180 Degree Capital : Letter to Shareholders Q1 2024

Q1 2024 Shareholder Letter

5% Fed Fund Rates are Not the End of the World... In Fact, They are Normal

Fellow Shareholders:

Since the Federal Reserve began its rate hiking cycle in March 2022, there has been a near-constant drumbeat that higher interest rates would drive the economy into recession. The common view wasn't whether we would end up in a recession, but rather, how deep and long-lasting it would be. After all, how could the economy grow after the Federal Reserve brought the Fed funds rate to a targeted 5.25-5.50% versus near zero rates only 18 months ago?

This question ignores over sixty years of history during which Fed funds rates were at or above 5%. We are not naive enough to think that higher rates haven't and won't continue to slow portions of the economy that are more interest rate sensitive than others, particularly given the speed at which the Fed funds rate was increased. We do not, however, believe rates at these levels will lead to a crashing of the U.S. economy, a catastrophic collapse in any major economic indicators, or the destruction of the small and microcapitalization companies in which we invest.

Are Fed funds rates, even at 5%, at historically low levels despite being significantly higher than they have been for over 15+ years? Yes, they are. Has the economy and earnings of perceived "risk" assets ever grown with a Fed Funds rate at 5%? More often than you may think. Have small capitalization stocks performed well with Fed funds rates at 5%? Absolutely. Recent history convinced investors that near-zero interest rates are required for economic prosperity, particularly for "risk" assets. However, long-term history contradicts this belief. We believe this time is notdifferent. If we are correct, and long-term history repeats itself, the ensuing years could see not only a continued period of strong economic growth, but also a period of strong returns for stocks of small and microcapitalization companies.

Recent History: ZIRP

The housing market deterioration that began in 2007, spurred what would eventually result in an aggregate 525 basis point reduction to the targeted Fed funds rate across ten separate cuts over 15 months. This zero-interest rate policy (or "ZIRP"), which also included various quantitative easing programs, was certainly effective in mitigating the economic fallout from the financial crisis of 2008/2009. GDP growth resumed in earnest in 2010, but the Federal Reserve did not raise rates whatsoever until December 2015, seven years after setting the target Fed funds range to 0-25 basis points. Even then, rate increases were gradual through 2018 before some cuts were made in 2019 due to economic uncertainties resulting from trade disputes between the U.S. and China along with slowing economic growth.

In March 2020, as economic activity was grinding to a halt due to the onset of the COVID-19 pandemic, the Federal Reserve lowered the Fed funds rate to 0-0.25% and announced further quantitative easing programs in a series of emergency meetings. While an effective means to deal with the calamity at hand at the time, these polices, along with historically large amounts of government stimulus funding, remained in place after the economic effects of the pandemic abated.

When capital is essentially free like the Fed allowed for so long, liquidity naturally seeps into odd and novel pockets of the market, or even creates new ones. Here is one extreme example: it's truly remarkable to think someone was willing to spend $3.4 million on a non-fungible token (NFT) of a cartoon ape less than three years ago.

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Source: X

During this period, there were numerous examples of irrational exuberance across sectors of the public markets, particularly so-called "meme" stocks and early-stage companies that completed public listings through special purpose acquisition companies, or SPACs. While each of these "bubbles" created and ultimately ended up destroying wealth, arguably the worst outcome was the perception that ZIRP was required to build value in all "risk" assets, including established small and microcapitalization public companies.

Long-Term (i.e., We Believe More Relevant) History:

Given that many investors have known nothing other than prolonged periods of ZIRP, it is hard for them to fathom that there is economic life outside of that policy for any companies other than the ones that are the largest and most well- capitalized. This theory could not be further from the truth based on historical data. Let's first look at the history of Fed funds rates since 1964.

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Source: Bloomberg

As shown above, the average Fed funds rate for the entirety of the last 60 years is 4.9%, if one excluded 2009 to 2023 when rates were historically low, the average Fed funds rate is 6.3%. Now let's overlay GDP growth during this period.

