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spk02: Hey and welcome to the Soros Capital's third quarter 2023 earnings call. Today's call is being recorded. Your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you'll be connected to an operator. I will now hand you over to your host, Tim Bates, to begin today's conference. Thank you.
spk01: 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, Alison 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 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 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.serocap.com or the SEC's website at sec.gov. Now, I would like to turn the call over to Mark Klein.
spk00: Thank you, Adam. Good afternoon, and thank you for joining us. We are pleased to share the results of Sero Capital's third quarter of 2023. The third quarter of 2023 was characterized by broad ongoing weakness in the public equity and bond market. Economic uncertainty has continued into the fourth quarter, although recent reports and commentary from the Federal Reserve has led investors to believe the Fed may be done, or close to done, raising interest rates. While the Fed may be done with interest rate hikes, geopolitical unrest, including the wars in Israel and Ukraine, coupled with the view that consumers are pulling back, has fueled continued volatility in the equity markets. In the first half of the year, we expressed our view that we believe the IPO market could open in Q3, which in fact did occur. Unfortunately, while there were several notable tech companies that debuted in the public markets, as of today, all of these companies have declined from their IPO price. The poor performance of these stocks, as well as other IPOs, has led to a pause in the IPO market. The IPO market is broadly closed and will likely reopen during the first or second quarter of 2024. The apparent delay in the IPO market has led to more volatility in the private markets, with secondary trading in many instances being significantly inconsistent with public comparables. As we have highlighted for several quarters, there is a disconnect between the pricing of late stage secondary opportunities and the recent performance of public markets. While we have been fortunate to find what we believe to be a couple of excellent opportunities, these are more the exception than the rule, as valuations of private markets remain inconsistent and higher than their public comparables. To that end, we have observed private secondary opportunities trading up or down around 25% within very short periods of time with no apparent catalyst. Additionally, we have noted stocks bid and offered simultaneously at meaningfully different prices. Finally, and perhaps the most instructive, we have observed trading in companies at levels that were meaningfully above where their IPO was first indicated and finally priced. It is clear to us that the private secondary markets are opaque. To navigate through them, it is imperative to have constant dialogue with the myriad of secondary participants. To be prudent in price in such an opaque and wide-ranging market, it is critical to perform rigorous valuation analysis as we deploy capital against these opportunities. As private companies face the prospects of prolonged timelines until IPO, our pipeline has remained extremely active with many companies and investors seeking liquidity. In fact, we continue to see more potential investments than other times. With that said, as always, we remain very focused on our potential entry levels. During the quarter, we were able to execute several new investments. Additionally, as previously discussed, one of our SPAC investments closed its previously announced merger, and two other SPACs announced definitive agreements to merge with target companies. We made two new investments during the quarter. We invested $5.8 million in Four Kites, a supply chain visibility software company through secondary transactions. And we also invested $1 million in Stake Trade, a sports betting exchange doing business as profit exchange through a primary transaction as part of the Suro Capital Sports portfolio. Please turn to slide four. Four Kites is a leading real-time supply chain visibility solution. Four Kites has been a pioneering force behind the idea that companies should know where their goods are at all time from the initial onset of being loaded onto a truck to when they finally reach a delivery destination. The impact of Four Kites technology is evidenced in its impressive clientele, which includes recognized brands such as nine of the top ten consumer packaged good companies and 18 of the 20 food and beverage companies. Today, 4Kites helps over 1,200 of the world's most recognized brands leverage real-time visibility and unlock efficiencies that save them millions of dollars a year. We believe that 4Kites is in a unique position to capture additional market share as they continue expanding their business and target customers with some of the most complex supply chain needs. We also made a $1 million investment in Profit Exchange through a primary transaction. Profit Exchange is a peer-to-peer sports betting exchange focused on providing bettors the best pricing and a seamless experience that is different from the incumbent operators. Bettors on the platform have the ability to request their own wagers or pick from outstanding options driven by both users and market makers. The company has gone through extensive licensing and regular steps and is now live in New Jersey with plans to expand to other legal betting states in the future. We are excited about the exchange wagering opportunity in the U.S. given the success Betfair has had in the U.K., and we believe Profit Exchange has both the team and the technology to execute on the large market opportunity. Please turn to slide five. During the quarter, Columbia Acquisition Corp, a SPAC in which we own both stock and warrants, successfully closed its business combination with PSQ Holdings, also known as Public Square. Public Square is a leading marketplace of patriotic businesses and consumers that began