Q2 2022 SuRo Capital Corp Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the solar capitals.
Quarter 'twenty to 'twenty two earnings call. During today's presentation, all parties will be in a listen only mode. Following this presentation. The conference will be opened for questions. This call is being recorded today Wednesday August 10 2022.
Now I'll turn the conference over to Mr. Jackson Stone offshore capital. Please go ahead Sir.
Thank you for joining us on today's call.
I'm joined today by the Chairman and Chief Executive Officer of Cerro Capital, Mark Klein, and Chief Financial Officer Alison.
Please note that a slide presentation corresponding to todays prepared remarks by management is available on our website at www Dot Cerro cap dot com under Investor relations events and presentations.
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 today.
This call is the property of <unk> 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.
<unk> is made in todays 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 find out financial condition or results and involve a number of risks estimates and uncertainties, including the impact of the COVID-19, pandemic and 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.
Seriously 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.
So obtain copies of Ferro capital's latest SEC filings. Please visit our website at www Dot Cerro cap dot com or the SEC's website at SEC Gov.
Now I would like to turn the call over to Mark Klein.
Thank you Jackson.
Good afternoon, and thank you for joining us we're pleased to share the results of Cerro Capital's second quarter 2022.
As we previously mentioned public equity market performance in the first half of 2022 was the worst first half performance in over 50 years.
This decline occurs simultaneously with inflation hitting a four decade high of nine 1% and over 40% year over year decrease in the consumer sentiment index to its slow its lowest level since inception, and the 19 forties.
Private market suffered as well as numerous late stage unicorns experienced turbulent market conditions.
This turbulence as far as new financing rounds evaluate valuations below previous capital reasons secondary trades at significant discounts and companies lowering their internal evaluations.
Originally reports of companies like instant card cutting their internal valuation by 38% back in March were surprising.
Now reports of companies like carnal completing financing at an 85%.
Discount to their last financing round.
And stripe, marking down their internal valuation by 28%.
Some increasingly prevalent.
While we exited a significant portion of our portfolio in 2021 and have maintained over 40% of our investable assets and cash.
We also experienced a challenging quarter.
At the end of the second quarter Zero capital had a net asset value of approximately $280 million or $9 24 per share down from $381 million or $12 22 per share at March 31 2002.
'twenty two.
These market dynamics, while impactful in short term valuations have provided us with compelling long term investment opportunities.
With over $150 million in cash at quarter's end, we remain confident and optimistic and seeking out compelling high growth companies.
Given current conditions, we believe being judicious on price when assessing potential investment opportunities is paramount to creating shareholder value.
Currently we are seeing private companies seeking primary financing had flat or discounted prices and private shareholders offerings secondary sales at significantly discounted rates.
Please turn to slide four.
To that extent during the second quarter, we invested $10 million and whoop.
Wearable health device company.
We were able to acquire a series C preferred shares through a secondary transaction at a significant discount tubes less financing.
So look Ben provides actionable insights for users to optimize performance by operating metrics like heart rate variability.
<unk> and resting heart rate.
A combination of whoops best in class software and wearable band allows the user to understand how specific lifestyle and training behaviors may affect their recovery and ability to perform on a given day.
As consumers continue to become more health conscious we believe roop sits in the heart of the broader fitness ecosystem and as a significant opportunity to become a dominant player in the health and wellness sector.
Please turn to slide five.
Zero Capital's top five positions as of June 30th where course hero.
<unk> global.
<unk> health aspiration and storm with.
These positions accounted for approximately 58% of the investment portfolio at fair value. Additionally.
Additionally, as of June 30th our top 10 positions accounted for approximately 79% of the portfolio.
As previously discussed our December 14th on December 14th largest position course hero announced that they raised $380 million at a $3 6 billion dollar valuation in this series C financing.
In 2021 course hero completed acquisitions of lit charts, Quillback, cliff's notes and symbol lab positioning them to grow their subscriber base.
Whereas hero continues to make strategic acquisitions, and so far in 2022, they have required Netherlands based company's scrubber.
We believe of course hero's recent fundraising gives us a significant advantage to continue to acquire companies and assets at attractive valuations.
Particularly against the backdrop of a challenging education technology market as reported by public companies Chegg Coursera and to you.
On March 22nd forged global was officially listed on the New York Stock exchange under the symbol F. R. G E buyers stack merger the merger completed with.
