180 Degree Capital Corp.'s Third Quarter 2023 Financial Results Update Call. This is Daniel Wolfe, President and 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. All participants are currently in a listen-only mode. Following our prepared remarks, we will open the line to questions. If you'd like to ask a question, please type star six on your phone or click the Ask a Question icon if you are participating via your computer. 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 relating 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 inherent uncertainties in predicting future results and conditions. These statements reflect the company's current beliefs, and a number of important factors could cause actual results to differ materially from those expressed herein. Please see the company's filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the company's business that could affect the company's actual results. Except as otherwise required by federal securities laws, 180 Degree Capital Corp. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. I would now like to turn the call over to Kevin. Thank you, Daniel, and good morning, everyone. I wanna leave you with a few key thoughts this morning. Our business transformation is essentially complete. After this past quarter, 97% of our assets are now in public companies. While it took over 6 years to get to this point, it is over. For those that are keeping track, since I arrived, and One Eighty came to be in 2017, we have generated nearly $3 per share, or specifically $2.77 in gains from our new strategy. We have had losses over the same period of time of $2.28 from the historic legacy positions of Harris & Harris. To be candid, this business probably wouldn't exist if we hadn't changed our stripes in 2017. While the last seven quarters have been a challenge for our public holdings, the market, and specifically the microcap indices, we now have a liquid, easily transparent balance sheet to be able to understand. Our NAV is easy to calculate. Therefore, as we said from day one, the discount our stock trade debt relative to our NAV should be far less than it was when our book was 80% privates. To that end, we announced a discount management program that Daniel will speak to later in this call. It's important that the reality of our discount mirror the thesis we had for it when we first started. To be clear, the most important thing we can do is invest in companies that rise in value so the absolute value of our NAV climbs. There is a reason our stock traded at close to $9 per share at the end of 2021. It was because we grew our NAV to over $10 per share from where it was when we started. And while the last 7 quarters have been a challenge for our holdings in the microcap index in general, we believe this period has set us up to once again grow our NAV as we look beyond this incredibly volatile and bearish market. In fact, we're gonna use the rest of this call to show you in illustration form why we believe this is the right time to be invested in microcaps, and as a result, TURN. We're gonna show you a series of charts and data that highlight just how undervalued we believe our investment universe is, and therefore, how much upside we believe there actually is for the companies that we own. I think this is one of the better buying opportunities for what we do than at any time since I've been here. The rest of this call will offer the rationale for why I think that is the case. As for the topics that we normally discuss on these calls, I recommend reviewing our shareholder call slides that are posted on our investor relations website. I won't speak to every chart included in this presentation, but I'll speak to a bunch of them and encourage you to flip through the presentation and shareholder letter for a complete discussion. On slide four, this shows that the ratio of U.S. small-cap performance to large-cap performance is that at the lowest level in almost a quarter of a century. And yet at the same time, this level of underperformance is nothing about the fundamentals of the businesses that comprise each index, given the fundamentals have actually held up better for many microcap companies than the index performance would suggest. On slide five, this argues that not only have the stocks of smaller companies underperformed, the relative price-to-earnings ratio are back to levels not seen since 2000 and 1978. What's interesting about 1978 was that was also a time of inflation, as has been the case in the last few years. The question for us is: Has the CPI peaked, and are we at the end of the Fed tightening cycle? The answer that we have for both of those questions is yes and yes. I do know the CPI has gone from 9.1% to 3.7%, and perhaps like 1978, which was the bottom for small caps, this is the bottom for small caps today because the CPI has long past peaked. You can review the CPI numbers this morning. They're a little softer than expected. Slide 6 shows that not only are small- cap value and small- cap core equities the cheapest segment of U.S. equities on a relative basis, it's also remarkable that these two categories are the only ones that are below their 25-year average valuation. Every other index in this chart shows that those indices traded premium to their 25-year averages. Slide seven shows that small caps trade not only at a discount to their large cap peers, but the discounts are incredibly high. For example, the performance gap is 41% on a trailing P/E, 39% on price to book, and 30% on price to sales. This is neither normal nor justified based on the actual performance of a company's fundamentals. Slide eight shows the historical returns of market indices. At least in 2008, when the economy actually did melt down, most indices were down about the same amount. Back in 2008, the S&P 500 Index was down 37%, the Nasdaq Composite Index was down 40%, the Russell 2000 Index was down 34%, and the Russell Microcap Index was down 40%. How is it that today the Nasdaq 100 could be up 37%, while the Russell Microcap Index is down 10%? How can the S&P 500 be 3% from its all-time high, while the Russell Microcap Index is down 38% and the Russell Microcap Growth Index is down 49% from the high? While we understand the bearish effect of today's world of higher interest rates, it has had a significantly greater effect on small caps relative to the 2008 economic environment, where nearly $1 trillion of losses occurred from categories of loans and related securities issued in the United States, secured primarily by residential real estate. 