trading on the New York Stock Exchange under the symbol PSQH on July 20th. At quarter end, we valued our position at approximately $18 million and our cost basis in Public Square is approximately $2.7 million. The lockup restriction on the warrants expired on August 19th, and our common shares are subject to a one-year lockup period as of the business combinations closing with a pricing condition that would unlock shares earlier. Allison will provide additional details on our Public Square investment later in the call. As we previously discussed, the Acquisition Corp announced a signed definitive agreement to merge with Oklo, an advanced fission technology and nuclear fuel company, on July 11, 2023. On September 27, 2023, the company filed an S-4 with the SEC. The combined company will be named Oklo and intends to list on the New York Stock Exchange with the symbol OKLO. The transaction, which has been approved by the boards of directors of Oklo and Alt-C, is expected to close in late 2023 or early 2024 and is subject to approval by Alt-C and Oklo shareholders, as well as other closing conditions. Lastly, during the quarter on August 1, 2023, Churchill Capital Corp. 7 announced it signed a definitive agreement to merge with Corpac, a corporate compounder specialized in acquiring small and medium-sized business enterprise. also known as SMEs, in the UK. The transaction has been approved by the boards of directors of Corpac and Churchill 7, and is expected to close in early 24, subject to approval by Churchill 7 and Corpac shareholders, as well as other closing conditions. Turning to the third quarter, we ended the quarter with net asset value of $212 million, or $8.41 per share. This is an increase in net asset up from $7.35 a share in Q2 of 2023, and up from $7.83 a share in Q3 of 2022. Please turn to slide six. Turning to our top five positions, I first want to highlight our cash position. As of quarter end, our cash and short-term U.S. Treasuries available for investment were approximately $94 million, representing 32% of our gross assets. We continue to believe having cash in this environment advantageously positions us to continue seeking out new opportunities emerging from current market conditions. CSERA's top five positions as of September 30th were Learnio, PublicSquare, Service, Titan, Blink Health, and Stormwind. These positions accounted for approximately 61% of the investment portfolio at fair value. Additionally, as of September 30th, our top 10 positions accounted for approximately 82% of the investment portfolio at fair value. Transitioning to our public investments. As previously stated, it is our objective to sell our public positions when lockup restrictions expire and there's relative stability in a given public position's trading. In line with this approach, we've continued to monetize our public unrestricted positions. During the third quarter, we monetized most of our remaining position in Nextdoor and subsequent to quarter's end, we began monetizing our position in public square warrants. We plan to continue to opportunistically monetize our public editions as market conditions improve. As previously discussed, we continue to focus on our shareholder-friendly initiatives. To that end, on August 7th, our board of directors authorized an additional $5 million for share repurchases and an extension of the share repurchase program through October 31st, 2024. Given the significant discount in which our stock is trading compared to net asset value, we determine the current continuation of the share purchase program to be an efficient and accretive deployment of capital. As public and private market volatility persists, we remain patient and selective as we evaluate new opportunities. We believe our considerable investable capital affords us an opportunity to continue to add high-quality companies to our portfolio. Thank you for your attention, and with that, I will hand it over to Allison Green, our Chief Financial Officer.
spk03: Allison Green Thank you, Mark. I would like to follow Mark's update with a more detailed review of our portfolio activity since the start of the third quarter, details on the Share or Purchase Program, followed by our financial results as of September 30, 2023, and finally, our liquidity position. First, I'd like to provide a more detailed update on our investment portfolio activity for the third quarter and subsequent to quarter end. This does not include investments in short-term U.S. Treasuries. During the third quarter, we invested a total of $7.3 million in new and follow-on investments. These include a $.8 million investment in four types of common shares via a secondary transaction, a $1 million investment through Soro Capital Sports, and Profit Exchange's Simple Agreement for Future Equity, or SACE. and a $500,000 follow-on investment in Haar Series B4 preferred shares, for which we also received warrants. Over the course of the third quarter, we continued to monetize our next-door public shares. We sold 589,996 public common shares of Nextdoor for approximately $1.8 million of net proceeds, resulting in a net realized loss of approximately $1.4 million. In addition to sales of our unrestricted publicly traded investments, we received approximately $266,000 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 income. That's a quarter end. We made a $325,000 fall on investment through Serial Capital Sports and X points convertible note. Subsequent to quarter end as well through yesterday, we sold 67,931 PSQ Holdings Inc warrants for approximately $68,000 of net proceeds, resulting in a net realized gain of approximately $39,000. Finally, subsequent to quarter end, we received approximately $86,000 in net proceeds from Second Avenue related to principal repayment and interest on the 15% term loan due December 2023, as well as other interest dividends and interest income. Please turn to slide seven. Segmented by six general investment themes, the top allocation of our investment portfolio at quarter end was to education technology, representing approximately 40% of the investment portfolio at