<unk> Capital Corp brought in gross proceeds of $215 million.
Since forges public debut the stock has experienced extreme volatility.
Reaching a high of 47 and a half.
And a low of near $4 50.
Zero capital's position is locked up until mid September .
As previously stated in our it is our objective to sell all our public positions, where lockup restrictions expire and there is relative stability in a given public positions trading we have not strayed from this approach as customary lockup restrictions expire and markets stabilize we will continue our.
Active and methodical approach to liquidating these unrestricted public positions.
As always it is our intent to be as transparent as possible with respect to our dividend distributions.
As a BDC our dividends are based on net long term realized capital gains.
Presently substantial market volatility has significantly impacted the opportunity to monetize our public positions.
As a result, we intend to provide additional clarity on the timing and amount if any of future distributions. This year.
As we've consistently demonstrated Cerro Capital's board of directors and management are committed to initiatives that enhance shareholder value.
And we believe the market is currently undervalue of our portfolio.
Accordingly on August one 2022, our board of directors authorized a modified Dutch tender offer to purchase up to 2 million shares of our common stock at a price per share between six and $7.
This modified Dutch tender offer comes in addition to the $15 million expansion of our analysis.
$55 million share repurchase program authorized by our board of directors in March.
Assuming 2 million shares tender share.
Zero zero capital, we will have repurchased over 3 million shares or approximately 10% of our outstanding shares since the expansion of the share repurchase program in mid March of this year.
Given our stock is trading at a significant discount to net asset value coupled with the extreme market volatility. We believe the modified Dutch auction tender to be an efficient and accretive deployment of capital.
Alison will discuss a tender offer and share repurchase program in more detail later in the call.
Given both public and private market volatility, we believe being patient with the public markets. Upon exits in the private markets upon investing remaining prudent on price and staying true to our investment thesis when sure zero capital is well positioned to take advantage of this.
Instability and dislocation to make compelling investments in high growth companies and industries and to strategically liquidate public positions to drive the greatest shareholder value.
We'll continue to focus on judiciously deploying our healthy cash balance to invest in great companies and deliver value for our shareholders.
Thank you for your attention and with that I will turn it over to our Chief Financial Officer Alison Greene.
Mac I would like to follow Mark's update with a more detailed review of our second quarter investment activity and financial results, including details on the share repurchase program and modified Dutch auction tender offer as well as our current liquidity position.
First I will review our investment activity, please turn to slide deck.
During the second quarter, we invested a total of $11 million in new and follow on investments.
During the second quarter included a $500000 follow on investment in Shogun.
5% short term convertible note of $500000 investment in the series C preferred shares of edge markets, Inc. Three let's start out capital point.
$10 million and series.
Series C preferred shares a group Inc.
Sir you train please.
Please turn to slide seven.
During the second quarter, we continued to monetize our public common shares and <unk> capital partners and robot group and began to monetize our public common shares of rent the runway.
<unk> 3676 common shares of <unk> capital partners for approximately $77000 of net proceeds resulting in a net realized gain of approximately $3000 as of June <unk>, We had I said, 45% of our <unk> position.
Installed 50000 common shares at runway for approximately $181000 in net proceeds resulting in a net realized loss of approximately $578000 as of June 30th.
14% of our positioning and.
And we sold 431591 common shares for approximately $2 4 million net proceeds resulting in a net realized gain of approximately $1 $1 million as of June 30, we have exited 57% of our robot position.
Additionally, during the quarter, we received approximately $874000 in distributions related to my limited partner fund investment and true global ventures for applied.
Finally during the quarter, we received approximately $314000 in proceeds from second Avenue related to principal repayment and interest on the 15% term loan due December 2023, please turn to slide eight.
The quarter and through today, we've also monetize the following public position.
We began monetizing our MSA and enjoy technology in July July 1st today, We sold 626955 common shares for approximately $235000 of net proceeds resulting in a net realized loss of approximately $3 million. We currently hold 320342 remaining shares of enjoy or 34%.
Remaining of our original position, we continue to sell our public common shares of rent the runway and sold 15000 shares for approximately $51000 of net proceeds resulting in a net realized loss of approximately $176000. We currently hold 274191 remaining shares I've been through one way or 81% remaining of our original position.
We sold 110000 common shares at broker for approximately $454000 in net proceeds resulting in a net realized gain of approximately $79000. We currently hold 254040 <unk> remaining shares in broker or 30% remaining of our original position on July 14th 2022 final payment was received from commentary lending Trust SPD.
