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spk02: Please stand by. We're about to begin. Good day, ladies and gentlemen, and thank you for standing by. Welcome to the SURO Capital Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. During the presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. During that time, we ask that you please limit yourself to one question. To signal for a question, it is star 1 during the Q&A period. This call is being recorded today, Wednesday, March 15, 2023. I'll turn the call over to Sindhu Kotha of Suro Capital. Please go ahead.
spk06: Thank you for joining us on today's call. I'm 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.serocap.com under Investor Relations, Events, and Presentations. Today's call is being recorded and broadcast live on our website at www.serocap.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 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 financial condition or results and involve a number of risks, estimates, and uncertainties, including the impact of the COVID-19 pandemic and its 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 statement. 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 compliant filings with the SEC. Management does not undertake to update such statements unless required to do so by law. To obtain copies of Serocapital's latest SEC filings, visit our website at www.serocap.com or the SEC's website at sec.gov. Now, I would like to turn the call over to Mark Klein.
spk01: Thank you, Sindhu. Good afternoon, and thank you for joining us today during these tumultuous times. We would like to share the results of Cerro Capital's fourth quarter and fiscal 2022. Over the weekend, the second and third largest bank failures in U.S. history occurred when Silicon Valley Bank and Signature Bank closed. The residual impact of these events is still rippling through the broader markets. In particular, the global financial system is experiencing instability that is despite the actions taken by the Federal Reserve. While Silicon Valley Bank and Signature Bank may be the only financial institutions to fail, uncertainty may cause significant further dislocation. Additionally, the SVB closure has highlighted the concentration of interdependencies that exist within and between the startup and venture capital ecosystems. As such, we expect the unfortunate collapse of SVB, which was densely integrated within the startup funding ecosystem, to potentially have longer tail impacts and possibly shift the way companies think about liquidity solutions. Amid these events, our team moved quickly to both assess and mitigate, where possible, exposure to SVB, as well as reach out to our portfolio companies to determine what support Cerro Capital might be able to provide. Cerro Capital's direct exposure to the affected banks was limited to less than a $2,000 business checking account at SVB. Cerro Capital's cash and securities are held at our custodian, U.S. Bank, and in its short-term U.S. Treasuries. Additionally, stemming from actions by the Fed, all of our portfolio companies that held cash at SVB are expected to regain access to those funds. It is important to also contextualize these recent events, which have taken place against the backdrop of 2022. As has been well documented, 2002 was one of the worst years for equity markets in decades. The year saw the NASDAQ composite index decline by over 30%. While technology stocks, as measured by the Morningstar U.S. Technology Index, declined 31.5%, their largest single year lost since 2008. NASDAQ market intelligence reports that growth-heavy communications consumer discretionary, and technology sectors were the largest with 2022 declines by approximately 40%, 37%, and 28% respectively. Given the overall market conditions, we have seen and continue to see a repricing of private securities and opportunities for us to take advantage of the market's volatility. While we have been cautious about deploying capital into the turbulent markets, we are seeing increasingly compelling opportunities as the pricing of private companies adjust to the movements in the public markets. To that end, we made investments totaling $24 million over the course of the year, with $10.3 million of that being deployed in Q4. The Q4 investments comprise of one new portfolio company, Locus Robotics, and a follow-on investment made in Fanpower via Serocapital Sports. Moving further into the new year with over $225 million of investable capital, we remain poised to continue investing in both primary and secondary opportunities, later stage high growth companies at which we believe will be compelling valuations. We believe current market conditions present an opportunity to explore prospects as businesses opt to remain private for longer to avoid going public in volatile market conditions. Additionally, while there is still a divergence between pricing in the private and public markets, we believe valuations will continue to converge, creating advantageous conditions for us to deploy capital. Despite significant slowdowns in SPAC transactions, we are pleased to share the following recent updates of our SPAC positions. On February 27, 2020, the Columbia acquisition announced their intention to merge with Public Square and e-commerce marketplace at a valuation of more than $200 million. Assuming the combination between Columbia and PSQ Holdings is completed, Cerro Capital's position in the new company will be worth more than $25 million. If the price of the new company holds, Cerro will see an over $20 million increase in its position given our current stake in Columbia Acquisition. Our current cost basis for the investment is approximately $2.7 million. On February 17, 2023, both Churchill Capital Six and Churchill Capital Seven filed eight case notifying investors they had signed LOIs with target companies. While we are encouraged they have signed LOIs, this does not ensure that they will reach a definitive agreement or consummate these transactions. Turning to Q4, we ended the year with a net asset value of $210 million or $7.39 per share. That NAV compares to a net asset value of $7.83 a share in Q3 2022 and $11.72 a share at the end of 2021. Turning to our top five positions, I first want to highlight our cash position. As of year end, our cash and short-term treasuries available for investment were approximately $125, representing 44% of our gross assets. As we have previously discussed, we believe having cash in this environment advantageously positions us to continue seeking out new opportunities becoming available due to current market conditions. Cerro Capital's top five positions as of December 31st were Lernio, formerly known as Coursero, Blink Health, Orchard Technologies, Locust Robotics, and Architect Capital