SuRo Capital Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to the SOREL Capital's First Quarter 2023 Earnings Call. Today's conference is being recorded. I will now hand you over to your Willy Lee to begin today's conference. Thank you.

Speaker 1

Thank you for joining us on today's call. I'm joined today by Chairman and Chief Executive Officer of SIR 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 at www.cerocap.com under Investor Relations, Events and Presentations. Today's call is being recorded and broadcast live on our website, www.cerocap.com. Replay information is Included in our press release issued today.

Speaker 1

This call is the property of CERO 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 For our future performance or financial condition. These statements are not guaranteed of our future performance or future financial condition or results It involves 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.

Speaker 1

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. Management does not undertake to update such forward looking statements unless required to do so. To obtain copies of CERO Capital's latest SEC filings, please visit our website at www. Cerocast.com or the SEC's website atsec.gov. Now, I would like to turn the call over to Mark Klein.

Speaker 2

Thank you, Willie. Good afternoon and thank you for joining us. We would like to share the results of SORO Capital's Q1 2023. The Q1 of 2023 saw continued volatility in the public equity markets as a result of continued inflation, coupled with decelerating GDP and extended stress in the banking sector. Recently, however, the NASDAQ Composite Index and the technology stocks in particular appear to have shown signs of stabilization.

Speaker 2

Despite the volatility, the IPO markets Have shown cautious signs of near term opening. For example, last week, Johnson and Johnson's consumer health spin off, Kinview, Debuted in the public markets raising $3,800,000,000 According to Bloomberg, this was just U. S. Listing since 2021. Additionally, according to the information, in the wake of its failed SPAC merger, leading online ticket platform SeatGeek filed confidentially for an IPO last month.

Speaker 2

Further, according to the Wall Street Journal, marketing automation company Klaviyo Hired bankers in April for an upcoming IPO with sources saying the listing could take place as early as September. Finally, according to Bloomberg, British computing firm ARM filed for a U. S. IPO with plans to raise between $8,000,000,000 $10,000,000,000 The list arm one of the largest U. S.

Speaker 2

IPOs of the last decade. These listings and headlines demonstrate cautious optimism for a rebound in the latter half of twenty twenty three. We are also seeing positive trends emerge in the private secondary markets. In its April 2023 Private Markets Update, Forage reported that the median bid ask spread on new indications of interest Compressed in March, down from the platform's all time high in Q3 of 2022. Consistent with prior quarters, Fortis has also reported that in the Q1 secondary transactions were closed at an approximately 50% discount to the company's last primary financing.

Speaker 2

While still relatively expensive compared to public comparables, this discount Coupled with increasing secondary trade volumes may indicate that the market is finding a level where investors will transact. Given these conditions, we continue to see numerous opportunities in the private markets. In fact, in 2023 to date, We evaluated more potential than any other prior period. However, given public and private valuations are still Converging, we have been cautious about deploying capital. With over $120,000,000 of investable capital at quarter end, We remain poised to continue investing in both primary and secondary opportunities for later stage high growth companies at what we believe will be compelling valuations.

Speaker 2

Current market conditions present us with opportunities to explore prospects as late stage businesses seek to go public soon after market conditions improve. We believe we will see increasingly promising opportunities to deploy capital this year as pricing in the private and public markets gradually converge. We ended the Q1 with a net asset value of $215,000,000 or 7 point and $0.59 per share. This NAV per share is a net asset value of $7.39 per share at year end And $12.22 a share in Q1 of 2022. Alison will discuss our Q1 results, including investment activity during the quarter and the results of our modified Dutch auction tender offer that we began during the quarter and executed subsequent to quarter end.

Speaker 2

Please turn to Slide 4. Turning to our top five positions, I first want to highlight our cash position. As of quarter end, our cash and short term U. S. Treasury balance totaled over $124,000,000 representing 43% of our growth assets.

Speaker 2

As we have previously discussed, we believe having cash in this environment Advantageously positions us to continue to seek out new opportunities emerging from current market conditions. Suro Capital's top five positions as of March 31 were Lernio, Columbia Sponsor, Blink Health, Locust Robotics And Architect Capital Pay Joy SPV. These positions accounted for approximately 59% of the investment portfolio at fair value. Further, as of March 31, our top ten positions accounted for approximately 78% of the investment portfolio at fair value. As you may recall, in December 2022, Course Hero announced its rebranding to Lernio In order to better reflect the company's evolution from its digital business model to a robust platform of education technology companies.

