SURO Capital Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

Key Takeaways

  • Despite late-quarter volatility driven by economic data and geopolitical events, Q2 venture deal count and value reached their highest levels since Q2 2022, led by AI financings such as xAI’s $6 billion Series B and CoreWeave’s $8.6 billion Series C.
  • SORO Capital invested $15 million in CoreWeave’s Series C via an SPV and $10 million in Tampa (ServiceTitan), further increasing its exposure to AI infrastructure and SaaS in late-stage technology companies.
  • The Board approved a $35 million repurchase program for its 6% notes due 2026 and entered into a private placement to issue up to $75 million of 6.5% convertible notes due 2029 at a ~104% conversion premium, enhancing liquidity and extending debt maturities.
  • Q2 net asset value fell to $6.94 per share from $7.17, primarily due to unrealized depreciation and net investment losses, partially offset by a $4.70 tender-offer share repurchase and stock-based compensation.
  • As of June 30, SORO held $54.4 million in cash (22% of assets), with its top five positions—Lernio, Blake Health, CoreWeave SPV, ServiceTitan and Locus Robotics—accounting for 49% of the portfolio’s fair value.
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Earnings Conference Call
SURO Capital Q2 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Hello, and welcome to SORO Capital's Second Quarter 2024 Earnings Call. My name is Melissa, and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in a listen only mode. However, you will have the opportunity to ask questions at the end of the presentation. I'll now turn the call over to Evan Schlosman.

Operator

Please go ahead.

Speaker 1

Thank you for joining us on today's call. I am joined today by the Chairman and Chief Executive Officer of CERO 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.cerocap.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 SORL 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 our 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 risk estimates and uncertainties, including the impact of any market volatility it 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 to update these forward looking statements unless required to do so by law. To obtain copies of Suro Capital's latest SEC filings, please visit our website at www.surocap.com or the SEC's website at sec.gov. Now I would like to turn the call over to Mark Cline.

Speaker 2

Thank you, Evan. Good afternoon and thank you for joining us. We would like to share the results of SORR Capital's Q2 2024. The Q2 was a broadly positive quarter for the U. S.

Speaker 2

Economy and equity markets as investors became increasingly confident in the prospect of rate cuts later in the year. But as of last week, the market has become volatile with a fixed spiking to levels not seen since the onset of COVID in March of 2020. A confluence of domestic and global factors led to the sharp change in investor settlement. Last Thursday's disappointing data on employment, manufacturing and construction pushed 10 year treasury yields below 4% for the first time since February. Investor fears were exacerbated on Friday when a weak jobs report showed decelerating U.

Speaker 2

S. Job growth and rising unemployment. We also saw some large cap technology companies issue weaker than expected forward guidance driving investor skepticism on monetization timelines for their investments in AI. Outside of the U. S, an unexpected rate hike from Bank of Japan last week fueled investor uncertainty as the ongoing geopolitical conflict in the Middle East.

Speaker 2

With that said, in Q2, private technology companies saw increasing interest from investors. According to the pitch book NBCA Q2 2024 Venture Monitor, both venture deal count and value reached their highest quarterly levels since Q2 of 2022. With several multibillion dollar capital raises, AI continue to see significant investor interest. In fact, according to the same source, XAI's $6,000,000,000 Series B financing, along with Coralweave's $8,600,000,000 Series C and debt financing, made up over 26% of the 2nd quarter's total deal value. As previously announced, we are pleased to have invested $15,000,000 into the Coral Reef funding round via an SPV.

Speaker 2

In addition to a $10,000,000 investment in Tampa, which continues to integrate AI across its product suite. While volatility has increased, we are encouraged that despite the recent technology sector struggling performance of the public markets, we have started to see the public markets brought in with a recent positive performance of mid and small cap companies and early indications of potential upcoming IPOs from companies such as Klarna, Sheen, Skin and Chime, signaling investor increasing appetite for marquee names. For the last several quarters, we have deployed capital into late stage technology companies such as Coraweed, CAMBA and LiquidDebt at compelling entry prices. We believe that these investments strengthen our already well positioned existing portfolio for the reopening of the IPO window. I would now like to discuss our note repurchase program approved yesterday by our Board of Directors.

