Q3 2022 SuRo Capital Corp Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the solar Capital's third quarter 2022 earnings conference call. During today's presentation, all parties will be in a listen only mode. During the presentation. The conference will be opened for questions. As a reminder, this call is being recorded today Tuesday November 19 2022.
I would like to turn the conference over to Mr. Evan Schlossman 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 Greene. Please note that a slide presentation corresponding to todays prepared remarks by management is available on our website at www Dot zero cap dot com under Investor Relations.
And the presentation today's call is being recorded and broadcast live on our website Www Dot zero cap 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.
We'd like to call your attention to our 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 <unk>.
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 of 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 Cerro capital greatest.
Please visit our website at www Dot <unk> dot com or the SEC website at SEC Gov, now I would like to turn the call over to Mark Klein.
Thank you Evan good afternoon, and thank you for joining US we're pleased to share the results of Cerro capitals third quarter 2022.
Especially mentioned the first nine months of 2022 were the worst for equity markets in the past two decades as of the beginning of November the S&P 500 index and the NASDAQ.
Stock market composite were down more than 20% and over 30% respectively year to date for comparison. According to Dealogic roughly 87% of the companies that went public in the U S last year are trading below their offering prices.
Down almost 50% on average.
At the same time, we have seen a continued a continued dramatic slowdown in the IPO market.
With S&P global reporting under 40, Ipos in the U S. This year and more than 60% of the Ipos year to date being withdrawn based on a recent Pwc report.
Over the first nine months of this year S&P Global reports that there have been 126 U S ipos totaling almost $18 billion.
Impaired to 673, ipos totaling in excess of $217 billion during the first three quarters of 2021.
This represents an 81% decline in the number of Ipos as well as a 92% decrease in capital raise.
Sully the federal reserve has taken aggressive actions in the hopes of curbing elevated inflationary rates that have been hovering near 40 year highs.
Year to date, the fed is by 375 basis points with additional rate hikes are expected in the fourth quarter of this year and into 2023.
As macroeconomic challenges persist, we expect continued acceleration in the repricing of private securities. We are beginning to see bid ask spreads starting to now is increased discounts were reflected in the asking prices of private securities on the secondary markets. As a result, we believe continued pressure from declining macroeconomic conditions.
And the unfavorable IPO IPO market will present compelling opportunities in the secondary market.
While we are currently holding over 46% of our investable assets in cash and U S. Treasuries, our portfolio of investments continue to be impacted by broader machines, and we have experienced a challenging quarter at the end of the third quarter Cerro capital had a net asset value of $7 83 per share.
Or approximately $221 8 million.
Down from $9 24 per share or $280 million at June 32022.
Despite what we believe are short term declines evaluations or continue our considerable cash and U S. Treasury positions of approximately $140 million continues to position us to be opportunistic in evaluating evaluating late stage high growth companies and <unk>.
Recently compelling valuations.
Zero capital continues its commitment to shareholder value enhancing initiatives given the discount our stock has traded at compared to net asset value per share our active share repurchase purchase program coupled with our recent modified Dutch tender offer has been and continue to be.
Efficient and accretive deployment of capital.
Year to date <unk> capital has repurchased over 3 million shares representing approximately 10% of the previously outstanding shares.
Alison will discuss the results of the tender offer in more detail later in the call.
Please turn to slide four.
Cerro Capital's top five positions as of September 30th.
Course hero, Blink health or chip technology architect capital Page S storm with.
These positions accounted for approximately 62% of the investment portfolio portfolio at fair value. Additionally, as of September 30 of our top 10 positions accounted for approximately 80% of the investment portfolio.
Yes.
As previously stated as our objected to sell our public positions when lockup restrictions expire and there is relative stability in a given public positions trading in line with this approach we have continued to monetize several of our public positions.
Public <unk> restrict positions over the course of the quarter during the third quarter, we fully exit exited our positions in both joy and Pelletier lending trust and continued to reduce our positions in new like capital partners rent the runway and Rover in fact subsequent to year end to quarter end we.
We closed out our remaining position in Rover.
As always it is our intent to be as transparent as possible with respect to our dividend distributions.
As a BDC that has elected to be treated as a ric flair to distribute our net realized long term capital gains as dividends.
At present at present, we anticipate a net realized long term capital loss for 2022.
Therefore, we do not anticipate distributing any additional this year.
Given the continued volatility in both public and private markets, we believe being patient and staying true to our investment thesis gives us significant opportunities are significant cash positions to add new high growth companies to our portfolio and drive shareholder value.
Thank you for your time and with that I will turn it over to our Chief Financial Officer Alison Greene.
Thank you Mike I will now provide a more detailed review of our third quarter investment activity as of September 30th including details on the completed modified Dutch auction tender offer and our Q3 financial results and liquidity position I'll also address our anticipated dividend distribution for the remainder of the year first I will review our investment activity during the third quarter, we embarked today.
$1 $5 million in new and follow on investments investments during the third quarter include a $1 million investment in the <unk> Group Holdings, 6% convertible note maturing in 12 months they start out capital spark.
