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spk02: Hello and welcome to Cerro Capital's fourth quarter and fiscal year 2023 earnings call. My name is Melissa and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call your lines will be in a listen-only mode. However, you will have the opportunities to ask questions at the end of the presentation. 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 will be connected to an operator. I'll now turn the call over to Jackson Stone. Please go ahead.
spk00: Thank you for joining us on today's call. I'm joined today by the Chairman and Chief Executive Officer of Sero 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.serocap.com under Investor Relations, Events, and Presentations. Today's call is being recorded and broadcast live on our website, www.serocap.com. Replay information included in our press release issued today. This call is the property of Sero 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. 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 Searle Capital's latest SEC filings, please visit our website at www.searlecap.com or the SEC's website at sec.gov. Now, I would like to turn the call over to Mark Klein.
spk01: Thank you, Jackson. Good afternoon, and thank you for joining us today. We would like to share the results of Cerro Capital's fourth quarter and fiscal year 2023. In 2023, there was geopolitical conflict, including two ongoing wars, a rapid rise in interest rates, and a volatile stock market led higher by a handful of companies. Known as the Magnificent Seven, these mega cap stocks drove major market indices to significant gains in 2023. On the other hand, private markets remained weak. According to PitchBook, 2023 venture deal volume declined 30% from 2022 and 51% from 2021. Valuations also declined. Forge's Private Market Index, which tracks the valuations of late-stage, venture-backed private companies, closed the fourth quarter down approximately 5% and down approximately 20% for the year. As we have discussed for several quarters, we feel the valuations of public markets and private markets are converging. We believe the current environment is now delivering the high-quality opportunities we had been awaiting. As such, we executed three investments during the fourth quarter. In 2023 as a whole, we made investments totaling approximately $26 million with over 70% of that capital deployed into secondary opportunities at significant discounts to their last primary valuations. Additionally, subsequent to year end, we invested $10 million in supplying demands otherwise known as liquid deaths, primary financing, as I will discuss shortly in my remarks. Turning to our fourth quarter results, we ended the year with a net asset value of $203.4 million, or $7.99 per share. This NAV compares to a net asset value of $7.39 a share at year end 2022. Please turn to slide four. Turning to our top five positions, I first want to highlight our cash position. As of year end, our cash and short-term U.S. Treasuries available for investment were approximately $92 million, representing 32% of our gross assets. Cerro Capital's top five investments as of December 31st were Lernio, Stormwind, Service Titan, Blink Health, and Locust Robotics. These positions accounted for approximately 56% of the investment portfolio at fair value. Additionally, as of December 31st, our top 10 positions accounted for approximately 80% of the investment portfolio. Next, I would like to provide further detail on our recent investments. During the fourth quarter, we made a $2.7 million follow-on secondary investment in Fork Heights, a $325,000 follow-on investment in XPoint as part of the Suro Capital Sports portfolio, and a $1.6 million investment in the sponsor economics of Columbia Acquisition Corp. II. Please turn to slide five. I would like to provide further detail on our investment in the sponsor economics of Columbia II. The management team most recently had success with our portfolio company, Columbia Acquisition Corp 1, which merged with Public Square and began trading on the New York Stock Exchange in Q3 of 2023. As previously discussed, we made a $2.7 million investment in the sponsor economics of Columbia A1, and as of the end of the year, we value our position in Public at nearly four times our initial investment. Given the success of Columbia A1, We are excited about the prospect of management executing on another compelling opportunity for its second vehicle. Please turn to slide six. Subsequent to year end, we made a $10 million primary investment in Liquid Death, a CPG brand focused on still water, sparkling water, and teas. Our investment was part of the company's series F1 financing round. a $67 million financing completed at a $1.4 billion valuation. The round included all major existing investors, strategic partners such as top national distributors, and notable names in entertainment and sports. Since its launch, the company has significantly expanded its footprint to over 113,000 retail doors in the U.S. and U.K., and has introduced new SKUs in sparkling water, flavored sparkling water, iced tea, and