Speaker 2

Under the program, we are authorized to repurchase in the open market up to $35,000,000 aggregate principal amount of our 6% notes due in 2026. Alison will discuss the note repurchase program during her prepared remarks. I would also like to announce that we have entered into a note purchase agreement with an institutional investor via private placement, which allows us to issue up to $75,000,000 in aggregate principal amount of 6.5 percent convertible notes due in 20 29 with an initial issuance of up to $25,000,000 We believe the convertible notes position us well for a number of reasons. First, the notes are initially convertible at $7.75 per share, approximately 104% premium from today's closing price, signaling significant confidence in our portfolio from our investor. If converted, this would be a meaningfully accretive transaction to our shareholders.

Speaker 2

2nd, the notes will extend the maturity of a portion of our debt by 3 years, strengthening our ability to deploy capital. Finally, given prevailing interest rates, we believe the interest rate of 6.5% is highly favorable. Alison will discuss the notes purchase agreement during her prepared remarks. Turning to our 2nd quarter results. We ended the quarter with a net asset value of $162,300,000 or $6.94 per share.

Speaker 2

This NAV compares to a net asset value of $7.17 per share in Q1 $7.35 per share in Q2 of last year. Please turn to Slide 4. Turning to our top five physicians, I will first want to highlight our cash position. As of quarter end, our cash available for investment was approximately $54,400,000 representing 22% of our gross assets. Cerro Capital's top five positions as of June 30 were Lernio, Blake Health, the CorWeave SPV, ServiceTitan and Locus Robotics.

Speaker 2

These positions accounted for approximately 49% of the investment portfolio at fair value. Additionally, as of June 30, our top ten positions accounted for approximately 75% of the investment portfolio. I would now like to discuss some of our larger investments in greater detail, starting with Blake Health. Blake Health's Quick Save and Blake's RX product lines create a significant value proposition for the entire value chain from pharma manufacturers looking to increase first fill rates all the way to consumers looking to find the best price on their medications. Blake Health continues to increase their customer base and signed additional partnerships with pharmaceutical manufacturers, while maintaining relationships with pharmacies around the U.

Speaker 2

S. To distribute its Quick Save product. We remain excited about Blink Health's positioning with the pharmaceutical SaaS market and believe the company is well positioned to expand significantly in the coming months and years. Next, I would like to discuss our investment in WHOOP, one of our 10 largest position. The WHOOP band provides actionable insights to users to optimize performance by offering metrics like heart rate variability and resting heart rate.

Speaker 2

The combination of WHOOP's best in class software and wearable band allows a user to understand how specific lifestyle and training behaviors may affect their recovery and ability to perform on a given day. We'll announce a global partnership with an investment from soccer star Cristiano Ronaldo according to a press release in May. Ronaldo is one of several of WHOOP's internationally recognized ambassador investors, including Patrick Holmes, Michael Phelps, Eli Manning, Rory McElroy, Scottie Scheffler and more. WHOOP continues to cement itself as a leader in the health and wellness space, most recently announcing the launch of its body composition and weight trends feature in partnerships with Withings, another leader in connected health. These features create an even greater value proposition for Whoop as consumers continue to find more fitness and sleep wearables to choose from.

Speaker 2

We remained incredibly excited about Whoop's success and path to becoming a predominant wearable category. Please turn to Slide 5. As previously discussed during the Q2, we made a $10,000,000 investment in CAMPA on similar terms as the reported company tender. According to Bloomberg, evaluation of the tender came at a significant discount to Canva's latest last primary financing. Canva is an online productivity design software collaboration platform with a mission to empower everyone in the world to design.

Speaker 2

Since our initial investment in Canva, the company has made significant strides to further integrate itself into the broader design ecosystem. For example, in May, the company announced a partnership with HP to expand its design to print services worldwide through localized printing options. In July, the company announced a partnership with Artlist, allowing creators to integrate royalty free digital assets from Artlist collection directly into the Canva platform. According to Bloomberg, Canva has surpassed $2,300,000,000 in annualized revenue with sales growing at a rate of 50% year over year. According to PitchBook, Canvys raised over $581,000,000,000 equity financing from investors, including Bessemer Venture Partners, General Catalyst, Iconic and more.