Payjoy SPV. These positions accounted for approximately 59% of the investment portfolio fair value. Additionally, as of December 31st, our top 10 positions accounted for approximately 78% of the investment portfolio. In the fourth quarter, Coursera announced the formation of Learnio, a new platform that will house the company's six distinct operating businesses. Cliff Notes, Coursero, Littra, Qobot, Scribbr, and Symbolab. The parent organization will now be under the Lernio name to reflect the company's recent growth in business segments that not only support educational use cases, but also support the development of foundational skills that unlock productivity beyond education. Our most recent investment to the CERV capital investment portfolio is Locust Robotics. Locus is an industry-leading autonomous mobile robotics company that seeks to productivity and accuracy in fulfillment and distribution warehouses. We participated with a $10 million investment in Locus' Series F Preferred Round that was led by Goldman Sachs Asset Management and G2 Venture Partners, and as reported by Business Insider, was oversubscribed. Locus seeks Locus seeks to deliver productivity increases and improvements in warehouse operations by coordinating human labor with their robotic systems. Locus is currently deployed in over 230 sites globally for more than 90 worldwide customers, including DHL, Geotis, and Rider. We believe Locus' innovative solution is well-positioned to enable retailers, third-party logistics companies, 3PLs, and especially warehouses, to effectively manage the increasingly complex and demanding requirements placed on today's fulfillment environments. Since completing the funding round, Locust Robotics has formed partnerships with Berkshire Gray, a leader in AI-enabled robotic solutions that automate supply chain processes, and Opturo, a leading technology platform for retail and returns and reverse logistics. The company's solution picked over 230 million units during the peak holiday shopping period, more than doubling the total number of items in the entire 2021. Transitioning to our public investments, as previously stated, it is our objective to sell our public positions when lockup restrictions expire and there's a relative stability in a given company's public position trading. In line with this approach, we continue to monetize several of our public unrestricted positions over the course of the quarter. During the fourth quarter, we fully exited our position in Rover and reduced our positions in New Lake Capital Partners, Rent the Runway, and Kahoot. Subsequent to year end, we sold our remaining positions in Rent the Runway and what was remaining in Kahoot. I would also like to reiterate Cerro Capital's commitment to initiatives that enhance shareholder value. As such, given the discount our stock is trading at compared to net asset value, we believe our active share repurchase program is an efficient and an accretive deployment of capital. Alison will speak more about our share repurchase program later in the call. As always, it is our intent to be transparent as possible with respect to our dividend distributions. As a BDC that is elected to be treated as a risk, required to distribute our net realized long-term capital gains as dividends. Given we recognize net long-term losses in 2022, we will not be distributing any dividends for 2022. As public and private market volatility persists, we remain patient and selective as we continue to evaluate our new opportunities. This will allow us to leverage our considerable cash position and add high-growth companies to our portfolio and driving shareholder value. Thank you for your attention, and with that, I will hand it over to Alison Green, our Chief Financial Officer.
spk07: Thank you, Mark. I would like to follow Mark's update with a more detailed review of our fourth quarter investment activity and financial results as of December 31st, including the status of our share program and our current liquidity position. First, I will review our investment activity. During the fourth quarter, we invested a total of $10.3 million in new and follow-on investments. New investments during the fourth quarter include a $10 million investment in the Series F preferred shares of Locus Robotics Corp., and a $250,000 follow-on investment in Series C2 preferred shares of UBET Technologies, Inc., doing business as FanPower via Soro Capital Sports. Over the course of the fourth quarter, we sold our remaining public shares of Rover and continued to monetize our public common shares in Kahoot, New Lake Capital Partners, and Rent the Runway. In addition to sales of our unrestricted publicly traded investments, during the fourth quarter, we received approximately $300,000 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 incomes. Subsequent to year end through today, we completed a $2 million fall on investment in Orchard Technology Inc's Senior One Series Preferred Shares. Additionally, subsequent to year end through today, we sold our remaining public common shares of Rent the Runway and continued to monetize our public common shares in Kahoot and New Lake Capital Partners. Finally, subsequent to year end, we received approximately $200,000 in net proceeds from Second Avenue related to principal repayment and interest on the 15% term loan due December 2023, as well as other investment dividends and interest income. Segmented by six general investment of our investment portfolio at year end is to education technology, representing approximately 39% of the investment portfolio at fair value. Financial technology and services is the second largest category, representing approximately 24% of the portfolio. The marketplaces category accounted for approximately 17% of our investment portfolio, and approximately 10% of our investment portfolio is invested in cloud and big data companies. Social and mobile accounted for approximately 9% of the fair value of our portfolio, and sustainability accounted for less than 1% of fair value of our portfolio as of December 31st. As mentioned earlier by Mark, Sorrel Capital is committed to initiatives that enhance shareholder value. As such, over the course of 2022, Sorrel Capital repurchased over 3 million shares, representing approximately 10% of previously outstanding shares via the share repurchase program and modified Dutch auction tender offer. The dollar value of shares that may yet be purchased by the company under the share repurchase program is approximately $16.4 million. The share repurchase program is authorized through October 31, 2023. Under the share repurchase program, we may repurchase thorough capital outstanding common stock in the
spk03: Apologies, we're having some audio difficulty. Allison will be back on in one moment, apologies.