powdered hydration mixes. The management team is composed of advertising and beverage industry veterans, including the former head of sales of Wyclaw, the former head of 7-Eleven Ventures, and the former head of supply chain for GT's Kombucha. Liquid Death is sold in the largest grocery store chains in the U.S., such as Walmart, Target, Kroger, Whole Foods, and Albertsons. as well as many of the largest convenience store chains such as 7-Eleven. In 2023, the company achieved over $260 million in scan sales, which equates to triple digit growth for the third consecutive year. According to SPNS data, this makes Liquid Death the fastest growing water and ice tea brand ever. As the company continues to grow, Their marketing strategy is centered around its almost 8 million Instagram and TikTok followers, making Liquid Death the third largest beverage brand followed on Solia. Liquid Death plans to utilize the funds from this capital raise to further scale and optimize distribution, expand its immense retail presence, and invest in product innovation. As we previously discussed, we believe our cash position in this environment advantageously positions us to continue seeking out new opportunities. As we near the end of the first quarter of 2024, we are pleased to share that we not only executed our investment in liquid debt, but we also anticipate closing two sizable, exciting investments by the end of the quarter. These two pending investments total $25 million in aggregate. They are both high growth, institutionally backed businesses. one of which operates in the artificial intelligence industry and the other in productivity software. As with any deals, there is no guarantee that either one of these transactions will close. Transitioning to our public investment. As previously stated, it is our objective to sell our public positions when lockup restrictions expire and there is relative stability in a given 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 New Lake Capital Partners and reduced our positions in Forge, Nextdoor, and Public Square Warrants. Sub-year end, we fully exited our remaining position in Nextdoor and further reduced our position in Public Square Warrants. I would also like to reiterate CERO Capital's commitment to initiatives to enhance shareholder value. As such, given the discount our stock is trading at compared to net asset value per share, we believe our active share repurchase program and recently commenced modified Dutch auction tender offer to be efficient and accretive deployments of capital. Alison will speak more about our share repurchase program and modified Dutch auction tender offer later in this call. Given Reddit's impending IPO, coupled with reports of several other potential high-profile IPOs, we believe the IPO market may begin to reopen. With our existing portfolio, as well as the investments we have in process, coupled with our remaining capital, we believe our portfolio is well-positioned to create value for our shareholders. Thank you for your attention. And with that, I will hand it over to Alison Green, our Chief Financial Officer.
spk03: Thank you, Mark. I would like to follow Mark's update with a more detailed review of our fourth quarter and financial results as of December 31st, including our investment activity, portfolio company monetizations, current liquidity, and the status of our share purchase program and current modified Dutch auction tender offer. First, I will review our investment activity. During the fourth quarter, we invested a total of $4.6 million in new and follow-on investments. These include a $1.6 million investment in the sponsor economics of Columbia Acquisition Corp. II. for which we received Class B and Class W units, a $2.7 million follow-on secondary investment in Fork Heights common shares, bringing our total investment in Fork Heights in 2023 to $8.5 million, and a $325,000 follow-on investment through Cerro Capital Sports and Xpoints Convertible Notes. Over the course of the fourth quarter, we sold our remaining public common shares in New Lake Capital Partners and continued to monetize our public common shares in Forge and Nextdoor and Warrants and Public Square. Notably, we sold 1,465,994 shares of Forge for approximately $5.2 million in net proceeds, resulting in a realized gain of approximately $3.9 million. We also sold 303,963 warrants of Public Square for approximately $300,000 in net proceeds, resulting in a realized gain of approximately $200,000. In addition to sales of our unrestricted publicly traded investments, During the fourth quarter, we received a final payment of approximately $300,000 in proceeds from Second Avenue related to principal repayment and interest on the 15% term loan due December 2023. Additionally, we exited our position in Churchill Sponsor 6 for a realized loss of approximately $200,000 after it was announced it would not consummate a business combination and would redeem its outstanding shares of Class A common stock. Finally, during the quarter, we received a distribution of approximately $116,000 related to our limited partner fund investment in True Global Ventures 