Speaker 2

We are excited about Canva's traction and positioning the market as it expands its enterprise footprint and further captures international markets. Please turn to Slide 6. Additionally, during the Q2, we made a $15,000,000 investment in CW Opportunity 2 LP and SPV that is invested in Corweave's Series C preferred shares. Corweave is a specialized cloud provider delivering access to a suite of NVIDIA GPUs coupled with its fast and flexible cloud computing infrastructure. CoreWeave is a critical foundation for AI and machine learning use cases from the initial stages of training a model to ultimately providing a model's output for end users.

Speaker 2

To serve the training phase, Coral Reef offers distributed clusters or connected computers using NVIDIA's groundbreaking quantuminfiniBand networking solution. Additionally, with spin up times as short as 5 seconds, Corweave offers 1 of the most powerful inference solutions using NVIDIA GPUs. In fact, according to a company blog post, CorWeed's inference service platforms, 8 to 10 times faster than a major generalized cloud provider. Since our investment in early May, Corweave has continued its impressive momentum. Later that month, according to a company press release, Coral Reef announced an agreement for a $7,500,000,000 debt facility led by funds managed by Blackstone with participation from Magnetar and Co2.

Speaker 2

This debt financing will be used to further grow Corwin's capacity to serve large enterprises at the forefront of AI, both in the U. S. And internationally. In early June, according to a company press release, Correv announced its plans to invest $2,200,000,000 to expand and open 3 new data centers in Norway, Sweden and Spain by the end of 2025. This EU expansion is in addition to their 1 point $3,000,000,000 U.

Speaker 2

K. Expansion announced May. According to PitchBook, Coral Reef has raised over $9,000,000,000 in debt and equity financing from investors such as Coatue, Fidelity, Magnatore and others. With its best in class cloud inference, we believe Correv will continue its exponential growth and capitalize on accelerated AI adoption. Please turn to Page Slide 7.

Speaker 2

One additional portfolio company we'd like to highlight again is our investment in AltC Sponsor LLC, the sponsor of this back led by Sam Altman. As previously discussed during Q2, AltC acquisition shareholders approved the business combination with Global, a fast vision clean power company. While we are always happy with our SPAC sponsors complete a business combination, this one is particularly exciting for a few reasons. Oklo is on the cutting edge of nuclear fuel recycling, which has many uses, including the potential to add clean power to AI related data centers. In late May, according to a company press release, OCCO announced its partnership with Wyoming Hyperscale to supply 100 Megawatts of clean energy to a state of the art data center campus as part of a 20 year power purchase agreement.

Speaker 2

Last month, according to a company press release, Oclo announced the successful demonstration of its advanced fuel recycling process, marking a significant step forward in enhancing fuel cost effectiveness and sustainability. Our investment thesis around AI has been deliberate, 1st focusing specifically on the infrastructure of AI. Our new investment in Coral Reef due to the CW opportunity LP plus the business combination between Alt C and Oklahoma now gives us further exposure to the structural foundations of the AI universe. 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 in a given public positions trading.

Speaker 2

In line with this approach, we began to monetize our position in Public Square Holdings shares as their lockup restrictions expired subsequent to quarter's end. I would like to also further reiterate CEROS commitment to initiatives that enhance shareholder value. 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. Given our recent investments and broader portfolio, we believe we are well positioned to drive shareholder return.

Speaker 2

Thank you for your attention. And with that, I will hand it over to Allison, our Chief Financial Officer.

Speaker 3

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our Q2 investment activity and financial results as of June 30, including results of the modified Dutch auction tender offer announced during Q1 and executed during Q2. Additionally, I'll provide more detail on the 6.5 note repurchase agreement and board approved note repurchase program and our current liquidity. Please turn to slide 8. As Mark mentioned, during the Q2, we completed a $10,000,000 investment in Tampa's common shares through a secondary transaction and a $15,000,000 investment in the Class A interest of CW Opportunities 2 LP, an SPV that is invested in CoreWeave Series C preferred shares.