Speaker 2

According to PitchBook, Lernio has raised approximately $500,000,000 Most recently, the December 2021, dollars 380,000,000 fundraise specifically targeted To fuel an acquisition strategy to broaden and diversify from the original Course Hero business and create a major leader in the EdTech space. For example, among Lernio's 6 recent acquisitions is Quillbot, an artificial intelligence Powered writing platform that paraphrases summarize grammar checks and reviews large sums of text. According to a press release at the time of the acquisition in August 2021, Quilbot had 7,000,000 active monthly users. Since the acquisition, Quilbot has shown tremendous growth surpassing 30,000,000 monthly active users in March of 2023. Additionally, in the same month, Quilbot reached its highest web traffic to date of approximately 78.5 1000000 website visits as reported on SimilarWeb.

Speaker 2

According to SimilarWeb, this is nearly equal to Grammarly's Approximately 79,800,000 visits during the same month. Another of Lernio's acquisitions was Symbalab, An AI powered math solver business that helps students solve complex math problems. Launched by Lernio in October 2021, At the time of the acquisition, Symbalab had already been used by over 50,000,000 students to work through 1,000,000,000 questions and explanations in 2020 alone. According to SimilarWeb, SimpleLab had approximately 21,000,000 websites visits in March of 2023. On April 5, Learneo announced its most recent acquisition Language Tool.

Speaker 2

German based language tool is a multilingual grammar, style and spell checker powered by AI. The acquisition bolsters Lernio's AI driven writing tools and supports Lernio's international expansion Given Language Tools' broad reach of B2C and B2B customers around the world. Lernio's acquisitions of Quillbot, Symbalab, Language Tools, LitCharts, Scribbr and CliffNotes has successfully created a robust and diversified platform of education technology companies that we believe positions the company well for the rise of AI in the EdTech universe. In addition to their successful acquisition strategy, Lernio has remained profitable on a cash basis since TedCrunch originally reported on its profitability in 2020. As of March 31, 2023, Lernio had more cash on its balance sheet than it did when it completed its last fundraise.

Speaker 2

In fiscal year 2022, Lernia was considered to be a Rule of 40 company, a term used to describe companies With some of revenue rate and adjusted EBITDA margin exceed 40%. Given Lernio's progress and path forward, We believe Lernio is well positioned to continue to make accretive acquisitions thus cementing the company as a major player in the AI based EdTech universe. Despite significant slowdowns in SPAC transactions, we are pleased to share The following recent update on one of our SPAC investments. On April 7, Columbia Aqual Corp. Completed their S-four filing in connection with the proposed merger with Public Square and E Commerce Marketplace.

Speaker 2

If the merger between Columbia Acquisition and Public Where it's completed, CERO Capital's position in the new company should be worth more than $20,000,000 Transitioning to our public investments. As previously stated, it is our objective to sell our public positions When lockup restrictions expire and there is relative stability given public positions trading. In line with this approach, we continue to monetize Several of our public unrestricted positions over the course of the quarter. During the Q1, we fully exited our positions in Kahoot and Rent the Runway and reduced our holdings in New Lake Capital Partners. Finally, I would like to reiterate Suru's commitment to initiatives that enhance shareholder value.

Speaker 2

Given the discount our stock has traded at compared to net asset value per share, we believe our recent modified Dutch auction tender offer Was an efficient and accretive deployment of capital. Alison will discuss the results of the tender offer in her prepared remarks. Thank you for your attention. And with that, I'd like to 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 Q1 investment activity and financial results as of March 31, including the results of our modified Dutch And our current liquidity position. First, I will review our investment activity, not including investments in short term U. S. Treasuries.

Speaker 3

During the Q1, we made a $2,000,000 follow on investment in the Series 1 senior preferred shares of Orchard Technologies Inc. Additionally, the remaining $1,300,000 unfunded commitment to True Global Ventures 4 Plus was funded via net distribution capital call. Over the course of the Q1, we sold our remaining public common shares of Rent the Runway and Kahoot and continued to monetize our public common shares in New Lake Capital Partners. In addition to sales of our unrestricted publicly traded investments, during the Q1, we received approximately $300,000 in proceeds from Second Avenue related to principal repayments on the 15% term loan due December 2023 as well as other investment dividend and interest income. Subsequent to quarter end, we continue to receive proceeds from Second Avenue related to the principal repayment and interest on the 15% term loan due December 2023 as well as other investment dividends and interest income.

Speaker 3

Please turn to slide 5. Segmented by 6 general investment themes, The top allocation of our investment portfolio at quarter end was to Education Technology, representing approximately 38% of the investment portfolio at fair value. Financial Technology and Services was the 2nd largest category representing approximately 30% of the portfolio. The marketplaces category accounted for 15% of our investment portfolio and approximately 9% of our portfolio was invested in cloud and big data companies. Social and mobile accounted for approximately 8% of the fair value of our portfolio and sustainability accounted for less than 1% of the fair value of our portfolio as of March 31.

