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SuRo Capital Corp. (SSSS -0.46%)
Q2 2022 Earnings Call
Aug 03, 2022, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the SuRo capital's second quarter 2022 earnings call. During today's presentation, all parties will be in a listen-only mode. Following this presentation, the conference will be open for questions.

This call is being recorded today, Wednesday, August 3rd, 2022. I will now turn the conference over to Mr. Jackson Stone of SuRo Capital. Please go ahead, sir.

Jackson Stone -- Investment Associate

Thank you for joining us 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.surocap.com.

Replay information 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 our future performance or financial condition.

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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 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 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 -- Chairman and Chief Executive Officer

Thank you, Jackson. Good afternoon, and thank you for joining us. We are pleased to share the results of SuRo 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 9.1%, and over a 40% year-over-year decrease in the consumer sentiment index to its lowest level since the inception in the 1940s. Private markets suffered, as well as numerous late-stage unicorns experienced turbulent market conditions. This turbulence has forced new financing rounds at valuations below previous capital raises, secondary trades at significant discounts, and companies lowering their internal valuations. Originally, reports of companies like Instacart cutting their internal valuation by 38% back in March were surprising.

Now reports of companies like Klarna completing financing at an 85% discount to their last financing round and Stripe marking down their internal valuation by 28% have become increasingly prevalent. While we exited a significant portion of our portfolio in 2021 and have maintained over 40% of our investable assets in cash, we also experienced a challenging quarter. At the end of the second quarter, SuRo 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, 2022. 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 in 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 at flat or discounted prices, and private shareholders offering secondary sales at significantly discounted rates. Please turn to Slide 4.

To that extent, during the second quarter, we invested $10 million in WHOOP, a wearable health device company. We were able to acquire Series C preferred shares through a secondary transaction at a significant discount to WHOOP's last financing. The WHOOP band provides actionable insights for users to optimize performance by offering metrics like heart rate variability and resting heart rate. The combination of WHOOP's 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 WHOOP sits in the heart of the broader fitness ecosystem, and has a significant opportunity to become a dominant player in the health and wellness sector. Please turn to Slide 5. SuRo Capital's top five positions as of June 30 were Course Hero, Forge Global, Blink Health, Aspiration, and StormWind. These positions accounted for approximately 58% of the investment portfolio at fair value.

Additionally, as of June 30, our top 10 positions accounted for approximately 79% of the portfolio. As previously discussed, our December 14 -- on December 14, our largest position, Course Hero, announced that they raised $380 million at a $3.6 billion valuation in their Series C financing. In 2021, Course Hero completed acquisitions of LitCharts, QuillBot, CliffsNotes, and Symbolab, positioning them to grow their subscriber base. Course Hero continues to make strategic acquisitions.

And so far, in 2022, they have acquired Netherlands-based company Scribbr. We believe Course Hero's recent fundraising gives them 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 2U. On March 22, Forge Global was officially listed on the New York Stock Exchange under the symbol FRGE via a SPAC merger. The merger completed with Motive Capital Corp brought in gross proceeds of $215 million.

Since Forge's public debut, the stock has experienced extreme volatility, reaching a high of $47.5 and a low of near $4.50. SuRo Capital's position is locked up until mid-September. As previously stated in our -- it is our objective to sell all our public positions when 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, SuRo Capital's board of directors and management are committed to initiatives that enhance shareholder value, and we believe the market is currently undervaluing our portfolio. Accordingly, on August 1, 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 $6 and $7. This modified Dutch tender offer comes in addition to the $15 million expansion of our now $55 million share repurchase program authorized by our board of directors in March.

Assuming 2 million shares tender, SuRo Capital 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 option tender to be an efficient and accretive deployment of capital. Allison will discuss the 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 and the private markets upon investing, remaining prudent on price, and staying true to our investment thesis will ensure SuRo Capital is well positioned to take advantage of this instability and dislocation to make compelling new investments in high-growth companies and industries and to strategically liquidate public positions to drive the greatest shareholder value.

We will 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, Allison Green.

Allison Green -- Chief Financial Officer

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our second quarter investment activity and financial results as of June 30, including details on the share repurchase program and the upcoming modified Dutch auction tender offer, as well as our current liquidity position. First, I will review our investment activity. Please turn to Slide 6.

During the second quarter, we invested a total of $11 million in new and follow-on investments. Investments during the second quarter include a $500,000 follow-on investment in Shogun's 0.5% short-term convertible note, a $500,000 investment in the Series C NewLake shares of EDGE Markets, Inc. through SuRo Capital Sports, and a $10 million investment in the Series C NewLake shares of WHOOP, Inc. via a secondary trade.