fair value. Marketplaces was the second largest category, representing approximately 22% of the portfolio. The financial technology category accounted for approximately 18% of our investment portfolio, and approximately 15% of our portfolio was invested in cloud and big data companies. Social and mobile accounted for approximately 4% of the 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 eight. As Mark mentioned, on August 7th, our Board of Directors authorized $5 million expansion to the Share of Purchase Program to $60 million and an extension of the Share of Purchase Program through October 31st, 2024. During the quarter ended September 30th, 2023, under the Share of Purchase Program, the company repurchased 186,193 shares of its common stock for approximately $680,000 subject to regulatory restrictions. Here today, under both the Share of Purchase Program and our modified Dutch auction tender offer, we have repurchased 3.2 million shares for approximately $14.2 million and have a remaining $20.7 million approved to deploy via the share repurchase program. Since the inception of the share repurchase program in August 2017, we have repurchased a total of 6,018,501 shares of our common stock for a total deployment of approximately $39.3 million of the $60 million authorized by the Board. This does not include repurchases under various tender offers during this time period. About $20.7 million remain authorized under the Share Purchase Program and is currently set to expire on October 31, 2024. Under the Share Purchase Program, Sorrel Capital may repurchase its outstanding common stock in the open market, provided it complies with the prohibitions under its insider trading policies and procedures and the applicable regulations. Please turn to slide nine. We recognize that our NAV per share is an important input to our shareholders. Over the years, we have received inquiries as to how we determine our NAV, more specifically, how we attribute value across our investment portfolio. Before I discuss our financial results for the quarter, I'd like to briefly make a very high note of how we value our portfolio, which comprises the most significant portion of our NAV. Thorough capital applies fair value accounting in accordance with U.S. generally accepted accounting principles, or GAAP, and the AICPA's Audit and Accounting Guide for Investment Companies, with consultation from the AICPA Guide for the Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies. We value our assets on a quarterly basis or more frequently if required. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. In summary on the hierarchy, Level one valuations are based on unadjusted quoted prices for identical assets in an active market or generally publicly traded investors. Level two valuations are based on observable inputs other than level one prices, such as quoted prices in markets that are not active or secondary trades. Level three valuations are based on unobservable inputs and reflect the best estimate of what market participants would use in pricing an asset at the measurement date. While many of our portfolio investments are deemed to have fair values determined by Level 3, unobservable inputs, in some instances, a secondary transaction will occur. Per the guidelines discussed, when a secondary transaction occurs in one of our portfolio companies, we closely review the size of the transaction, the share class, and any other pertinent information regarding the transaction to assess fair value. Unless a rare exception is noted, these secondary transactions are classified as Level 2 valuation inputs and are deemed to be a more appropriate indication of fair value than a Level 3 fair value analysis. We are pleased to report we ended the third quarter of 2023 with an NAV per share of $8.41, which is consistent with our financial reporting. The increases in NAV per share from $7.35 per share at the end of Q2 2023 to $8.41 per share as of September 30th was primarily driven by a $1.16 per share increase resulting from net unrealized depreciation of investments during the quarter, largely due to observed secondary trades in our portfolio companies. Also contributing to the increase was a $0.04 per share increase due to net repurchase of common stock and a $0.03 per share increase due to stock-based compensation. As we previously noted, the use of cash in connection with the repurchases decreased net asset value as of quarter end. However, the reduction of shares outstanding as of quarter end resulted in an increase in the net asset value per share. The increase in NAB per share was partially offset by a $0.11 per share decrease due to net investment loss and a $0.06 per share decrease decreased due to net realized losses on investments during the quarter. Finally, I would like to take a moment to review Serial Capital's liquidity position as of September 30th. We ended the quarter with approximately $105.4 million of liquid assets, including $73.5 million in cash, $20.3 million in short-term U.S. Treasuries, and approximately $11.6 million in unrestricted public securities. The approximately $11.6 million of unrestricted public securities held as of quarter end represent our shares in Nextdoor, New Lake Capital Partners, Forge Global, Skillsoft, and our public square warrants. At September 30th, 2023, there were 25,209,108 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. Operator?
spk02: Thank you. As a reminder, if you'd like to ask a question, please press the one on your telephone keypad. Please limit your question to only one. Thank you. There are no further questions. I would like to hand the call over to your host, Mark Glenn, to conclude today's conference. Thank you.
spk00: Thank you, everybody, for participating on our call. We greatly appreciate your support. If you have any further follow-up questions, feel free to reach out to us either through our IR portal or just directly through email. Thank you very much.
spk02: That concludes today's event. Thank you for your participation. You may now disconnect.
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