2008 was an economic Pearl Harbor, as Warren Buffett said, and 2023 is not the same economic calamity. The disparity of performance between the size of companies is the widest it has ever been and makes no sense to us. This is not 2008. Skipping ahead to slide 10, the above chart depicts bearish sentiment. Are there problems in the world? Yes, there clearly are a number of pressing issues. Higher interest rates, the war in Ukraine, now a war in the Middle East, inflationary pressures. There's many concerns, but bottoms in stock markets nearly always occur when bearishness is at its highest levels, and the opposite, of course, is true of tops in markets. We are near the high end of bearish sentiment, as depicted in this chart. Skipping ahead to slide 13, this shows the historical P/E ratios of the Russell 2000. It isn't only about relative valuations of one asset size to the next. The above chart from Royce Investment Partners shows that the actual P/E for the Russell 2000 has gone down measurably over the last few years. Now, one would expect that higher interest rates would lead to lower P/E multiples, but the multiples are now lower than the long-term growth rates, arguing for an inexpensive asset class. Additionally, given we believe that the Fed is likely near the end of its interest rate hiking cycle, it is possible that rates have hit or are close to hitting a peak, and therefore, multiples should be close to or at a trough. Again, referring back to my prior comments, while one would expect multiples to be given lower, to be lower, given interest rates are higher, why is it that the only small cap universe, why is it that the only indices, the small cap universe, have lower multiples, while every other asset size company has higher multiples based on its 25-year average? That is completely incongruent. Slide 16 shows flows in different ETFs for 2023. Never underestimate the effect of flows of investor capital on the value of public market assets, especially equities. As you can see above, there was $5.1 billion of inflows into the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF, while at the same time, there was a combined outflow of $1 billion from small- cap funds. In the case of the Russell 2000 Value ETF, the outflow has been a staggering 11.4% of the entire asset base. There is almost no question that the price dislocation that we have seen in the small- cap universe is a direct result of indiscriminate selling by ETFs and other funds facing redemptions. Again, this trend is normal for equity market bottoms, not tops. Slide 17 shows U.S. industries returns by size. In this chart, you can see the effects of the outflows on specific performance of stocks based on size. Through September 30, 2023, there is a historically large 3,000 basis point disparity between small and large industries. I have yet to see that in all my career of investing. Slide 18. What is the most important explanatory power, sorry about that, over long-term returns for an index? We have long stated that the price you pay for the business you buy is a key factor in determining one's ultimate success in an investment. If you buy a good business at the wrong time, you may lose money. If you buy a less than good company at the right time, you may make money. The above chart was published by Bank of America and shows that while valuations tend to be a poor short-term timing indicator, they do matter for longer-term returns. Note that this chart represents the relationship between the relative P/E for the Russell 2000 versus the Russell 1000 and subsequent rolling return differentials. Simply put, valuation has the highest explanation power over long-term returns, and we know today that small caps are historically attractive using that metric. Finally, on slide 20, the above chart and commentary below is again attributed to Royce Investment Partners. I love any statistic which has a 100% success rate, and this one does. Small-cap's historical return patterns show that below average return periods have been followed by those with above average return periods, with a much lower than average frequency of negative return periods. Specifically, the Russell 2000 had positive annualized three-year returns 100% of the time. That is, in all 86 periods, averaging an impressive 17.55%, following five-year periods of less than 5% annualized returns. At the same time, five-year returns had positive annual returns 100% of the time. That is, in all 81 periods, averaging 14.9%. So while the future may be different than the past, it's hard to ignore this trend given its accuracy to date. We can debate opinions, but we can't debate the facts. Every chart depicted above shows historically low valuations and significant underperformance for small cap stocks. While we are very comfortable with our view that our stocks have discounted a lot of bad news, that quite simply has not occurred in 2023. Maybe the news will come next year, and maybe they won't. Either way, we expect the management teams of the companies we own to adapt to whatever environment we are in, and we will use our collaborative and collegial activism, if need be, in an effort to unlock value for all our stakeholders. We are not naive enough to not be aware that there are bear cases for why small cap companies will underperform for the next decade. I am sure there are myriads of investors who have charts that bolster their bearish thesis. I've often told