Speaker 3

During the Q2, we redeemed our membership interest in Architect Capital PageRight SPV, resulting in net proceeds of approximately $10,000,000 We also received a distribution of approximately $233,000 related to our limited partner fund investment in True Global Ventures 4 Plus. Please turn to Slide 9. Subsequent to quarter end, we began to sell our public common shares in Public Square following their lockup expiration on July 19. To date, we have sold 220,000 shares of Public Square for approximately $632,000 in net proceeds, resulting in a realized gain of approximately $458,000 Please turn to slide 10. Segmented by 6 general investment themes, the top allocation of our investment portfolio at quarter end was to AI, cloud and big data, representing approximately 34% of the investment portfolio at fair value.

Speaker 3

Marketplaces and Education Technology were the next largest categories with approximately 22% 21% of our portfolio respectively. Approximately 13% of our portfolio was invested in social, mobile and consumer companies and the financial technology category accounted for approximately 9% of the fair value of our portfolio. Sustainability and alternative energy accounted for 1% of the fair value of our portfolio as of June 30. Please turn to slide 11. We ended the Q2 of 2024 with an NAV per share of $6.94 which is consistent with our financial reporting.

Speaker 3

The decrease in NAV per share from $7.17 in Q1 to $6.94 as of June 30 was primarily driven by a $0.30 per share decrease resulting from unrealized depreciation of our portfolio investments during the quarter and a $0.16 per share decrease due to net investment loss. The decrease in NAV per share was partially offset by a $0.20 per share increase from the repurchase of common stock related to our recent tender offer and a $0.03 per share increase from the impact of stock based compensation during the quarter. As mentioned by Mark, Cerro Capital is committed to initiatives that enhance shareholder value. Accordingly, on February 14, our Board of Directors approved a modified Dutch auction tender offer, which commenced on February 20 to purchase up to 2,000,000 shares of our common stock at a price per share not less than $4 per share and not greater than $5 per share and since the increment using available cash. Pursuant to the terms of the tender offer, following the expiration of the tender offer on April 1, 2024, we repurchased 2,000,000 shares of our common stock at a price of 4.70 dollars per share, representing 7.9 percent of outstanding shares.

Speaker 3

The per share purchase price of properly tendered shares represented 65.6 percent of the net asset value per share as of March 31, 2024. We used available cash to fund the purchase of shares, common stock and the tender offer and to pay for all related fees and expenses. I would also like to note that the dollar value of shares that may yet be purchased by SORL Capital under the share repurchase program is approximately $20,700,000 The share repurchase program is authorized through October 31, 2024. Next, I'd like to provide more detail on the executed note purchase agreement for 6.5 percent convertible notes due 2029. On August 6, 2024, SORO Capital entered into a note purchase agreement, pursuant to which we may issue up to a maximum of $75,000,000 in aggregate principal amount of 6.5% convertible notes due 2029.

Speaker 3

Pursuant to the note purchase agreement, we initially agreed to issue and sell and the purchaser agreed to purchase up to $25,000,000 in aggregate principal amount of the convertible note. Thereafter, upon mutual agreement between the purchaser and us, we may issue additional convertible notes for sale and subsequent offerings or issue additional notes with modified pricing terms in the aggregate for both the additional notes and the new notes up to a maximum of $50,000,000 in 1 or more private offerings. The purchaser will acquire and we will issue up to $25,000,000 of the initial notes on or about August 14, 2024 and thereafter at such time and date as the purchaser and we mutually agreed to purchase and sell any additional notes. Interest on the convertible notes will be paid quarterly in arrears on March 30, June 30, September 30, December 30 at a rate of 6.5% per year beginning September 30, 2024. The convertible notes will mature on August 14, 2029 and may be redeemed in whole or in part at any time or from time to time at our option on or after August 6, 2027 upon the fulfillment of certain conditions.

