SuRo Capital Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 4 speakers on the call.

Operator

Good day, and welcome to the Soros Capital Third Quarter 2023 Earnings Call. Today's call is being recorded. Your lines will be on listen only. However, you will have the opportunity to ask questions at the end. I will now hand you over to your host, Tom Bate, to begin today's conference.

Operator

Thank you.

Speaker 1

Thank you for joining us on today's call. I'm joined today by the Chairman and Chief Executive Officer of Suro Capital, Mark Klein and Chief Financial Officer, Alison Green. Please note that a slide presentation corresponding to today's prepared remarks by management is available on our website atwww.surocap.com under Investor Relations, Events and Presentations. Today's call is being recorded and broadcast live on our website, www.surocap.com. Replay information is included in our press release issued today.

Speaker 1

This call is the property of Surrow Capital and the unauthorized reproduction of this call in any form is strictly prohibited. I would also like to call your attention to Customary disclosures in today's earnings press release regarding forward looking information. Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or future performance or financial condition. These statements are not guarantees of our future performance or future financial condition or results and involve a number of risks, estimates and uncertainties, including the impact of any market volatility that may be detrimental to our business, our portfolio companies, our industry and the global economy that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward looking statements. Actual results may differ materially from those in the forward looking statements as a result of a number of factors, including, but not limited to, those described from time to time in the company's filings with the SEC.

Speaker 1

Management does not undertake Please visit our website at www.surocap.com or the SEC's website atsec.gov. Now, I would like to turn the call over to Mark Klein.

Speaker 2

Thank you, Adam. Good afternoon and thank you for joining us. We are pleased to share the results of SORO Capital's Q3 2023. The Q3 of 2023 was characterized By broad ongoing weakness in the public equity and bond markets, economic uncertainty has continued into the 4th quarter, Although recent reports and commentary from the Federal Reserve has led investors to believe the Fed may be done or close to done raising interest rates. While the thing we've done with interest rate hikes, geopolitical unrest, including the wars in Israel and Ukraine, coupled with the view that consumers are pulling back has fueled continued volatility in the equity markets.

Speaker 2

In the first half of the year, we expressed our view that we believe the IPO market Could open in Q3, which in fact did occur. Unfortunately, while there were several notable tech companies that debuted The poor performance of these stocks as well as other IPOs has led to a pause in the IPO market. The IPO market is broadly closed and will likely reopen during the 1st or Q2 of 2024. The apparent delay in the IPO market has led to more volatility in the private markets with secondary trading in many instances being significantly inconsistent with public comparables. As we have highlighted for several quarters, there is a disconnect between the pricing of late stage secondary opportunities and the recent performance of public markets.

Speaker 2

While we have been fortunate to find what we believe to be a couple of excellent opportunities, these are more the exception than the rule, as valuations of private markets remain inconsistent and higher than their public comparables. To that end, we have observed private secondary opportunities trading up or down around 25% within very short periods of time with no apparent catalyst. Additionally, we have noted stocks bid and offered simultaneously at meaningfully different prices. Finally, and perhaps the most instructive, we have observed trading in companies at levels that were meaningfully above their IPO where their IPO was first indicated and finally priced. It is clear to us that the private secondary markets are opaque.

Speaker 2

To navigate through them, it is imperative to have constant dialogue with the myriad of secondary participants, To be prudent in price in such an opaque and wide ranging market, it is critical to perform rigorous valuation analysis as we deploy capital against these opportunities. As private companies face the prospects of prolonged timelines until IPO, Our pipeline has remained extremely active with many companies and investors seeking liquidity. In fact, we continue to see more potential investments then other times. With that said, as always, we remain very focused on our potential entry levels. During the quarter, we were able to execute several new investments.

Speaker 2

Additionally, as previously discussed, one of our SPAC investments closed It's previously announced merger and 2 other SPAGs announced definitive agreements to merge with Target Companies. We made 2 new investments during the quarter. We invested $5,800,000 in 4 kites, a supply chain visibility software company through secondary transactions. And we also invested $1,000,000 in Stake Trade, a sports betting exchange doing business as profit exchange through a primary transaction as part of the SORO Capital Sports portfolio. Please turn to Slide 4.

Speaker 2

4kites is a leading real time supply chain visibility solution. 4kites has been a pioneering force behind the idea that companies should know Where their goods are at all time from the initial onset of being loaded onto a truck to when they finally reach a delivery destination. The impact of FourKite's technology is evidenced in its impressive clientele, which includes recognized brands such as 9 of the top 10 Consumer packaged goods companies and 18 of the 20 food and beverage companies. Today, 4Kite helps over 1200 of the world's most recognized brands Leverage real time visibility and unlock efficiencies that save them 1,000,000 of dollars a year. We believe that 4 Kites is in a position to capture additional market share as they continue expanding their business and target customers with some of the most complex Supply Chain Leads.

