SuRo Capital Corp

NASDAQ:SSSS

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the SuRo Capital's Third Quarter 2023 Earnings Call. Today's call is being recorded. [Operator Instructions]

I will now hand you over to your host, Adam Bates, to begin today's conference. Thank you.

[Adam Bates, executive]

On today's call, I am joined today by the Chairman and Chief Executive Officer of SuRo Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation corresponding to today's prepared remarks by management is available on our website at www.surocap.com under Investor Relations, Events and Presentations. . Today's call is being recorded and broadcast live on our website, www.serocap.com. Replay inform is included in our press release issued today. This call is the property of SuRo 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. Management does not undertake to update such 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 Klein.

[Mark Klein, executive]

Thank you, Adam. Good afternoon, and thank you for joining us. We are pleased to share the results of SuRo Capital's third quarter 2023. The third quarter of 2023 was characterized by a broad ongoing weakness in the public equity and bond markets. Economic uncertainty has continued into the fourth quarter, although recent reports and commentary from the Federal Reserve has led investors believe the Fed may be done or close to done raising interest rates. While the fee be 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. . 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 in the public markets, as of today, all of these companies have declined from their IPO price. The poor performance of these stocks as well as other IPOs has led to a pause in the IPO market. The Idaho market is broadly closed and will likely reopen during the first or second quarter 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 pricing of late-stage secondary opportunities and the recent performance of public markets. 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 components.

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 in offered simultaneously and meaningfully different prices.

Finally, 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. To navigate through them, it is imperative to have constant dialogue with the myriad of secondary participants. To be prudent in price 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 some prospects of prolonged time lines until IPO, our pipeline has remained extremely active with many companies and investors seeking liquidity. In fact, we continue to see more potential investments than 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. Additionally, as previously discussed, one of our SPAC investments closed its previously announced merger and 2 other SPACs announced definitive agreements to merge with target companies.

We made 2 new investments during the quarter. We invested $5.8 million in four4 Kite, a supply chain visibility software company through secondary transactions. And we also invested $1 million in state trade, a sports betting exchange in business as profit exchange through a primary transaction as part of the SuRo Capital's portfolio.

Please turn to Slide 4. FourKites is a leading real-time supply chain visibility solution. FourKites has been a pioneering for us behind the idea that company 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 FourKites technology is evidenced in its impressive clientele which includes recognized brands such as 9 of the top 10 consumer packaged good companies and 18 of the 20 food and beverage companies. Today, FourKites helps over 1,200 of the world's most recognized brands leverage real-time visibility and unlock efficiencies that save them millions of dollars a year.

We believe that FourKites is in a unique position to capture additional market share as they continue expanding their business and target customers with some of the most complex supply chain needs.

We also made a $1 million investment in profit exchange through a primary transaction. Profit exchange is a peer-to-peer sports betting exchange focused on providing better 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 in regulates 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., given the success Betfair has had in the U.K. 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, Colombier 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 million and our cost basis in Public Square is approximately $2.7 million. The lockup restrictions 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. Allison 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 in advanced vision technology and nuclear fuel company. On July 11, 2023. On September 27, 2023, the company filed an S-4 with the SEC. The combined company will be named Oklo and intend to list on the New York Stock Exchange with the symbol O-K-L-O. The transaction, which has been approved by the Board of Directors of Oklo and AltC is expected to close in late 2023 and for early 2024 and is subject to approval by AltC and Oklo shareholders as well as other closing conditions.

Lastly, during the quarter, on August 1, 2023, Churchill Capital Corp. VII announced signed a definitive agreement to merge with CorpAcq, a corporate compounder, specialist acquiring small- and medium-sized business enterprise, also known as SMEs in the U.K. The transaction has been approved by the Boards of Directors of CorpAcq and Churchill VII and is expected to close in early '24, subject to approval by Churchill VII and CorpAcq shareholders as well as other closing conditions.

Turning to the third quarter. We ended the quarter with a net asset value of $212 million or $8.41 per share. This is an increase in net assets, up from $7.35 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 5 positions. I first want to highlight our cash position. As of quarter end, our cash and short-term U.S. Treasuries available for investment were approximately $94 million, representing 32% of our gross assets. We continue to believe having cash in this environment have antageously positions us to continue seeking out new opportunities emerging from current market conditions.

SuRo's top 5 positions as of September 30 were Learneo, Public Square, Blink Health and StormWind. These positions accounted for approximately 61% of the investment portfolio at fair value. Additionally, as of September 30, our top 10 positions accounted for approximately 82% of the investment portfolio at fair value.