For the remaining 512290 class a common shares upon tier technologies, Inc. They can pay us the beneficial equity interest in underlying shares and total on our $6 9 million structured commentary alone. We realized there was kind of approximately 55%.
This gain from Cerro Capital's investment in commentary lending tried that PD. One is generated by the proceeds from the sale of shares collateralized the repaid promissory note to pound our lending.
And attributable to the equity participation in underlying collateral.
Finally subsequent to quarter end, we received approximately $102000 in proceeds from second Avenue related to principal repayment and interest on the 15% term loan due December 2023, Please turn to slide nine I will review our investment portfolio allocation by investment theme.
Segmented by six general investment themes, the top allocation of our investment portfolio at quarter end, the education technology, representing approximately 37% at the investment portfolio at fair value financial technology and services was among the second largest category representing approximately 34, 8% of the portfolio.
The market places category accounted for approximately 15, 2% of our investment portfolio and approximately 10% of our portfolio was invested in social and mobile companies.
Big data accounted for approximately two 3% of the fair value of our portfolio and sustainability accounted for less than 1% of the fair value of our portfolio as of June <unk> yet.
Please turn to slide 10.
As Mark mentioned on March 13th our board of directors authorized a $10 million expansion of the share repurchase program to $55 million.
This expanded share repurchase program during the second quarter, we repurchased 855159 shares of our common stock for approximately $6 $9 million.
Since the expansion on March 16, we have repurchased a total of 1 million 8676 shares of our common stock for approximately $8 $3 million since the inception of the share repurchase program. In August 2017, we have repurchased a total of $5 million 832008 shares of our common stock for a total deployment of approximately $38 6 million.
The $55 million authorized by the board.
Approximately $16 $4 million remains authorized under the share repurchase program is currently set to expire on October 31 2022.
As Mark previewed earlier on August 1st are the company's board of directors authorized a modified Dutch auction tender offer to purchase up to 2 million shares of our common stock at a price per share not less than $6 and not greater than $7 and tencent increments using available cash.
The offer will commence on August eight.
P M. Eastern time on September <unk> 2022, unless extended if the tender offer is fully subscribed the company will purchase 2 million shares or approximately six 6% of the company's outstanding shares of its common stock any shares tendered maybe withdrawn prior to expiration of the tender offer stockholders that do not wish to participate in the tender offer do not.
Need to take any action.
Based on the number of shares tendered in the price of specified by the tendering stockholders. The company will determine the lowest per share price that will enable it to acquire up to 2 million shares of its common stock all shares accepted in the tender offer will be purchased at the same pace, even if tendered at a lower price.
The tender offer is not contingent upon any minimum number of shares being tendered. The tender offer is however, subject to other conditions, which will be disclosed in the tender offer documents.
In the future the board of directors May consider additional tender offers or other measures to enhance shareholder value based upon a variety of factors, including the market price of the company's common stock and its net asset value.
The company's board of directors is not making any recommendation to stockholders as to whether to tender or refrain from tendering their shares into the tender offer stockholders must decide how many shares they will tender if any and the price within the stated range at which they will offer their shares for purposes.
Information agent for the tender offer is the king and the depositary as American stock transfer and trust.
Her to purchase a letter of transmittal and related documents will be mailed to registered holders and certain of our beneficial holders beneficial holders may alternative Alternatively received the offer to purchase and our communication to consult with their bank broker or custodian, if they wish to tender shares.
Quick questions and information please contact the information agent at Cerro <unk>, King Dot Com banks and brokers may call. The information agent at 212269555.
And all others may call the information agent toll free at 870 694414.
The information in this earnings call and our corresponding press release, describing the company's tender offer is for informational purposes, only and does not constitute an offer to buy or the solicitation of an offer to sell shares of the company's common stock in the tender offer.
Under offers being made only pursuant to the offer to purchase and the related materials that the company will file with the Securities and Exchange Commission and are distributing to its stockholders.
They may be amended or supplemented.
<unk> should read such offer to purchase and related materials carefully and in their entirety, because they contain important information, including the various terms and conditions of the tender offer stockholders is throw capital Corp may obtain a free copy of the tender offer statement on schedule T O. The offer to purchase and other documents that the company will be filing with the securities and exchange.