Speaker 2

We also made a $1,000,000 investment in profit exchange through a primary transaction. Profit Exchange is a peer to peer sports betting exchange focused on providing betters the best pricing and a seamless experience That is different from the incumbent operators. Betters on the platform have the ability to request their own wagers or pick from outstanding options driven by both users and market makers. The company has gone through extensive licensing and regular steps and is now live in New Jersey With plans to expand to other legal betting states in the future, we are excited about the exchange wagering opportunity in the U. S.

Speaker 2

Given the success Betfair has had in the UK and we believe profit exchange has both the team and the technology to execute on the large market opportunity. Please turn to Slide 5. During the quarter, Columbia Acquisition Corp, a SPAC in which we own both stock and warrants, Successfully closed its business combination with PSQ Holdings also known as Public Square. Public Square is a leading marketplace of patriotic businesses and consumers that began trading on the New York Stock Exchange under the symbol PSQH on July 20. At quarter end, we valued our position at approximately $18,000,000 and our Cost basis in Public Square is approximately $2,700,000 The lockup restriction on the warrants expired on August 19 And our common shares are subject to a 1 year lockup period as of the business combinations closing with a pricing condition that would unlock shares earlier.

Speaker 2

Alison will provide additional details on our Public Square investment later in the call. As we previously discussed, the acquisition Corp announced a signed definitive agreement to merge with Oklo, an advanced vision technology and nuclear fuel company. On July 11, 2023 on September 27, Of 2023, the company filed an S-four with the SEC. The combined company will be named OCOO and The transaction which has been approved by the Board of Directors of OCO and Altsi It's expected to close in late 2023 or early 2024 and is subject to approval by AltC and OCBLO shareholders as well as other closing Lastly, during the quarter on August 1, 2023, Churchill Capital Corp. 7 announced it signed a definitive agreement to merge with CorpAC, a corporate compounder specialized in acquiring small and medium sized business enterprise, also known as SMEs in the UK.

Speaker 2

The transaction has been approved by the Boards of Directors of Corpak and Churchill 7 and is expected to close in early 2024 subject to approval by Churchill 7 and Corpack shareholders as well as other closing Turning to the 3rd quarter, we ended the quarter with net asset value of $212,000,000 or $8.41 per share. This is an increase in net asset, up from 7.35 dollars a share in Q2 of 2023 and up from $7.83 a share in Q3 of 2022. Please turn to Slide 6. Turning to our top five positions. I first want to highlight our cash position.

Speaker 2

As of quarter end, our cash and short term U. S. Treasuries available for investment were approximately $94,000,000 representing 32% of our gross assets. We continue to believe having cash in this environment advantageously positions us continue seeking out new opportunities emerging from current market conditions. CERO's top 5 positions as of September 30 We're Lernio, Public Square, Service Titan, Blink Health and Stormwind.

Speaker 2

These positions accounted for approximately 61% of the investment portfolio at fair value. Additionally, as of September 30, our top ten positions accounted for approximately 82% of the investment Portfolio and fair value. Transitioning to our public investments. As previously stated, it is our objective to sell our public positions when lockups restrictions expire and there is relative stability in a given public positions trading. In line with this approach, we have continued to monetize our public unrestricted positions.

Speaker 2

During the Q3, we monetized most of our remaining Nextdoor and subsequent to quarter's end, we began monetizing our position in Public Square warrants. We plan to continue to opportunistically monetize our public additions as market conditions improve. As previously discussed, we continue to focus on our shareholder friendly initiatives. To that end, on August 7, our Board of Directors authorized additional $5,000,000 per share repurchases and an extension of the share repurchase program through October 31, 2024. Given the significant discount in which our stock is trading compared to net asset value, we determine the current continuation of the share repurchase program As public and private market volatility persists, We remain patient and selective as we evaluate new opportunities.

Speaker 2

We believe our considerable investable capital affords us an opportunity to continue to add high quality companies to our portfolio. Thank you for your attention. And with that, I will hand it over to Alison Green, our Chief Financial Officer.

Speaker 3

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our portfolio activities since the start of the Q3, details on the share repurchase program, followed by our financial results as of September 30, 2023 and finally, our liquidity position. First, I'd like to provide a more detailed update on our investment portfolio activity for the Q3 and subsequent to quarter end. This does not include investments in short term U. S.

Speaker 3

Treasuries. During the Q3, we invested a total of $7,300,000 in new and follow on investments. These include A $800,000 investment in Forquipe common shares via a secondary transaction. A $1,000,000 Series B4 preferred shares for which we also received warrants. Over the course of the Q3, we continue to monetize our Nextdoor public shares.

Speaker 3

We sold 589,996 public common shares of Nextdoor for approximately $1,800,000 of net proceeds, resulting in a net realized loss of approximately $1,400,000 In addition to sales of our unrestricted publicly traded investments, we received approximately $266,000 in proceeds from Second Avenue related to principal repayment and interest on the 15% term loan due December 2023 as well as other investment dividend and interest income. At the quarter end, we made a $325,000 follow on investment through Suro Capital Sports and X Point's convertible note. Subsequent to quarter end as well, through yesterday, we sold 67,930 1 PSQ Holdings Inc. Warrants for approximately $68,000 of net proceeds, resulting in a net realized gain of approximately $39,000 Finally, subsequent to quarter end, we received approximately $86,000 in net proceeds from Dividends and interest income. Please turn to Slide 7.