Speaker 3

As mentioned earlier by Mark, SORO Capital is committed to initiatives that enhance shareholder value. Accordingly, on March 17, 2023, our Board of Directors approved a modified Dutch auction tender offer or the tender offer, which commenced on March 21, 2023 to purchase up to 3,000,000 shares of our common stock at a price per share not less than $3 per share and not greater than $4.50 per share using available cash. The tender offer expired on April 17, 2023. Pursuant to the terms of the tender offer, On April 21, 2023, we repurchased 3,000,000 shares at a price of $4.50 per share, representing 10.6 of outstanding shares. The per share purchase price of properly tendered shares represented 60.9% of net asset value per share as of December 31, 2022.

Operator

The company used the cash to fund

Speaker 3

the purchase of its shares of common stock in the tender offer and to pay for all related fees and expenses. Because the tender offer was executed subsequent to quarter end, It is not reflected in our financial statements for the 3 months ended March 31, 2023. The purchase price of $4.50 per share represents 39.1 percent discount to the December 31, 2022 NAV per share and a 40.7% discount to the March 31, 2023 NAV per share. Accretion on NAV per share based on these same metrics is in excess of $0.30 per share. Please turn to slide 6.

Speaker 3

We are pleased to report we ended the Q1 2023 with an NAV per share of $7.59 which is consistent with our financial reporting. The increase in NAV per share from $7.39 at year end to $7.59 as of March 31 was primarily driven by a $0.31 per share increase resulting from the unrealized appreciation of our portfolio investments during the quarter. Also contributing to the increase was a $0.01 per share increase related to realized gains on investments and a $0.03 per share increase related to the impact of stock based compensation. The increase in NAV Per share was partially offset by a $0.15 per share decrease due to net investment loss. Finally, I would like to take a moment to review SORO Capital's liquidity position as of March 30 First, we ended the quarter with approximately $135,600,000 of liquid assets, including approximately $48,100,000 in cash, Volatility in the banking sector, we continue to hyper focus on the location of our cash balances to ensure our cash balances will not be in danger or inaccessible.

Speaker 3

At March 31, 2023, there were 28,338,580 shares of the company's common stock outstanding. Presently, following the execution of the tender offer subsequent to quarter end, there are 25,338,580 shares of the company's common stock outstanding. 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 the Q and A session.

Speaker 3

Operator?

Operator

Thank you. Thank you. We have our first question from Kevin Fowles from JMP Securities. Please go ahead.

Speaker 4

Hi, good afternoon. Thank you for taking my questions. My first question relates to Lernio. You've seen the headlines Around the impact that AI and GPT is having on the online education space, some publicly traded education platforms are down More than 60% year to date. Mark, I was curious if you could share your thoughts on the impact that AI is having on Lernia's business model, They're experiencing the same degree of disruption that other education platforms are facing.

Speaker 4

I'm just trying to get a better understanding around how you're valuing your investment and what the outlook is for the company. Thanks.

Speaker 2

Thanks, Kevin. Appreciate it. And as you can tell, we focus a lot of our prepared remarks around Lernio To address that issue head on. So what I would say is that Lernio's management has been At the forefront of understanding the need to diversify their business model and they raised a bunch of money In the end of December of 2021 to do that, as we discussed in the prepared remarks, several of their investments are with AI based Tools as part of them and have experienced significant growth of their business. They do have the of course hero based business, Which is similar to Chegg, and they have been discussing how to utilize AI in connection with All of their tools in Course Hero to address that and be successful with it as well.

Speaker 4

Okay. I appreciate the comments and I'll leave it there.

Speaker 2

Thank you.

Operator

Thank you. We have our Second question from Jon Hickman from Ladenburg Thalmann. Please go ahead.

Speaker 1

Hi. So you made the comment, Mark, that you Looked at or reviewed more opportunities in the months than in any other period. Is that what you said?

Speaker 2

Yes. Well, it's about 5 months, but sure. Okay. 5 months. Yes.

Speaker 2

So, John, it's there is An awful lot that is going on specifically in the secondary markets as early investors or employees or ex employees are looking to monetize their holdings because they don't know when the IPO market is opening. So we are getting a lot of opportunities In that area, we are seeing some smaller primary rounds that are being done as well. And as we said also in our prepared remarks, Although we are seeing a lot, there still is a bit of a dislocation between where the public company comparable companies are trading versus where The secondary prices of these private companies are, but we are looking at a lot, we are evaluating a lot and we continue to move forward on that. So are these organized secondaries?

Speaker 1

Like the companies or they've hired Like bankers or whatever?

Speaker 2

No. For the large part, no. Some are organized secondary, some are Company tender offers some are sourced either through our network or through brokers or through exchanges.

Speaker 1

Okay. And then besides AI

Operator

There are no further questions. So I will hand the call over to Mr. Mark Klein to It concludes today's conference.

Speaker 2

Thank you all very much for taking the time this afternoon to participate in our earnings call. As always, we and management are available to have further conversations. Thank

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