And a $500000 follow on investment in Orchard technology, It's simple agreement for future equity or statements. Additionally, on an effective August 2022 zero capital notified forged global of its intent to exercise a cashless settlement, it's 230144 common warrants enforced global.
53283 shares of forge public common stock pursuant to the net exercised formula and the warrant agreement the exercise of the fluctuated on September 30 of 2022 during the third quarter, we continued to monetize our public common shares and <unk> capital partners rent the runway and Rover and begin to monetize and have fully exited our public common.
Shares of enjoy technology we.
We sold 15310 common shares of New Lake capital partners for approximately $265000 in net proceeds.
One thing at a net realized loss of approximately $40000 as of September 30th we've exited 48% of our LCP positioning.
We sold 60000 common shares at rent the runway for approximately $300000 of net proceeds resulting in a net realized loss of approximately $600000 as of September 30, we have exited 32% of our rent position.
We sold 257192 common shares of Rover for approximately $1 $1 million of net proceeds resulting in a net realized gain of approximately $300000 as of September 30th we've exited 87% of our Rover position.
Finally, we sold 900 voice 7297 common shares of enjoy for approximately $240000 of net proceeds resulting in a net realized loss of approximately $5 3 million as of September 30, we have fully exited our enjoy position. Additionally, during the quarter. We received approximately $300000 in proceeds from second Avenue related to.
Principal repayment and interest on the 15% term loan due December 2023. Finally on July 14th 2022, a final payment was received for the remaining 512298 class a common shares of <unk> technologies that comprise the beneficial equity interest in underlying shares there.
The realized gain from Cerro Capital's investment in <unk> lending Trust SPV is generated by the proceeds from the sale of shares collateralized. The repaid promissory note to volunteer lending Trust STB and attributable to the equity participation in underlying collateral. The total realized gain on the Pantera lending Trust SPV is approximately $10 $7 million since inception.
The collateralized loan in 2020 subsequent to quarter end through today, we have also monetize the following public positions. We continue monetizing our investment in Rover as of October 11th we sold our remaining 100854 common public shares of Rover for approximately $420000 of net proceeds resulting in a net realized gain of approximately <unk> <unk>.
$100000.
We also sold our 61367 currently unrestricted shares of <unk> common stock for approximately $130000 of net proceeds resulting in a net realized loss of approximately $152000. We currently hold 38305 remaining restricted shares of Cahouet, our 38% of our original positions.
Subsequent to quarter end, we received approximately $100000 in net proceeds from second Avenue related to principal repayment and interest on the 15% term loan due December 2023, please turn to slide five.
I will review our investment portfolio allocation by investment thing.
Segmented by general investment themes, the top allocation of our investment portfolio at quarter end as the education technology accounting for approximately 43, 4% of the investment portfolio at fair value the.
The second largest category with financial technology and services, representing approximately 24% of the portfolio. The marketplaces category represented approximately 17, 7%.
Our investment portfolio and social mobile companies comprised approximately 11% of our portfolio.
Big data contributed to approximately three 3% at fair value of our portfolio and sustainability accounted for less than 1% of the fair value of our portfolio as of September 30th Please turn to slide six.
As mentioned by Mark earlier on August eight 2022 zero capital commenced a modified Dutch auction tender offer or the tender offer to purchase up to 2 million shares of its common stock from holders, which expired on September <unk> 2022 in accordance with the terms of the tender offer we selected the lowest price per share of not less than $6 per share.
And not greater than $7 per share.
Pursuant to the tender offer on September 12th we repurchased 2 million shares at a price of $6 60 per share on a pro rata basis, and representing six 6% has been outstanding shares.
Available cash of $13 2 million before expenses was used to fund the tender offer purchase of shares of common stock.
An additional cash was used to pay for all additional related fees and expenses.
Firstly, our purchase price properly tendered shares represents 71, 4% of net asset value per share or an approximate 28, 6% discount to NAV per share as of June 32022, the proration factor for the tender offer was determined to be approximately 75%.
The tender offer comes in addition to the previously discussed share repurchase program originally authorized by our board of directors in August 2017.
As previously mentioned on March 13th the board of director of Directors authorized a $15 million expansion of the share repurchase program to $55 million.
On October 19th at the Board of Directors approved an extension of the share repurchase program until October 31, 2023, approximately $16 $4 million remains authorized under the program year to date, we have repurchased a total of 1 million 8676 shares of our common stock for approximately $8 $3 million under the share repurchase program in combination with the recent tender offer.
Our year to date, we have repurchased over 3 million shares of our common stock or approximately 10% of previously outstanding shares for approximately $21 $5 million under the share repurchase program in combination with the 2019 and 2022 tender offers zero capital has repurchased approximately nine 3 million shares of its common stock for an aggregate purchase price of approximately.
$61 8 million.
Please turn to slide seven we ended the third quarter 2022, with an NAV per share of $7 83.
Which is consistent with our financial reporting.
<unk> NAV per share as of quarter end has shown the decrease in NAV per share from $9 24 at the end of the second quarter to $7 83 per share as of September 30th was primarily driven by a $1 30 per share decrease resulting from unrealized depreciation of our portfolio investments during the quarter. Additionally, in 2018 <unk> per share decrease due to net.
