Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to shutter walk Capital's third quarter 2019 earnings conference call todays presentation, all parties will be any listen only mode.

The presentation. The conference will be open for questions. This call is being recorded today Wednesday November six 2019, I'll now turn the conference over to clear Council sought a rock capital. Please go ahead.

Thank you for joining us on today's call I'm joined today by the Chief Executive Officer upset or out capital, Mark Klein and Chief Financial Officer, Allison Greene. Please note that a slide presentation that correspond to todays prepared remarks by management is available on our website at www dot southern <unk> Dot com under Investor Relations presentation.

Today's call is being recorded and broadcast live on our website Www Dot <unk> Dot Com replay information is included in our press release issued earlier today. This call is a property of sat around 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. Our financial condition. These statements are not guarantees of our future performance or future fuel.

Our results and involve a number of rough estimates and uncertainties actual results may differ materially from there isn't 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 FTC management does not undertake to update such forward looking statements unless required to do so.

Bylaw jumped 10 copies et cetera capitals latest assay SEC filings. Please visit our website at <unk> dot com or the Fccs website <unk> as he see dotcom now I would like to turn the call over to Mark Klein.

Thank you Claire.

We're pleased to share the results of soda Raj third quarter 2009 cheap.

First I will review the recent quarter and provide an update on Ci initiatives, we are executing to enhance shareholder value.

Then I will present, an overview of recent developments in the portfolio.

To conclude I'll hand, the call over to also green for a brief financial overview and then we'll open the call for questions.

Let's start with slide three.

At the end of the third quarter net asset value was $11, a 24 cents per share increased from $10.75 per share in the second quarter.

Net asset value totaled $214 million compared to $211 million in the second quarter.

As we've stated before we believe this strong growth of our portfolio companies have have been exhibiting will continue to drive NV and we are optimistic about the future of our portfolio as we have been in recent memory.

Please turn to slides four and five.

We continue to take initiatives to drive shareholder value.

Today, we're pleased to declare a 20 cents per share dividend to shareholders. This dividend is driven by monetizations instead of rocks public and private securities.

Based on an ongoing portfolio activity and the results of the tender offer we anticipate declaring an additional de minimis dividend by yearend.

Additionally on October 21st we commenced a modified Dutch auction tender offer to purchase up to $10 million in common stock at a price per share between $6 an $8. This expires on November 20.

Furthermore, we have repurchased $20 million of shares since we initiated our share repurchase program.

Allison will provide additional details on the tender offer as well as an update on the share repurchase program to date.

These shareholder initiatives come in addition to our internalization earlier this year.

As announced during our call on March 14, Southern Iraq transition to an internally managed fund structure.

As we have now completed two quarters as an internally managed BDC the cost savings from operations are reflected in our income statement.

Please turn to slide six and seven for review no notable developments in our investment portfolio in the third quarter and subsequent to quarter said.

So to rocks top five positions as of September Thirtyth, We're of course, Sarah Palin tier Ozzie media course hero and lift.

These positions accounted for approximately 55% of the investment portfolio at fair value.

As of September Thirtyth, our top 10 positions accounted for approximately 79% of the portfolio.

Our largest position Coursera raised $103 million in April of 2019 at a 1.56 billion dollar pretty money valuation according to pitch book.

Of course, there's learning platform currently serves 40 million learners 1800 businesses and over 150 top universities.

According to Reuters and C N B C or second largest position Pelletier is reportedly seeking funding at evaluation in excess of $26 billion.

We currently hold or pelletier position at an implied equity about value of approximately $12 billion.

Our third log largest position Ozzie media is a media and entertainment business focusing on serving young adults, whose whose recent funding we will highlight later in the call.

Our fourth largest position course hero led by CEO , Andrew Grauer continues the extra again execute against its growth strategy offering over 30 million or specific resources for the 20 million plus students in education educators on its platform.

Our fifth largest position at quarter's end was lift subsequent to quarter is and we sold our entire position for a sizable Jane.

To put our investment portfolio into perspective, the combined fair value of our top five positions as of September Thirtyth was $110 million or approximately 93% of shutterbugs $119 million total market capitalization at quarter's end.

We believe this dynamic emphasize is a significant risk reward opportunity for our investors.

Segmented by six Gen investment themes, the top allocation of our investment portfolio is to education technology, representing approximately 36% of the investment portfolio at fair value.

Marketplaces was the second largest category, representing approximately 90% of the portfolio.

Our financial technology and services category accounted for approximately 16% of our portfolio at fair value Big data in cloud accounted for approximately 15%, well, social and media social and mobile accounted for approximately 14% of our portfolio at fair value.

Please turn to slide eight.

As stated on our previous earnings call. It is our intention to hold public securities through a lockup period and the ensuing stabilization period.

Accordingly, we sold our remaining position and dropbox throughout the third quarter for again.

Subsequent subsequent to quarter is and we sold our entire position lift for a sizable Jane.

We have now exited all of the public securities in our portfolio.

With this year's exit of Dropbox and lift two of our top positions. A key area of continued focus is selectively adding new names to the portfolio to drive long term value for shareholders.