Source: Bloomberg

Over the past 60 years, there have been 31 years (or half the time) in which the Fed funds rate was 4.9% or greater. The dark blue bars in the chart above show that the economy grew in 26 out of these 31 instances, or 84%. As, or perhaps more interesting, is that in the years where the Fed funds rate was greater than 4.9%, the economy grew an average of 3.3%. In the years where the Fed funds rate was less than 4.9%, the economy grew 2.9%. GDP growth doesn't tell the

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whole story, however, since it incorporates all parts of the economy. Let's dig in further and look at the performance of small and microcapitalization public companies during these years versus Fed funds rates. One of the best proxies for this universe of companies is the Russell 2000 Index.

Source: Bloomberg

The Russell 2000 Index was down 14 years out of the last 45. In 8 of those 14 years, the Fed funds rate was less than 5%, while in 6 years the Fed funds rate was 4.9% or higher. The number of times the Russell 2000 Index was up in each interest rate environment is approximately equal with 15 years of increases when Fed funds rates were greater than 4.9% and 16 times when it was less than 4.9%.

Reversion to Normal Isn't Bad News for the Economy or Stocks

If history is a guide to potential future outcomes, then the data presented above supports our view that the current interest rate environment of 5.25-5.50%, or anything close to it, should not be viewed as the end of the world. Rather it is a reversion to more normalized levels that historically have supported both strong economic growth and value creation in small and microcapitalization stocks. We believe this more normal interest rate environment is not likely to lead to a recession by itself. We believe the resiliency the economy showed in 2023 is more than capable of continuing into 2024. Therein lies what we believe to be the opportunity for investors, who like us, believe history will repeat itself and lead to meaningful value creation in this more normal environment, particularly for small and micro-capitalization companies.

For those of us who spend our time in the non-NVDA markets, it has been a complete slog since the Russell Microcap Index peaked in November of 2021. While most of the "large cap indices" have pressed for new highs in recent months, the Russell Microcap Index is still down an incomprehensible 30% from its all-time high. I have said in prior letters that we bastardize the end of the world scenarios of prior recessions (2008 as an example) by claiming today is an uninvestable market for small caps. I spent most of 2008 hiding under my desk at BlackRock and on an endless string of weekend conference calls learning which banks were going to zero by the market open on Monday morning. Repeat after me: This isn't that. This isn't that. This isn't that.

Here are some comments in the recent Beige Book for use in a recent FOMC meeting as sent to me by our friends at Cantor Fitzgerald.

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• Economic activity "expanded slightly" since late February
• Expansion was more broadly based with ten of 12 Districts experiencing "slight or modest economic growth" up from 8.
• Auto spending was "buoyed" and Tourism "increased modestly."
• Employment "rose at a slight pace overall", but with "persistent shortages" of qualified applicants; wages "grew at a "moderate pace".
• Price "increases were modest...running at about the same pace as in the last report" with "moderate increases in energy". Firms' ability to "pass cost increases on to consumers...weakened."
• "Contacts expected that inflation would hold steady at a slow pace moving forward...with a few Districts perceived upside risks to near term inflation in both input prices and output prices."
• These comments are Fed Speak for "sticky" inflation, with possible upside risk.
• Further, with no indication for significant deterioration in labor market and expectation for "modest further job gains", the employment side of the mandate remains an impediment to rate cuts.

Doesn't exactly feel like 2008 now does it? We got a little taste mid-quarter of TURN's ability to generate material gains from its concentrated portfolio. Against the backdrop of good numbers for SNCR and PBPB, at one point during Q1 2023, TURN's gross total return and estimated intra-quarter net asset value per share ("NAV") were up more than 16%. Then we hit an air pocket of news from our portfolio companies in mid-March, and the market started a new "stagflation" obsession. SNCR went from a starting point of $6.21 per share on January 1, 2024, to nearly $14 per share after it reported good numbers for Q4 2023 and a strong guide for 2024, only to retrace itself back to $6.25 per share as investors seemingly forgot the good news. Let me repeat, nothing changed between that announcement and the end of the quarter. PBPB also hit new 52-week highs after pre-announcing its Q4 2023 results along with additional franchise deals, only to see its stock retrace a portion of its gains after reporting a quarter that was already pre-announced…. This action on no fundamental

news is exhausting.

