, everyone. As I said earlier, if you have any follow-up, please feel free to e-mail. I’d be happy to get on the phone with you at any given point in time. We wish you the very best rest of the summer. Have a good third quarter, and we’ll speak to you again when we report our Q3. Thank you.
Daniel Wolfe
Thank you. You can all now disconnect.
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