Accordingly, our team continues to expand or sourcing network in order to evaluate a wide range of investment opportunities in top VC and institutionally backed companies that demonstrates strong operating fundamentals. We are targeting businesses that have shown to provide skilled valuation growth.

Before potential IPO or strategic <unk> exit.

A few industries of focus include block chain consumer retail financial technology, food technology, and transportation and logistics.

On our second quarter earnings call, we announce et cetera had committed to investments in green acreage and aspirations subject subsequent to quarter is that.

We had also announced that we expected to and invested an additional seven and a half million dollars into a Canada's read investment Trust. We were pleased to announce that each of these investments closed during the third quarter as expected, including said rugs, new seven and a half million dollar investment into Treehouse real estate and best.

Trust.

Additionally, during the third quarter cetera amended the structure of its investment in next nest GSV, otherwise known as GSV labs.

The amended agreement restructured cetera, <unk> equity positions not including its warrants into a derivative security. The agreement is intended to take set of rocks downside, well affording cetera upside participation.

Southern Iraq will maintain its amended outstanding convertible note as well as its warrant position, India GSV labs.

We're also pleased to report noteworthy developments from lime and Ozzie media.

On October Thirtyth lime CEO , Brad bow spoke to CNBC regarding future <unk> future IPO prospects for the company.

In conjunction with the interview Bow announced that lime has now reached 100 million chips to date with operations in more than 120 cities in over 30 crunch countries across five continents.

Reports that is profitable in the vast majority of its markets and it was unit economic positive as a company in the last quarter.

To date lime is raised $777 million in funding and bow expects the company to be profitable in 2020.

Well he decline to give specifics about timing is interview bound noted the lime plans to go public as it brings greater discipline to the financials and because the company wants its tens of millions of users to have an opportunity to be part of line.

Additionally, as announced last week Ozzie media raise a $35 million series C round led by Mark last are you with participation from investors, including until our partners Liontree add to them investment Axel Springer and administering collective.

He is now raised approximately $70 million and funding to date.

As announced by CEO Carlos Watson on CNBC as he continues to see positive momentum and its television business and its embedded business <unk> expects majority of its revenue do come from these segments going forward.

As reported by Axios Odyssey's topline growth has approximated 50% year over year for the last four years and the company expects to be profitable in calendar year 2020.

Looking ahead, we believe that southern Iraq is well positioned to deliver long term value. We are executing against a disciplined growth investment strategy was strong tailwinds. We believe the fundamentals of our portfolio are strong.

IPO.

Firemen continues to reward high growth companies with strong past profitability, which has historically been a catalyst for stuff. Thank you for your attention and with that I'll hand, it over to house.

Thank you, Mike I would like to follow my update with them like each other.

And so as though the September Thirtyth 2018, including details of our liquidity position I lost to provide an update on our transition to an internally managed BDC and expense reduction initiatives. In addition to providing further details on our current shareholder said.

We ended the third quarter with an NPV per share of $11.24, which is.

I know isn't 75 cents per se I last quarter, a breakdown of the increase in a the third quarter as shown on slide nine and it's consistent with our financial reporting.

On the increase in AG per share during the third quarter was largely driven by approximately 42 cents per share and net unrealized gain on and I think nine cents per share and net realized gain on investment and then appreciation of 14 cents per se I teach the accretive effect a common stock repurchase during the quarter increases to any well.

Offset by a nice decreased to 16 cents per se I have not envestnet law and the effect of estimated annual stock based compensation on paid in capital.

42 cents per share increased due to net unrealized gain on investment in the third quarter is largely attributable to the appreciation in value at certain existing portfolio investment most notably aspiration of course, there and I think media.

Nine cents per share increase net realized and I didn't back then and the third quarter is attributable to the gains realized on the sale of our remaining publicly traded got like shares during the quarter as Mark mentioned subsequent to quarter end, we ought to liquidate it I shared publicly traded stock.

Through the use that Iraq liquidity at September Thirtyth 2018.

We ended the third quarter with about $57.6 million liquid <unk>.

Including $45.2 million pass and $12.4 million marketable security is not subject to lockup agreement.

Cash balance at $45.2 million as of September Thirtyth 2018 consisted primarily of proceeds generated by the monetization various portfolio positions in the fourth quarter 2017 did a third quarter of 2019 and remaining Christine <unk>. She went that $40 million at 4.7 type person.

<unk> convertible senior notes due in 2023 during the first quarter 2018.

1.4 million in marketable securities everything I publicly traded shares of left subsequent to quarter end, we liquidated I'm pilots to descend a 304829 shared approximately $13.3 million total net pokey.

Having approximately 9 million died in total Dana.

During the third quarter, we continue to see the cost saving effects in the internalization and the management about Iraq as previously discussed as an internally managed BDC, we haven't significantly reduced cost structure upon termination of the investment advisors. They met on March 12, 2019, we no longer pain management teams each month as management is now and.

Quite directly by the BDC and we no longer crew and incentive.