Despite the market's sell-off in March, we achieved a +4.7% gross total return from our cash and public-related securities leading to a 2.8% gain in our NAV to $5.16. As we have said for six months or longer, we think we are at the end of the Fed hiking cycle. We are not in the camp that the Fed will be cutting rates anytime soon, because we believe the economy will continue to show the resilience that it showed last year. That, in our view, is a positive rather than a negative. Our portfolio companies do not require lower rates to execute and build value for shareholders. They benefit from the types of positive economic trends we saw in 2023 and continue to see in the beginning of 2024. We believe they will also benefit from our activism across many of our holdings.

Let's now review the material sources of change in our NAV this past quarter.

Largest increases in public portfolio in Q1 2024:

• Potbelly Corporation (PBPB): PBPB pre-announced another strong quarter with 6.4% growth in same-store sales and average weekly sales that exceeded estimates driven primarily by traffic growth. PBPB also noted 192 new shop commitments as part of the pre-announcement that was expanded to 202 when PBPB reported its full results in March 2024. PBPB provided long-term growth targets that supported its belief that the growth trends from 2024 will continue into the future.
  In 2018, Potbelly traded at nearly $15 per share. As of the end of Q1 2024, the stock traded at 2/3 that price despite having better comps, a better management team, higher revenue, and a franchising-based growth strategy that didn't exist back then.
  For the quarter, PBPB increased NAV $0.25/share, or $2.5 million.

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- Synchronoss Technologies, Inc. (SNCR): In February 2024, SNCR reported that it had completed post- divestiture cost removals that resulted in annual savings of approximately $15 million. In the same release, SNCR noted that it expected to report revenue and adj. EBITDA for Q4 2024 that met or exceeded the upper end of its original guidance. SNCR's stock doubled after this announcement to a high near $14/share before retreating through the remainder of the quarter on no new information.

We joined SNCR's Board of Directors in late 2023 with the purpose of helping the company create value as a newly pure-play cloud business. We don't join boards because we want to clip coupons through board compensation. We only join if we are convinced that we can help a company enhance its return profile through specific actions or steps that we think we can help achieve through such active involvement. We believe there are plenty of opportunities for us to help SNCR and we hope that is evident as 2024 unfolds. The stock has literally retraced itself back to this year's starting point and trades at, in our opinion, a low multiple of enterprise value/EBITDA (~5.5x) for a company with 75% gross margins, over 90% recurring revenues, and 25% EBITDA margins. We believe such companies, based on comparable valuations, could easily trade at 10x EBITDA, or $20 per share, which is more than triple the current share price.

For the quarter, SNCR increased NAV by $0.18/share, or $1.8million.

• D-WaveQuantum, Inc. (QBTS): QBTS announced the availability of new quantum computing resources and partnerships to drive quantum computing adoption. The increase in QBTS' stock price also allowed it to regain compliance with NYSE listing standards and the ability to tap its equity line of credit for additional capital to fund operations.
  For the quarter, QBTS increased NAV by $0.09/share, or $0.9 million.
• Quantum Corporation (QMCO): Even though QMCO remained delayed in filing its financial statements due to the ongoing review of revenue recognition as raised by its new auditor, Grant Thornton, the company was able to provide updates on its balance sheet and noted that it was taking steps to optimize its working capital and reduce debt. QMCO also announced several new products with artificial intelligence-related features.
  I have not truly had a good word to say about this company in a very long time. It is the one name we own where we have gotten it very wrong from a fundamental thesis perspective, and without question, this position has turned into our worst idea since 180 started. QMCO has an uncanny ability to snatch defeat out of the jaws of victory and the management team, unfortunately, has been long on excuses since the early days when we had a very high regard for the team. That said, based on recent filings and public communications, we do believe QMCO is at the end of this latest drama with its new auditors. We don't believe the issue is significant, and we do believe the stock is going to go materially higher when it is resolved, hopefully, by the end of Q2 2024. It is our view that once this accounting matter is resolved, QMCO should sell themselves, and we will advocate for that likely through some form of activism.
  For the quarter, QMCO increased NAV by $0.08/share, or $0.8 million.