Please turn to Slide 7. During the second quarter, we continued to monetize our public common shares in NewLake Capital Partners and Rover Group and began to monetize our public common shares of Rent the Runway. We sold 3,676 common shares of NewLake Capital Partners for approximately $77,000 of net proceeds, resulting in a net realized gain of approximately $3,000. As of June 30, we have exited 45% of our NLCP position.

We have sold 50,000 common shares of Rent the Runway for approximately $181,000 of net proceeds, resulting in a net realized loss of approximately $578,000. As of June 30, we have exited 15% of our Rent position. And we sold 431,591 common shares of Rover for approximately $2.4 million of net proceeds, resulting in a net realized gain of approximately $1.1 million. As of June 30, we have exited 57% of our Rover position.

Additionally, during the quarter, we received approximately $874,000 in distributions related to our limited partner fund investment in True Global Ventures 4 Plus. Finally, during the quarter, we received approximately $314,000 in proceeds from Second Avenue related to principal repayment and interest on the 15% term loan due December 2023. Please turn to Slide 8. Subsequent to quarter end through today, we have also monetized the following public positions.

We began monetizing our investment in Enjoy Technology in July. July 1 to date, we sold 626,955 common shares for approximately $235,000 of net proceeds, resulting in a net realized loss of approximately $3 million. We currently hold 320,342 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 15,000 shares for approximately $51,000 of net proceeds, resulting in a net realized loss of approximately $176,000.

We currently hold 274,191 remaining shares of Rent the Runway, or 81% remaining of our original position. We sold 110,000 common shares of Rover for approximately $454,000 in net proceeds, resulting in a net realized gain of approximately $79,000. We currently hold 254,046 remaining shares of Rover or 30% remaining of our original position. On July 14, 2022, a final payment was received from Palantir Lending Trust SPV for the remaining 512,290 Class A common shares of Palantir Technologies, Inc.

that comprised the beneficial equity interest in underlying shares. In total, on our $6.9 million structured Palantir loan, we realized a return of approximately 55%. The realized gain from SuRo Capital's investment in Palantir Lending Trust SPV I is generated by the proceeds from the sale of shares collateralizing the repaid promissory note to Palantir Lending Trust SPV and attributable to the equity participation in underlying collateral. Finally, subsequent to quarter end, we received approximately $102,000 in proceeds from Second Avenue related to principal repayment and interest on the 15% term loan due December 2023.

Please turn to Slide 9. 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 is the education technology representing approximately 37% of the investment portfolio at fair value. Financial technology and services was among the second largest category, representing approximately 34.8% of the portfolio.

The marketplaces category accounted for approximately 15.2% of our investment portfolio, and approximately 10% of our portfolio is invested in social and mobile companies. Cloud and Big Data accounted for approximately 2.3% of the fair value of our portfolio, and sustainability accounted for less than 1% of the fair value of our portfolio as of June 30. Please turn to Slide 10. As Mark mentioned, on March 13, our board of directors authorized a $15 million expansion of the share repurchase program to $55 million.

Under this expanded share repurchase program, during the second quarter, we repurchased 855,159 shares of our common stock for approximately $6.9 million. Since the expansion on March 13, we have repurchased a total of 1,008,676 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 5,832,008 shares of our common stock for a total deployment of approximately $38.6 million of the $55 million authorized by the board. Approximately $16.4 million remains authorized under the share repurchase program and is currently set to expire on October 31, 2022.

As Mark previewed earlier, on August 1, 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 in $0.10 increment using available cash. The tender offer will commence on August 8 and will expire at 5:00 p.m. Eastern Time on September 2, 2022, unless extended. If the tender offer is fully subscribed, the company will purchase 2 million shares or approximately 6.6% of the company's outstanding shares of its common stock.

Any shares tendered may be 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 and the prices 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 price 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 we'll disclose in the tender offer document. 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 purchase. The information agent for the tender offer is D.F. King, and the depository is American Stock Transfer & Trust. The offer to purchase, a letter of transmittal and related documents will be mailed to registered holders and certain of our beneficial holders.

Beneficial holders may alternatively receive the offer to purchase and a communication to consult with their bank, broker or custodian if they wish to tender shares. For questions and information, please contact the information agent at [email protected]. Banks and brokers may call the information agent at 212-269-5550, and all others may call the information agent toll-free at 800-769-4414. The information in this earnings call and in 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.