Speaker 3

Segmented by 6 general investment themes, the top allocation of our investment representing approximately 22% of the portfolio. The financial technology category accounted for approximately 18% of our investment portfolio Approximately 15% of our portfolio was invested in cloud and big data companies. Social and mobile accounted for approximately 4% of the fair value of our portfolio Sustainability accounted for less than 1% of the fair value of our portfolio as of September 30. Please turn to Slide 8. As Mark mentioned, on August 7, our Board of Directors authorized a $5,000,000 expansion to the share repurchase program to $60,000,000 and an extension of the share repurchase program through October 31, 2024.

Speaker 3

During the quarter ended September 30, 2023, Under the share repurchase program, the company repurchased 186,193 shares of its common stock for approximately $680,000 subject to regulatory restrictions. Year to date under both the share repurchase program and our modified Dutch auction tender offer, we have repurchased 3,200,000 shares for approximately $14,200,000 and have a remaining $20,700,000 approved to deploy via the share repurchase program. Since the inception of the share repurchase program in August 2017, have repurchased a total of 6,018,501 shares of our common stock for a total deployment of approximately $39,300,000 of the $60,000,000 authorized by the Board. This does not include repurchases under various tender offers during this time period. Approximately $20,700,000 remain authorized under This is outstanding common stock in the open market, provided it complies with the prohibitions under its insider trading policies and procedures and the applicable regulation.

Speaker 3

Please turn to Slide 9. We recognize that our NAV per share is an important input to our shareholders. Over the years, we have received inquiries as to how we determine our NAV, more specifically, how we attribute value across our investment portfolio. Before I discuss our financial results for the quarter, I'd like to briefly make a very high note of how we value our portfolio, which comprises the most significant portion of our NAV. SORO Capital applies fair value accounting in accordance with U.

Speaker 3

S. Generally Accepted Accounting Principles or GAAP and the AICPA's audit and accounting guide for investment companies with consultation from the AICPA guide for the valuation of portfolio company investments of venture capital and private equity funds and other investment companies. We value our assets on a quarterly basis or more frequently if required. Is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a mid day. GAAP establishes a framework for measuring fair value and includes a hierarchy used to classify the inputs used in measuring fair value.

Speaker 3

The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into 3 levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. In summary, on the hierarchy. Level 1 valuations are based on unadjusted quoted prices for identical assets in an active market or generally publicly traded investors.

Speaker 3

Level 2 valuations are based on observable inputs other than level 1 prices such as quoted prices in markets that are not active or secondary trade. Level 3 valuations are based on unobservable input and reflect the best estimate of what market participants would use in pricing an asset at the measurement date. While many of our portfolio investments are deemed to have fair values determined by level 3 unobservable inputs, in some instances, a secondary transaction will occur. For the guidelines discussed, when a secondary transaction occurs in one of our portfolio companies, we closely review the size of the transaction, the share class and any other pertinent information regarding the transaction to assess fair value. Unless a rare exception is noted, these secondary transactions are classified as level 2 valuation inputs and are deemed to be a more appropriate indication of fair value than a level 3 fair value analysis.

Speaker 3

We are pleased to report we ended the quarter, the Q3 of 2023 with an NAV per share of $8.41 which is consistent with our financial reporting. The increases in NAV per share from $7.35 per share at the end of Q2 2023 The $8.41 per share as of September 30 was primarily driven by a $1.16 per share increase resulting from net unrealized appreciation of investments during the quarter, largely due to observed secondary trades in our portfolio companies. Also contributing to the increase was a $0.04 per share increase due to net repurchase of common stock and a $0.03 per share increase due to stock based compensation. As we previously noted, the use of cash in connection with the repurchases Decreased net asset value as of quarter end. However, the reduction of shares outstanding as of quarter end resulted in an increase in the net asset value per share.

Speaker 3

The increase in NAV per share was partially offset by $0.11 per share decrease due to net investment loss and a $0.06 per share decreased due to net realized losses on investments during the quarter. Finally, I would like to take a moment to review SORL Capital's liquidity position as of September 30. We ended the quarter with approximately $105,400,000 of liquid assets, including $73,500,000 in cash, $20,300,000 in short term U. S. Treasuries and approximately $11,600,000 in unrestricted public securities.

Speaker 3

The approximately $11,600,000 of unrestricted public securities held as of quarter end represent our shares in Nextdoor, New Lake Capital Partners, Forge Global, Skillsoft and our Public Square warrants. At September 30, 2023, there were 25,209,108 shares of That concludes my comments. We would like to thank you for your interest and support of SIRO Capital. Now I will turn the call over to the operator to start

Operator

Please limit your question to only 1. Thank you. Okay. There are no further questions. I would like to hand the call over to your host, Mark Glenn, to conclude today's conference.

Operator

Thank you.

Speaker 2

Thank you everybody for participating on our call. We greatly appreciate your support. Thank you very much.

Operator

That concludes today's event. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
SuRo Capital Q3 2023
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