Largest decreases in public portfolio in Q1 2024:

• Lantronix, Inc. (LTRX): LTRX reported results for its fiscal Q2 2024 (ended December 31, 2023), that met expectations, however delays in one of its compute programs coupled with weakness in its distribution sales channels led to lowering of full-year guidance. While this reduction was expected to lead to weakness in the stock, LTRX's new CEO indicated his need to review every aspect of the company and would not back the opportunity funnel communicated on calls prior to his tenure. His tone and word selection made LTRX appear as a turnaround rather than a strong business, and this approach placed extreme pressure on the stock that continued through the remainder of the quarter.
  Subsequent to the disaster that was the fiscal Q2 2024 conf call, we have spent considerable time with the management team and Board attempting to provide advice on what we believed LTRX's management needed to do on its next earnings call. Some of these suggestions were incorporated into LTRX's recent fiscal Q3 2024 conference call, but additional steps are required to regain the confidence of investors. LTRX is another

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portfolio company where we may ramp up our constructive activism to drive change and value creation for shareholders.

For the quarter, LTRX decreased NAV by $0.13/share, or $1.3million.

• The Arena Group Holdings, Inc. (AREN): AREN defaulted on its contractual payments to ABG related to its Sports Illustrated license, which resulted in ABG giving AREN notice that it was cancelling the license. Subsequent to the end of Q1 2024, ABG signed a new agreement to run SI with Minute Media. AREN was also served with lawsuits from ABG and former management. In Q2 2024, representatives from AREN held a conference call during which they reiterated the expectation of driving to a close of the transaction between AREN and Bridge Media, albeit without providing financial estimates on what the go-forward business looks like without Sports Illustrated in terms of financial performance.
  We have a hard time making an investment case for AREN until the merger with Bridge Media closes and the company provides clarity on its financial operating model. We started out optimistic about the deal, and as is customary for large holders in public companies, we agreed to sign a voting agreement at the request of Bridge Media and its parent company, Simplify Investments. To be perfectly honest, the team at Simplify hasn't listened to any of our suggestions, and the arrogance under which they have operated has exposed false assumptions and complete naivety with regards to the public markets and AREN's partners. While we think the business can be run more efficiently and profitably than in years past, it is incumbent on the new team to get its act together and understand AREN is a public company with stockholders other than Simplify, and is not some pet private business where public market rules do not apply.
  For the quarter, AREN decreased NAV by $0.12/share, or $1.2 million.
• comScore,Inc. (SCOR): SCOR again missed top-line estimates and exceeded EBITDA targets for Q4 2023. SCOR then provided guidance for 2024 that indicated expected revenue growth, but not the ability to maintain or exceed 15% EBITDA margins for the year. SCOR also was unable to reach a conclusion on the outstanding negotiations with Charter to resolve data licensing issues and with the preferred stockholders to resolve outstanding capital structure issues.
  180 nominated Matt McLaughlin, the former COO of DoubleVerify Holdings, Inc., as a board nominee at the 2024 Annual Meeting and planned to run a competitive proxy contest. After several members of the Board met with Matt, SCOR decided to support Matt's addition to SCOR's Board through an expansion of the Board to 11 members without us needing to run a competitive proxy contest. While this is a smart first step for SCOR's Board, it has painfully failed to address substantial overhangs to the creation of value for common stockholders including SCOR's capital structure and Charter's inherent conflicts of interest. From our vantage point, we do not know if the Board is unable to agree on a path, or too lazy to understand the urgency in getting to some conclusion. Either way, it doesn't matter. SCOR's Board is ineffective and has overseen a decline in SCOR's common stock price by 80% since they arrived. They need to wake up and take action.
  SCOR is another case study in terms of a stock price being obliterated without real news as the source of such destruction. As we stated previously, SCOR had the same capital structure three years ago when its stock traded at $5.00, and its EBITDA was $32 million. EBITDA in 2023 was $44 million. The consensus analyst estimates according to Bloomberg for 2024 is $51.1 million and $56.2 million for 2025. The obsession of stockholders and otherwise would be stockholders with the unknown intentions of the preferred stockholders is the only thing anyone talks about these days instead of the meaningful progress the current management team has made in fixing the business and building cross-platform products that customers want and need. We will not go away as we believe there is so much hidden value to be unlocked if the Board gets some urgency.
  For the quarter, SCOR decreased by $0.05/share, or $0.5 million.