Transitioning to our public investments. As previously stated, it is our objective to sell our public positions when lockup restrictions expire and is relative stability in a given public positions trading. In line with this approach, we have continued to monetize our public unrestricted positions. During the third quarter, we monetized most of our remaining position in next door and subsequent to quarter's end, we began monetizing our position in Public Square warrants. We plan to continue to opportunistically monetize our publications 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 an additional $5 million for 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 determined the current continuation of the share repurchase program to be an efficient and accretive deployment of capital.

As public and private market both to volatility persist, we remain patient and selective as we evaluate new opportunities. 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 Allison Green, our Chief Financial Officer.

[Allison Green, executive]

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 third quarter. 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 third quarter and subsequent to quarter end. This does not include investments in short-term U.S. treasuries.

During the third quarter, we invested a total of $7.3 million in new and follow-on investments. These include a $0.8 million investment in 4 common shares via a secondary transaction, a $1 million investment even through SuRo Capital and profit exchange is a simple agreement for future equity or space. and a $500,000 follow-on investment in Heart Series B 4 preferred shares, for which we also received words.

Over the course of the third quarter, we continued to monetize our next SuRo Capital shares. We sold 589,996 public common shares of next door for approximately $1.8 million of net proceeds, resulting in a net realized loss of approximately $1.4 million. In addition to sales of our unrestricted publicly traded investments, we received approximately $256,000 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 XPoint's convertible note. Subsequent to quarter end as well through yesterday, we sold 67,931 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 Second Avenue related to principal repayment and interest on the 15% term loan due December 2023 as well as other interest dividends and interest income.

Please turn to Slide 7. Segmented by 6 general investment themes, the top allocation of our investment portfolio at quarter end was to education technology, representing approximately 40% of the investment portfolio at fair value. Marketplaces was the second largest category, representing approximately 22% of the portfolio. The financial technology category accounted for approximately 18% of our investment portfolio and 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 and 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 million expansion to the share repurchase program to $60 million and an extension of the share repurchase program through October 31, 2024. 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 3.2 million shares for approximately $14.2 million and have a remaining $20.7 million approved to deploy via share repurchase program. Since the inception of the share repurchase program in August 2017, we have repurchased a total of 6.018,501 shares of our common stock for a total deployment of approximately $39.3 million of the $60 million authorized by the Board. This does not include repurchases under various tender offers during this time period. About $20.7 million remain authorized under the share repurchase program and is currently set to expire on October 31, 2024.

Under the share repurchase program, SuRo Capital may repurchase its outstanding common stock in the open market provided that complies with prohibitions under its insider trading policies and procedures and the applicable regulation.

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. SuRo Capital applies fair value accounting in accordance with U.S. generally expected 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. Their value is defined as the price that would be received to sell an asset or paid to transfer liability and an orderly transaction between market participants at a date.

GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation technique 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. 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 trades. Level 3 valuations are based on unobservable inputs 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. Further guidelines discussed when a secondary transaction occurs in one of our portfolio companies, we closely review the size of the transaction, the share cost and any other pertinent information regarding the transaction to assess fair value. Unless a rare exception as 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 for value analysis.

We are pleased to report we ended the quarter -- the third quarter of 2023 with an NAV per share of $8.41, which is consist with our financial reporting. The increases in NAV per share from $7.35 per share at the end of Q2 2023 to $8.41 per share as of September 30 was primarily driven by a $1.16 per share increase resulting from net unrealized depreciation of investments during the quarter largely due to observed secondary trades in our portfolio companies. Also contributing to the case 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, decrease net asset value as of quarter end. However, the reduction of shares outstanding at quarter end resulted in an increase in the net asset value per share.

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 decrease due to net realized losses on investments during the quarter.

Finally, I would like to take a moment to review SuRo Capital's liquidity position as of September 30. We ended the quarter with approximately $105.4 million of liquid assets, including $73.5 million in cash, $20.5 in short-term U.S. treasuries and approximately $11.6 million in unrestricted public securities. The approximately $11.6 million of unrestricted public securities held as of quarter end, represent our shares in Next Door, New Lake Capital Partners, Forge Global, Skillsoft and our Public Square warrants.

At September 30, 2023, there were 25,209,108 shares of the company's common stock outstanding. That concludes my comments. We would like to thank you for your interest and support of SuRo Capital.

Now I will turn the call over to the operator to start the Q&A session. Operator?

[Operator]

[Operator Instructions] There are no further questions. I would like to hand the call over to your host, Mark Klein, to conclude today's conference.

[Mark Klein, executive]

Our call, we greatly appreciate your support. If you have any further follow-on questions, feel free to reach out to us either through our IR portal or just directly through e-mail. Thank you very much.

[Operator]

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