Realized losses on investments <unk> 13 per share decrease due to net investment loss also contributed to the decline.
These decreases in NAV per share were partially offset by an aggregate 20 <unk> per share increase is due to capital transactions, including a 17 cents per share increase attributable to the repurchase of common stock via the tender offer and stock based compensation the use of cash in connection with the tender offer related share repurchases decreased net asset value as of quarter end. However, the.
And shares outstanding as of quarter end resulted in an increase in net asset value per share.
Next I will review throw capital's liquidity position as of September 30th we ended the quarter with approximately $154 $2 million of liquid assets, including approximately $39 $7 million in cash $99 $2 million in short term U S treasuries and approximately $15 3 million in unrestricted public securities. This does not include approximately $70000 in <unk>.
Securities subject to certain customary lockup provisions at quarter end in total our cash short term U S treasuries and public positions, both restricted and unrestricted totaled $154 3 million at quarter end.
The approximately $15 3 million of unrestricted public securities held as of quarter end quarter and represent our shares and forge next door newly capital partners rent the runway Rover and Skillsoft valued as of September 32022.
$1000 of public securities subject to lockup provisions or other sales restrictions as of quarter end is comprised of our positioning who valued at September 32022 closing public share price less a discount for lack of marketability related to the lockup provision.
As of September 32022 week, and currently there are $28 million 333661 shares of the company's common stock outstanding.
Finally, I'd like to follow up Marc commentary regarding our tax treatment as a BDC Reg and currently anticipated dividends for the remainder of 2022 and.
As previously mentioned throw capital has elected to be treated as a ric under subchapter M of the internal revenue code beginning in 2014 and have qualified to be treated as a ric for subsequent tax taxable years.
To qualify and be subject to taxes or rest of the company is required to meet certain requirements. In addition to the distribution requirements of an amount generally at least equal to 90% of its investment company taxable income as defined by the code.
<unk> to be paid out as a distribution is determined by the board of directors each quarter and is based upon the annual earnings estimated by the management of the company.
The degen declaration and amount of any dividends, including any future dividends are subject to the full discussion of Cerro Capital's board of directors the aggregate amount of the dividends declared and paid might throw capital will be fully taxable to stockholders. The tax character of zero capital dividends cannot be finally determined until the close of Cerro capitals taxable year December 31.
Zero capital report the actual tax characteristics of each year's dividends annually to stockholders.
And the IRS on form to 99 days subsequent to year end, given our current year net investment loss of approximately $11 $8 million and a net realized loss on investments of $4 million. We do not currently anticipate paying any additional dividends for the remainder of 2022 that concludes my comments and we'd like to thank you for your interest and support of sterile capital now I will turn the call over to the <unk>.
Operator to start the Q&A session operator.
Thank you ma'am, if you'd 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 you signaled to reach out with Goodman.
There was a time please limit yourself to one question once again Thats star one to enter the queue.
Yeah.
We will take the first question from Mark Palmer. Your line is open. Please go ahead.
Yes, Thank you and thanks for taking my question.
Good morning.
Of what you are seeing.
In the private market.
And and how the situation has evolved.
Since.
We ended the last quarter and what im talking about in particular.
The extent to which.
Funding has become unavailable the extent to which we're seeing.
Other players in the market that are looking to potentially dispose of some of their positions things of that nature.
Sure.
Mark. Thanks. Thanks, Thanks again for all your efforts and support we really appreciate it.
As we mentioned in our prepared remarks.
We started to see this in Q2 that there is a realization.
For folks that are trying to.
Liquidate positions that.
There is a different price point between buying and selling and that was at the beginning of the year that was they were pretty wide. Apart in Q2, we started seeing sellers realized what was going on in the public markets and they were starting to.
Easing in pricing.
Second quarter right now, we're seeing significant discounts not only to prior rounds, where trades can be effectuate it.
And that is that is a change I think that as we move into year end, the IPO market really hasnt gotten much better and the markets are pretty volatile.
There is more of a sense of urgency from sellers and more of a desire or willingness to take.
Lower valuations so clearly in the secondary market.
The spread between bid and ask is much less than it had been earlier in the year.
I think as far as primary financing I think its really challenging right. Now there are certainly companies that are doing extraordinarily well and you read about that there are financings that are done.
At or above prior rounds, but the vast majority that we're seeing or extension of last rounds, some sort of unpriced round that will be discounted to the next ground or companies that ultimately youre going to need financing debt or just decided to pause and hoping.
The next Q1 or Q2 will be a better financing environment for them.
And therein lies the challenge for us as we look at.
We should be participating in the secondary markets, what is going to happen to those companies as they are looking to raise money and at what valuations.
If at all are going to be available to those companies, where they're trying to raise capital in the future.
Thank you.
Thank you and this does conclude today's question and answer session I would like to teleconference back over to management for additional or closing remarks.
Thank you. Thank you all for participating we appreciate your interest in our company and as always we're available to answer questions that you may have either by going to the genus directly. Thank you very much.
Okay.
Thank you that does conclude today's conference. We thank you for your participation and you may now disconnect.
Okay.
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