you that the price you pay for the business you buy is the first and key factor in determining whether or not you'll be ultimately successful in that particular investment. It would be an understatement at this point to say that we own many companies whose stock prices and valuations, we believe, materially understate the true values of those businesses. The starting point is price, and we believe the price is right for the potential for material upside in our portfolio. If you believe I'm right, you should own TURN in your portfolio. If you don't, then you shouldn't. I currently own 680,000 shares, and Daniel currently owns 229,000 shares. You can certainly expect that our ownership levels will continue to grow in the future through open market purchases. One day I hope to be able to reference this call at the bottom. As always, thank you for your support. I'll now turn the call over to Daniel. Thank you, Kevin. Please turn to slide 22. While many of the 180 Degree's current portfolio companies have generally been swept up in the recent vicious market selling, particularly for microcap companies, we do not believe the businesses and the balance sheets of many of these holdings reflect the distress that their falling stock prices indicate. This slide provides examples of some recent announcements from our portfolio companies that clearly show, in our view, that these companies are continuing to execute on their business plans, and we believe are set up well for value creation for their shareholders, including 180 Degree Capital. For example, Potbelly announced a new shop development agreement for 36 shops and 4 refranchise shops that brings its new contracted franchise shops to 150. It also announced record average unit volumes and continued growth in shop-level margins and gain in market share. Synchronoss sold its non-core assets and now is a pure-play cloud service company that is currently expected to generate material positive free cash flows and 25% EBITDA margins in 2024. The Arena Group signed the definitive agreements to merge with Bridge Media, a company owned by the founder and owner of 5-hour ENERGY, that will result in a combined company with 100 owned and affiliated stations and over-the-top partnerships across 46 states, on top of the assets that Arena brings to the combination. Intevac is in the final stages of certification for its TRIO tool with its partner, Corning. Lantronix announced that it's beginning volume production of its smart meter product for Gridspertise or Enel. That is expected to drive 30%+ organic growth and material profitability in 2024. In summary, these are all positive news for each of these companies. While our performance has been challenged over the past 7 quarters after 5 years of strong performance, the notes above are just a portion of the reasons we believe our portfolio is positioned well for the creation of value for shareholders in 2024 and beyond. We will use this period to ramp up our collegial and constructive activism. We are keenly aware that hope is not a strategy, activism is. As Kevin noted earlier in this call, and we announced in the press release yesterday, 180's board has initiated the discount management program with an initial two measurement periods, beginning January 1, 2024 to the end of 2024, and January 1, 2025 to June 30, 2025. Should 180 Degree Capital's common stock trade at an average daily discount to NAV of more than the current average trading discount of other equity closed-end funds, which is about 12%, during either of these measurement periods, then 180 Degree Capital's board will consider all available options, including, but not limited to, significant expansion of our buyback program, where 180 Degree Capital repurchases stock through open market trades, cash distributions in the forms of dividends or returns of capital, depending on in-year gains, or a tender offer, where shareholders will be able to decide if they want to sell a portion of their holdings back to 180 Degree Capital at a price per share that is set by 180 Degree Capital board. To be clear, any decision regarding actions taken at the end of each measurement period as a result of this program remains with the 180 Degree Capital's board and has not been made today. We believe that the existence of the program and its associated measurement periods demonstrates the continued focus of both 180's board and management team on taking active steps to minimize any persistent discount in 180 share price. In the future, 180 may or may not determine to extend the program beyond June of 2025. During these measurement periods, as Kevin mentioned, we fully expect that management will continue to purchase TURN stock in the open market. To be clear, and I reiterate what Kevin said, the most important thing we can do is find investments that materially increase value so that NAV, as a result, NAV increases from its current values. But we believe that we will have the most impact, that will have the most impactful effect and positive effect on TURN stock price and returns to our shareholders. Lastly, I would like to note that we included the slides we normally present on these calls in an appendix at the end of the slide deck on our website. We're not going to discuss them on today's call, but we'd be happy to answer any questions on them anytime. We would now like to open the line for questions. If you have a question, please press star six on your phone or click the Ask a Question icon if you are participating via computer. We'll give a second for the queue to fill with any questions that there are. Hi, Oliver. Please go ahead. Oliver? Okay, sorry, we'll move to our next question. Hi, Dennis, please go ahead. Dennis, if your line is on mute, you may have to turn off the mute. Sorry. Since there's been a large decrease in the value of AgBiome in a short period of time, could you please just go over what happened there? Yeah. Dennis, it's Dan. I'll be happy to provide some additional detail. As you know, the