Total operating expenses net of waiver of management and incentive fees and annual stock based compensation expense estimate decreased approximately 37% in the first nine months of 2018 to a total of 6.5 million to the first nine months of 2019 did decrease is primarily due to the elimination of management team incentive fees and costs under the tired minutes.

Basically Matt.

Together, we believe our ongoing efforts to reduce operating expense. It and then meaningful cost savings we have already been answered realizes it internally managed BDC well have continued positive impact on anything we remain diligent about managing I've been saying that in quite right.

Finally, I'd like to wrap up with additional details of our current shareholder initiative.

Please refer back to slide five for an update on our share repurchase program. During the third quarter, we repurchased 605327 shares et cetera capital common stock for approximately $3.9 million subsequent to quarter, and we repurchased 28000 shares for approximately $169000.

That's commencement of the share purchase program in 2017 that are out because we purchased approximately $20 million and stock accounting for over 14% and the outstanding common stock.

Now.

As Mike stated on October 21st Southern not commenced a modified Dutch auction tender offer to purchase at the $10 million are common stock at a price per share between $6 and $8. They tend to offer will expire at five P.M. Eastern on November 22019, unless extended its a tender offer it fully subscribed.

Michael purchase between 1.25 million shares and 1.65 million shares or between 6.57% and 8.7, 10% respectively outstanding common shares.

Finally, as Mike alluded to earlier on November 2019 that are rocks board of directors declared a dividend at 20 cents per share payable on December 12, 2019 to the company common stockholders of record as of the close of business on December 2nd 2019, the dividend will be paid in cash that concludes my comments because I'd like to thank you for your interest and stuff.

Yes that Iraq now I will turn the call over to the operator for the sorry to keep an eye operator.

Thank him at this time, we will open the floor for questions. If he would like to ask a question, placing them by pressing star one on your telephone keypad.

If you're using a speakerphone. Please make sure that your me function is turned off to allow your signal to me chocolate.

And again not a star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

[laughter].

[noise].

And we'll take our first question from Bill Hyler with W.T.H. capital.

Yes, I, a good afternoon or things of the call today.

I was hoping you could review with us the process, you're using to calculate the a fair value of the private portfolio companies you know I believe you're using a fear of value approach.

I would love different levels, depending on the available data.

For comparable companies and assets, but do the valuation generally approximate the left the funding round up where the company.

[laughter] Bill Thanks for the question and obviously this how we do valuation is integral to people's ability to evaluate what are in a b is and how they want to.

Trade the securities.

We actually have a very robust robust process that begins a couple of weeks before the quarters ending goes straight through to numerous iterations, both internally and we have an independent valuation firms as well.

But we we have a series of heuristics, partially that deals with last rounds may also deal with private transactions that are occurring in marketplaces deals with market comps and and we at a rate around that and then we come up with our valuation b of the independent group come up with their valuation.

We then compare and contrast and try to level set with one another we then bring it up to our valuation committee, who has comments who push it back down to us with comments as management ultimately goes back up to value and audit Committee and ultimately our board of direct.

Okay, well, let me just a quick follow up then related. So for example, if pile interior was successful in obtaining a valuation of 26 billion.

You know you would take that into consideration.

That would not be necessarily enough for you to raise the carrying value alone.

They have to be fair, obviously, yeah, yeah, what would be a fair statement is.

Primary rounds are heavily weighted in the quarter and which are they occur they occur or.

But so too in the case a pound you're specifically, there's a great deal of secondary trading that's occurred as well. So we have oh, we have a a longstanding a series of heuristics and and applications of that valuation.

You should is that if they if they do a around at evaluation that significantly higher than we carried that that would impact our valuation that's correct.

Got you Okay. Appreciate it thank you.

Thanks, a lot bill.

[noise].

[noise] once again, if he would like to ask a question that star one.

And we'll take our next question from Norman need.

[laughter] [laughter].

[laughter] Arvind.

Yeah.

Hello.

Two questions can you hear me okay.

Yeah, we can that's great sorry, we had little to no problem, but you are so on the parents, you're just a follow up in the last gentleman's.

So should the 30.4 here, though is that.

A blend between your book value and the latest round I, just want to understand or should that be.

Multiplied by 2.33 based on the 28 million.

<unk>.

Well.

A couple of things our valuation is as we stated conference call was at about $12 billion equity value. We haven't we haven't overlaid any other.

Subsequent financings.

<unk>.

So the 30 point poor fair value, then would just be using the 12 so.

So that's correct that's correct.

And then I guess.

Another obvious question, but.

I'm going ask it's it's it's obviously, it's not obvious to me the 11 in the corridor.

So you shouldn't that you guys are using in the press release is that old so.

I would imagine using that original htwo right, but not the 28.

No no sir the or 11.24, and a b is Uh huh.

Fluids using the Pelletier as we reflected in her presentation at approximately 12 million equity value.

So billion equity.

Ladies and gentlemen. This concludes today's question and answer session I will now turn it back speakers for closing remarks.

Thank you all very much for attending the call and thank you for your support and as always were available. If you want to have conversations outside of the conference call. Thank you very much.

Ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

[noise] [noise].

[noise].

[noise].

[noise].