Commission from the Securities and exchange Commission's website at Www SEC Gov.
<unk> may also obtain a copy of these documents without charge from DF King the.
The information agent for the tender offer by E mailing style at the King Dot com or calling toll free at 800 700 694415.
Holders are urged to carefully read all of these materials prior to making any decision with respect to the tender offer stockholders and investors who have questions or need assistance may cause the king or email than zorro at King Dot Com. Please turn to slide 11, we ended the second quarter of 2022 with an NAV per share of $9 24, which is consistent with our final.
Reporting a breakdown of NAV per share as of quarter end as shown.
The decrease in NAV per share from $12 22 at the end of the first quarter to $9.24 per share as of June 30 was largely driven by a $2 92 per share decrease attributable to unrealized depreciation of our portfolio of investments during the quarter, most notably a result of the broader market decline on our on both our public positions and those type of positions valued with.
Public company multiples.
Also contributing to the decrease was a <unk> 13 per share decrease due to net investment loss and a 6% decrease due to realized losses on investments.
These decreases in NAV per share were partially offset by an aggregate 13 cents per share increase due to capital transactions, including an 11% per share increase attributable to the repurchase of common stock. During the quarter ended June 32022, the company repurchased 855159 shares of stereo capital common stock for approximately $6 9 million.
And cash under its share repurchase program the use of cash in connection with the repurchases decreased net asset value as of quarter end. However, the reduction in shares outstanding as of quarter end resulted in an increase in the net asset value per share finally, I'd like to review Starwood capital's liquidity as of June 30, yet.
We ended the quarter with approximately $169 $4 million of liquid assets, including approximately $153 million in cash and approximately $16 5 million in unrestricted public securities. It does not include approximately $21 $1 million in public securities subject to certain customary lockup provisions at quarter end.
In total our cash in public positions, both restricted and unrestricted totaled $196 million at quarter end.
The approximately $16 $5 million of unrestricted public securities held as of quarter end represent our shares and enjoy technology next door you weight capital partners rent the runway Rover group and Skillsoft valued at the June 32022 closing prices.
$1 $1 million of public securities subject to lock up provisions or other sales restrictions as of quarter end include our positions in <unk>. Prior to the June 32022 clothing public share prices less a discount for lack of marketability related to the lockup provision as of June 32022, and currently there are 30.325 million.
187 shares of the company's common stock outstanding that concludes my comments, we would like to thank you for your interest and support of stereo capital now I will turn the call over to the operator to start the Q&A session operator.
Thank you ma'am.
The interest of time, please limit your questions to only one if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again breast I wanted to ask a question. We would for just a moment for everyone the opportunity to signal for question.
Again.
One to ask a question.
We will take the first question from Jon Hickman Ladenburg. Your line is open. Please go ahead.
Hi.
First of all Alison could you whats the net liquidity I missed that number.
With.
Including the public shares and cash.
Okay.
John it's about $169 million $164 million.
Thank you.
Okay. Thank you and then Mark could you opine a little bit on.
So do you believe the private markets are down as much as or more than what's happened say in the Russell or the Nasdaq.
Sure.
Well, John I think as.
Most people have read and seen that the indices, while down sharply don't really tell the whole story and I think we discussed in our last call.
Over 50% of the NASDAQ is down over 50% in something like 20, some odd percent or down 70% or more so.
Actually the small mid cap growth I think there has been.
Significant degradation in value I think over the last.
Call it month or so we are seeing very significant breaks.
Primarily primary financing and especially in the secondary market. So there is there is catching up that's occurring and we're clearly seeing that.
What we're looking at including the opportunity to deploy the capital that we just did.
So thank you and thank you for your ongoing.
So is it safe for us to assume that we could here.
Like more activity when we when you talk to us on the third quarter call.
We I will say that we evaluated more opportunities in this quarter than we've had in many quarters behind previously.
We're being really really careful of how we deploy our capital and trying to be as opportunistic as.
As we can but we are obviously open for business and looking to find the best opportunities to deploy the capital.
Sure.
Thank you and just to be clear.
There is no further question at this time I'd like to turn.
The conference back to you for any additional or closing remarks.
Well. Thank all of you for joining us today on our conference call. We appreciate your interest and support.
And if there's any further questions. Please reach out through.
Our investor portal, and we'll be we'll be sure to get back in touch with you. Thank you all very much we appreciate it.
Okay.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
[music].
Okay.