venture industry is in somewhat disarray, especially with follow-up financings of later-stage companies. AgBiome raised a significant amount of capital in, I believe it was 2021 or 2020. T hey have a business that requires a substantial amount of capital to continue operations. They embarked on a concerted effort with a bank to raise capital, and thus far, that has not been successful. There were indications that in mid-year that they were making progress on that effort. We did actually the valuation has come down significantly since the beginning of the year, reflecting both the status of their business as well as the financing environment. Recently they also put out a press release, or they didn't put out a release, but they had to do a government filing regarding the potential they may need to downsize. So our valuation reflects the risks that the company now faces, in light of not being able to raise capital at this time. I would add that this is exactly why we are not in that business anymore. We were too small. We did not scale. We had no controlling stakes. We couldn't control outcomes. And as a result, what you've seen since basically I came out of retirement to do this with Daniel, is that we've had over $20 million worth of losses in that portfolio since we arrived. Because we can't affect outcomes, and what you get in this kind of environment is when companies need to raise money, and you're trying to raise money in this kind of environment, the valuations can get squeezed. I hate to beat a dead horse on this topic because don't believe in constantly harping on the same thing over and over and over again, but it is true. I'm not sure we would be here today if we didn't change our stripes, because we would have run out of cash and be forced to liquidate many of these holdings at prices that would have ended up unfortunately resulting in potentially TURN stock going away, or Harris & Harris stock going away. So it's been a struggle to get to this point. We've never been able to make appropriate investment decisions or strategic decisions really until now, because now 90%, 97% of our assets are in the strategy and in public companies that we can control. We have permanent capital, so in a year like this year, while there's liquidations and people selling and tax loss selling, we don't have to sell. And so, I'm not happy that we got to the end of our transformation with AgBiome getting written down this quarter, but it is what it is. I signed up for this when I got here in 2017, and it's over now. I don't have to worry about it anymore. Because like I said, 97% of the assets are in our public company, so we have other things to worry about, but the private portfolio is not one of those anymore. Thank you. You're welcome. Anything else? Again, if you have a question, please type star six on your phone. Hi, Zach, go ahead. Hey, good morning. Can you hear me? Yeah. Oh, great. Hey, I appreciate the conviction and the strategy and the cheapness of the asset class. I guess my question is, what, if anything, is the board doing, or you guys doing to help with the scale problem? Because I see now we have 5% risk-free. You got a 5% expense ratio including these bonuses. And that's a big hurdle, even if this asset class and your performance turns up. So I'm curious, is the board looking at trying to find partners to merge into, the possibility of a rights issue or anything else where you guys can actually act on the conviction for shareholder benefit? Because this hurdle seems very high for you guys to clear. T hat when we've. If you don't, when we first got here, we meaningfully cut our expenses overnight. We moved out of Manhattan. We let a lot of people go. I don't have an administrative assistant. Our team budget got cut by 95%. We've done everything that we can do on an absolute level to reduce our expenses, and the ratio now is, to your point, it's dependent upon our ultimate level of assets. So a year ago, the ratio that you referenced was half of what it is, because we had more assets. So as you would think, we-- and we just had a board meeting last week. The board is actively engaged in discussing with management ways to increase our assets, whether that's our ability to fundraise on the outside, which we've done. W e had a one gigantic pension fund that we managed that unfortunately has been redeeming because rates have gone from basically 0% to 5%, so their asset allocation strategies changed. So what I think at the peak, Daniel, we had maybe $35 million or $40 million, $40 million in outside capital, and they decided that they no longer wanted to own equities. There's nothing we could do about that. So we're always looking for ways to raise capital, and we'll continue to do that. And from a strategic perspective, we're a public company. If somebody wants to own us, they can certainly give us a call. I think you know we're shareholder-friendly. We can certainly entertain merging with anybody to gain greater assets. But remember, a lot of those transactions have to be done at NAV because of 1940 Act funds require that other than because they have to get a shareholder vote. So those mergers between closed-end funds, historically, or BDCs, have been few and far between. Daniel, would you? T hey don't happen extraordinarily often, because of all the hurdles that Kevin mentioned, the fact that most almost all of them trade at some level of discount. They can vary. Transactions would have to take place at NAV. And then you also have the issues that a lot of the externally managed closed-end funds, we've actually reached out to some of the externally managed closed-end funds because there are four internally managed, and we've reached out to some of the smaller ones to see if there was an interest in maybe doing something, and there's very little. There's very little inertia for those funds and those managers to give up that management fee. And so it's those conversations really haven't gone anywhere, but we continue to explore a variety