The tender offer is 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 is distributing to its stockholders as they may be amended or supplemented. Stockholders 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 of SuRo Capital Corp. may obtain a free copy of the tender offer statement on Schedule TO, 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.

Stockholders may also obtain a copy of these documents without charge from D.F. King, the information agent for the tender offer, by emailing [email protected] or calling toll-free at 800-769-4414. Stockholders are urged to carefully read all these materials prior to making any decision with respect to the tender offer. Stockholders and investors who have questions or need assistance may call D.F.

King or email them at [email protected]. Please turn to Slide 11. We ended the second quarter of 2022 with a NAV per share of $9.24, which is consistent with our financial reporting. A breakdown of NAV per share as of quarter end is 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 investments during the quarter, most notably a result of the broader market decline on both our public positions and those private positions valued with public company multiples. Also contributing to the decrease was a $0.13 per share decrease due to net investment loss and a 6% decrease due to realized loss on investments. These decreases in NAV per share were partially offset by an aggregate $0.13 per share increase due to capital transactions, including an $0.11 per share increase attributable to the repurchase of common stock. During the quarter ended June 30, 2022, the company repurchased 855,159 shares of SuRo Capital common stock for approximately $6.9 million in 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 SuRo Capital's liquidity as of June 30. 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.

This does not include approximately $21.1 million in public securities subject to certain customary lockup provisions at quarter end. In total, our cash and public positions, both restricted and unrestricted, totaled $190.6 million at quarter end. The approximately $15.5 million of unrestricted public securities held as of quarter end, represent our shares in Enjoy Technology, Nextdoor, NewLake Capital Partners, Rent the Runway, Rover Group, and Skillsoft valued at the June 30, 2022 closing prices. The $21.1 million of public securities subject to lockup provisions or other sales restrictions as of quarter end include our positions in Forge Global and Kahoot! valued at the June 30, 2022 closing public share prices plus a discount for lack of marketability related to the lockup provision.

As of June 30, 2022, and currently, there are 30,325,187 shares of the company's common stock outstanding. That concludes my comments. We would like to thank you for your interest and support of SuRo Capital. Now I will turn the call over to the operator to start the Q&A session.

Operator?

Questions & Answers:


Operator

Thank you, ma'am. For the interest of time, please limit your questions to only one. [Operator instructions] We wait for just a moment to allow everyone the opportunity to signal for question. [Operator instructions] We will take the first question from Jon Hickman, Ladenburg.

Your line is open. Please go ahead.

Jon Hickman -- Ladenburg Thalmann -- Analyst

Hi. First of all, Allison, could you -- what's the net liquidity? I missed that number -- with -- including the public shares and cash?

Mark Klein -- Chairman and Chief Executive Officer

Jon, it's about $169 million.

Allison Green -- Chief Financial Officer

$169.4 million.

Jon Hickman -- Ladenburg Thalmann -- Analyst

$169.4 million. 

Mark Klein -- Chairman and Chief Executive Officer

Thank you.

Jon Hickman -- Ladenburg Thalmann -- Analyst

OK. Thank you. And then, Mark, could you opine a little bit on -- so, do you believe that private markets are down as much as or more than what's happened, say, in the Russell or the Nasdaq?

Mark Klein -- Chairman and Chief Executive Officer

Well, Jon, 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 it on our last call, over 50% of the Nasdaq is down over 50% and something like 20-some-odd percent are down 70% or more. So, especially with the small mid-cap growth, I think there's been a significant degradation in value. I think over the last, call it, month or so, we are seeing very significant breaks in primary financing and especially in the secondary market.

So there is a catching up that's occurring, and we're clearly seeing that in what we're looking at, including the opportunity to deploy the capital we just did in WHOOP. So, thank you. And thank you for going --

Jon Hickman -- Ladenburg Thalmann -- Analyst

Well, so is it safe for us to assume that we could hear, like, more activity when we -- when you talk to us on the third quarter call?

Mark Klein -- Chairman and Chief Executive Officer

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 we can. But we are obviously for business and looking to find the best opportunities to deploy the capital. Thank you.

Operator

Thank you. Just to be clear, it appears there is no further question at this time. I'd like to turn the conference back to you for any additional or closing remarks.

Mark Klein -- Chairman and Chief Executive Officer

Well, thanks to 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 sure to get back in touch with you. Thank you all very much.

We appreciate it.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jackson Stone -- Investment Associate

Mark Klein -- Chairman and Chief Executive Officer

Allison Green -- Chief Financial Officer

Jon Hickman -- Ladenburg Thalmann -- Analyst

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