spk01: I'll pick it up from now and Allison will join.
spk07: Okay, I've got it. I'm sorry. Apologies. Under the share of, sorry, technical difficulties, I appreciate everyone's patience. Share of purchase program, we may repurchase thorough capital outstanding common stock in the open market provided we comply with the prohibitions under our insider trading policies and procedures and the applicable provisions of the Investment Company Act of 1940 as amended and the Securities Exchange Act of 1934 as amended. We are pleased to report we ended the fourth quarter in fiscal year 2022 with an NAV per share of $7.39. which is consistent with our financial reporting. The decrease in NAV per share from $7.83 at the end of Q3 was primarily driven by a $0.27 per share decrease resulting from unrealized depreciation of our portfolio investments during the quarter, in addition to a $0.10 per share decrease due to a net investment loss and a $0.07 per share decrease due to a net realized loss on investment. Additionally, I'd like to follow up to Mark's commentary regarding our tax treatment as a BDC RIC and dividends for 2022. As previously mentioned, Suro Capital has elected to be treated as a RIC under subchapter M of the Internal Revenue Code beginning in 2014 and is qualified to be treated as a RIC for subsequent taxable years. To qualify and be subject to taxes of RIC, 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's taxable income and 98.2% of net long-term realized capital gains subject to an excise tax below 100%, as defined by the code. The amount 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 management of the company. Given our year-end net investment loss of approximately $14.7 million, a net long-term realized capital loss on investments of $5.9 million, we will not be distributing any dividends for 2022. This net long-term realized capital loss is carried forward into 2023. I would also like to take a moment to review Suro Capital's liquidity position as of December 31st. We ended the year with approximately $138.5 million of liquidity, including approximately $40.1 million in cash, $85.1 million in short-term U.S. securities, and approximately $13.3 million in unrestricted public securities. This does not include approximately $24,000 in public securities subject to certain customary lockup provisions at year end. As Mark mentioned earlier, Zorro Capital's direct exposure to recently impacted banks was limited to a less than $2,000 business checking account at Silicon Valley Bank. Zorro Capital's cash is held at our custodian, U.S. Bank, and in short-term U.S. Treasuries. The approximately $13 million of unrestricted public securities, held as of year-end, represent our shares in Forge, Kahoot!, New Lake Capital Partners, Rent the Runway, and Skillsoft, valued at the December 31, 2002 closing prices. The $24,000 of public security subject to lockup provisions or other sales restrictions as of year end is comprised of our position in Kahoot! valued at December 31st, 2022 closing public share price, less a discount for lack of marketability related to the lockup provision. At December 31st, 2022, there were 28,429,499 shares of the company's common stock outstanding. Presently, there are 28,338,580 shares of the company's common stock outstanding. That concludes my comments. We would like to thank you for your interest and support of Stero Capital. Now I will turn the call over to the operator to start the Q&A session.
spk05: Operator? Thank you.
spk02: If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll pause for a moment.
spk05: And we'll first hear from Kevin Fultz of JMP Securities.
spk00: Hi, good afternoon, and thank you for taking my question. You know, I realize it's a fluid situation, but just considering the events of the past week, has your view of the investment landscape for JMP shifted at all? I'm just looking to get your perspective and possibly maybe outlook on how recent developments could impact venture fundraising and also investment activity moving forward.
spk01: Thanks, Kevin, and thanks for your ongoing support. From Thursday up until today, it's been pretty interesting for all. I think if you were walking down the streets last Wednesday and asked people if they ever heard of Silicon Valley Bank, most would not have. So clearly, the quick, the suddenness of what occurred caught everybody's attention. I do think that with Silicon Valley Bank not there, you have certain things that occur as simple as how does a startup company or a new company open a bank account? As we all know, opening up a bank account in large money-setter banks takes an extreme period of time and it's just a different level of complexity than whether it's Silicon Valley Bank or some others that support the venture capital community. I think for a while, venture capital funding has started to become more challenging. I think all this is taken together in this sort of insular ecosystem that you see will cause people to take even more pause. I think on the secondary side, I suspect you'll see more selling as people are trying to find liquidity and there's a bit more uncertainty, so that might provide opportunity. Yet to be determined whether on the primary side it will have any difference or not, but the primary markets have been challenged now for several months. So hopefully that was helpful.
spk03: And thank you again for your call.
spk05: Was there anything further, Kevin?
spk00: No, that's it for me. Thank you, Mark. Thanks, Kevin.
spk02: And there are no further questions. I'll turn the call back over to our presenters for any additional or closing comments.
spk01: Well, thank you all again for taking time this afternoon to hear our earnings call. We're always available to any of you if you want to call and reach out. Thank you for your ongoing support.
spk05: That does conclude today's call. Thank you all for your participation. You may now disconnect.
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