of different options. So, we're shareholder-friendly around here. I mean, I don't own 700,000 shares to not create some, to not create value. I will say that despite the fact that in our first five years, despite the fact that we had almost $3 a share in losses from our private portfolio, we more than doubled our equity price. So it's not like we can't do that again. We can. And now we don't have the headwind that we had seven years ago because our portfolio is all public companies at what we think are ridiculous prices. So our ability to meaningfully generate a return for our shareholders in the next three years is higher today than it was seven years ago. You can expect our board to be actively engaged in all discussions around how to create value, whether that's inorganic growth or organic growth. All right. Thanks a million, guys. Appreciate it. Thanks, Zach. David, please go ahead. Hi, Dan. Hi, Kevin. Can you help us understand the discount management program, how well it actually works? Is it at each quarter, and then you judge how far the discount is, and then what are you likely to actually do? T hanks, Dan. So the way that we've designed it is really looking over a period of, the first period would be 24. H istorically, if you look at 180, one of the big problems was, is that you had all these privately held investments that were really hard to understand and you had fair values, but you didn't know where they moved on a daily basis. And you didn't have a reference in the public markets. A nd also you didn't have liquidity, right? That you could count on from those to be able to take any type of action that we're talking about. So we are now in a position from an asset base that we've never been in before, and so it'll be interesting to see how the discount performs during that period. And so we'll be looking actively at that on a daily basis, over the next year, through the end of next year. And then at that point, the board will determine what steps are. The first steps will be to address the discount if it's greater than 12%. And the reason that the board didn't lock in on something right now is because for example, if you were to say, we plan to tender, at the end of a discount management program, from the point when you say that, to the point when you actually do the tender, the company is not allowed to buy back stock. But even worse, in our view, is that management is not allowed to buy stock in the open market. T o basically restrict the management from, which I think is shareholder-friendly, from being able to buy stock in the open market and show their support and continue to increase their holdings of the company, given we cannot issue equity as compensation, they were not allowed to under the Forty Act, that didn't seem appropriate. And then also if you said, "Oh, we're gonna do a dividend or a distribution," well, the issue there is that depending on where we're at in year, in terms of gains or losses, if we were in a gain position, then that return of capital - that distribution could be a dividend rather than a return of capital. It also depends on if we're a RIC or not, regulated investment company for tax purposes or if we end up being taxed as a C corp. So there's a lot of complexities in there to lock in what will happen at the end of the first measurement period. But I think you can be confident that everyone is aligned to have the discount be as narrow as possible and to generate as much value for shareholders as possible. Kevin, something you want to add? One, we gotta find just like we've done for the first seven years and in the last seven quarters, find companies whose stock prices materially rise. Our NAV will rise on an absolute basis. Most important thing we can do. I've said it in 27 quarters that we've been here, that the discount should be narrower if you've got more liquid, public, transparent balance sheet of public companies versus what we had when we got here. And if that's not the case in a year, then we need to take action on the discount. And if people wanna potentially think we're gonna tender at a 5% discount or something like that, then they can arb it, and the discount's gonna narrow between now and then. And we're serious about creating value for our shareholders on an absolute basis, and we're also serious about the discount. We're serious about both. And so we'll make sure that in a year's time, we'll look at it and see if my thesis is right. In other words, we should trade at a narrow discount because everyone understands what our NAV is on a regular basis, versus what they thought the NAV was before. I mean, anybody could have valued our privates, we, I mean, we valued our privates properly, but I think it was hard for investors to really understand what we owned. So we'll look at it in a year, and then we'll look at it six months from now, and we are serious about it. That's helpful. Thanks a lot, everyone. Thanks. Thanks, Dan. I think that is the end of the call. So thanks. As I said earlier, this we did a little different way of doing this call, where you can look at the appendix at the end of our presentation to get a full understanding for the quarter. We do think this is a unique time in the marketplace for what we're, what we do for a living, both in terms of the indices and the names that we own. To Daniel's point about hope is not a strategy, we are not gonna sit around and hope for eventual outcomes. I think you'll see over the next few weeks, few months, how we will engage with the companies that we own, to hopefully create value for their shares, and as a result, create value for TURN shares. So, look forward to speaking with you when we report Q4. We wish you nothing but the best, of investing for the next month and a half, and we'll speak to you in a few months. Of course, if anybody has any questions that they want to discuss or about this quarter, the program that we announced this morning, feel free to reach out. Thank you all very much. You can now disconnect.