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Conclusion

I have been managing money for over 30 years and have been an investor or portfolio manager since 1988. Never in my life have I been more convinced that we own a collection of companies that I believe have the potential to rise materially in value as much as the portfolio TURN has currently put together. We are also at a point where I believe our constructive activism will make a difference in this value creation. While the last 2 years have been incredibly frustrating and disappointing, I have had the 30+ year experience of knowing that challenging performance periods happen. During these periods, it is crucial that you don't shy away from talking about them, you don't become over-emotional about them, and you stick to your knitting and process, no matter the pain in doing so during such a period.

While generating modest gains through the first quarter of 2024, we hope Q1 2024 was the start of what we believe will be a return to risk asset classes, including the microcapitalization stocks in which we invest. 180 Degree Capital's constructive activism means working with management teams and/or boards of directors of our portfolio companies to build value for all stakeholders in those businesses. We do not have the hubris to believe we know the businesses of our investee companies better than their management teams and boards. We do have complementary skill sets and contacts that we believe can help unlock stunted value. We believe this complementarity is what led to the invitation to join the Board of Directors of SNCR. We have rolled up our sleeves to help SNCR's management and board wherever possible and could not be more excited about the opportunity for value creation that we believe exists for SNCR. We believe our nominee, Matt McLaughlin, has both relevant industry experience for where SCOR is heading with its business and can be an advocate for proper corporate governance, particularly for common stockholders, as a significant common stockholder himself. We are prepared to ramp up our constructive activism to drive value creating events for common stockholders, which includes employees, at QMCO and LTRX, should such steps be needed. We believe our constructive activism is not only a differentiated investment approach, but also can be an important part of the ultimate unlocking of value for our portfolio holdings and creation of value for 180 Degree Capital's stockholders.

Lastly, we established our Discount Management Program to make it clear that TURN's management and Board are serious about our intentions to narrow this discount and create value for TURN's stockholders. Management and the Board of Directors of TURN collectively own almost 12% of outstanding shares, and this ownership continues to grow solely through open market purchases. We are laser-focused on creating value for all stockholders of TURN through growth of our NAV and the narrowing of the discount.

As always, thank you for your support.

Best Regards,

Kevin Rendino

Chief Executive Officer

Forward-Looking Statements and Disclaimers

This shareholder letter may contain statements of a forward-looking nature relating to future events. 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 in this press release. Please see the Company's securities filings filed with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the Company's business and other significant factors that could affect the Company's actual results. Except as otherwise required by Federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. The reference and link to any websites have been provided as a convenience, and the information contained on such website is not incorporated by reference into this shareholder letter. 180 Degree Capital Corp. is not responsible for the contents of third-party websites. The information discussed above is solely the opinion of 180 Degree Capital Corp. Any discussion of past performance is not an indication of future results. Investing in financial markets involves a substantial degree of risk. Investors must be able to withstand a total loss of their investment. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but no representation or warranty is made, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of the information and opinions.

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