Speaker 3

The convertible notes will be convertible into shares of our common stock purchaser's sole discretion at an initial conversion price of $7.75 per share equating to a conversion rate of 129.03 23 shares of our common stock for 1,000 principal amount of the convertible notes, subject to adjustment as provided in the note purchase agreement. The net proceeds from the offering will be used to repay outstanding indebtedness, make investments in accordance with our investment objective and investment strategy and for other general corporate purposes. Note purchase agreement includes customary representations, warranties and covenants by the company. Additionally, I'd like to provide more detail on the note repurchase program. On August 6, 2024, SOHO Capital's Board of Directors approved a discretionary note repurchase program, which allows us to repurchase up to 46 0.67 percent or $35,000,000 in aggregate principal amount of our 6% notes due 2026 through open market transactions, including block purchases in such manner as will comply with the provisions of the Investment Company Act of 1940 as amended and the Securities Exchange Act of 1934 as amended.

Speaker 3

As of August 7, 2024, we had not yet repurchased any of the 6% notes due 2026 under the note repurchase program. Finally, I would like to take a moment to review SORO Capital's liquidity position as of June 30. We ended the quarter with approximately $57,600,000 of liquid assets, including approximately $54,400,000 in cash and approximately $3,200,000 in unrestricted public securities. At June 30, 2024 and currently there are 23,378,002 shares of the company's common stock outstanding. That concludes my comments.

Speaker 3

We would like to thank you for your interest and support of SIR Capital. Now I will turn the call over to the operator for the start of the Q and A session. Operator?

Operator

Thank you very much. We have a question from Mac Sykes of Gabelli Funds. Please go ahead.

Speaker 4

I just want to wish you congratulations on the team for rebuilding the portfolio. Certainly some innovative companies in the mix.

Speaker 2

Thanks, Matt. Go ahead.

Speaker 4

Actually, I know I'm limited to one question, but I wanted to just since it's been a while, I wanted to ask about the IPO cycle. I had 3 sub questions from that, so just ask them. First, typically for an IPO, what is the percentage that you may typically realize kind of on the opening? And then how long is the lockup typical for the balance of that realization? And then assuming a $10,000,000 gain on XYZ Company, what is retained by the company and what is paid out to investors?

Speaker 4

And then typically, what's the timing of dividends following some realizations? And then my last question is around, is the company at this point carrying any tax shield to offset potential gains? Thanks.

Speaker 2

That's the best way to ask one question. So first of all, thanks for the kind words and thanks for being a supportive shareholder. I think it's kind of pretty well documented in the press right now. The IPO cycle, certainly before last week was gearing up and the expectations as we entered sort of exited the summer into the early part of September, you would see the ramp up in the IPO market, which I still think we're going to see in end of Q3 anyhow. So I think that's consistent with broadly what's out there.

Speaker 2

Specifically or what's typical is in any traditional IPO, shares are typically locked up for additional 6 months. So we don't have liquidity until 6 months after the IPO occurs. Typically, if there's a direct on direct listings, that's waived. But on traditional IPOs, that would be. As far as our distributions are concerned, generally speaking as a BDC, we're required to distribute on a capital gains basis functionally all of the gains.

Speaker 2

So those would be distributed. As far as the tax shield, I don't think we actually look at anything as a tax shield. But we carried into this year some amount of capital losses. So the first application of capital gains would be against those capital losses. When those capital losses are exhausted, then we would be in a dividend position, and we would obviously pay out the dividends.

Speaker 2

We are very communicative about our dividend strategy. We have been in the past. We will lay it out for our investors as we find ourselves in the position to pay dividends. Thank you.

Operator

Thank you very much. As we have no further questions in the queue, I would like to turn it back over to Mark Klein for any closing remarks.

Speaker 1

I want to thank everybody from

Speaker 2

the CERO team. Thank all of our investors. Thank you for joining the call today. I know the markets have been a bit chaotic. So appreciate that you took the time to listen to us today, hear our story and be supportive.

Speaker 2

Thank you very much.

Operator

Thank you very much. That concludes today's conference. You may now disconnect.

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