4+. Additionally, subsequent to year-end, we sold our remaining public common shares in Nextdoor and continued to monetize our warrants in Public Square. As Mark mentioned, subsequent to year-end through today, we completed a $10 million investment in Liquid Debt Series F1 preferred shares. As it relates to our pending investment subsequent to year-end, We are in the final stages of documentation on two investments totaling $25 million in aggregate. In the normal course of business, Servo Capital may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. We are frequently in negotiations with various private companies with respect to investments in such companies. Investments in private companies are generally subject to satisfaction of applicable closing conditions. Please turn to slide seven. Segmented by six general investment themes, the top allocation of our investment portfolio at year-end is to education technology, representing approximately 38% of the investment portfolio at fair value. Marketplaces was the second largest category, representing approximately 20% of our portfolio. The financial technology and services category accounted for approximately 18% of our investment portfolio, and approximately 17% of our portfolio is invested in cloud and big data companies. Social and mobile accounted for approximately 8% of the fair value of our portfolio, and sustainability accounted for less than 1% of the fair value of our portfolio as of December 31st. Please turn to slide eight. We are pleased to report that we ended the fourth quarter in fiscal year 2023 with an AUV per share of $7.99, which is consistent with our financial reporting. The decrease in NAV per share from $8.41 at the end of Q3 was primarily driven by a $0.36 per share decrease resulting from unrealized depreciation of our portfolio investments during the quarter, in addition to an $0.11 per share decrease due to net investment loss and a $0.06 per share decrease due to the impact of stock-based compensation. The decrease in NAV per share was partially offset by a $0.10 per share increase due to net realized gains on our investments during the quarter. At December 31, 2023, there were 25,445,805 shares of the company's common stock outstanding. Presently, there are 25,353,284 shares of the company's common stock outstanding. Regarding Serocapital's liquidity position as of December 31, we ended the quarter with approximately $99 million of liquid assets, including approximately $28.2 million in cash, $63.8 million in short-term U.S. treasuries, and approximately $7 million in unrestricted public securities. The approximately $7 million of unrestricted public securities held as of year end represent our shares in Forge, Nextdoor, and Skillsoft, and our warrants in Public Square. Our common shares in Public Square remain restricted until July 19, 2024. Please turn to slide 9. As previously discussed, on August 7, 2023, our Board of Directors authorized a $5 million expansion to the Share of Purchase Program to $60 million and an extension of the Share of Purchase Program through October 31, 2024. During the year ended December 31st, 2023, under both the share repurchase program and the 2023 modified Dutch auction tender offer, the company repurchased 3.2 million shares of its common stock 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 purchase 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. Approximately $20.7 million remain authorized under the Share Purchase Program currently set to expire on October 31, 2024. As previously announced, on February 14, 2024, the Company's Board of Directors authorized a modified Dutch Auction tender offer to purchase up to 2 million shares of its common stock at a price per share not less than $4 and not greater than $5 in 10-cent increments using available cash. The tender offer commenced on February 20, 2024 and will expire at 5 p.m. Eastern Time on April 1, 2024 unless extended. If the tender offer is fully subscribed, the company will purchase 2 million shares or approximately 7.9% 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 are disclosed in the tender offer documents filed with the U.S. Securities and Exchange Commission on February 20, 2024. 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 ZF King & Co., and the depository is Equinity Trust Company LLC. The offer to purchase, a letter of transmittal, and related documents have been 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 suro at dfking.com. Banks and brokers may call the information agent at 212-269-5550, and all others may call the information agent toll-free at 877-361-7972. Shareholders may also visit the Suro Capital website at www.surocap.com for a list of frequently asked questions related to the tender offer. That concludes my comments. We would like to thank you for your interest and support of Sorrel Capital. Now I will turn the call over to the operator to start the Q&A session. Operator?
spk02: Thank you very much. As a reminder, if you would like to ask a question on today's call, you may press star one on your telephone keypad to register your question. To withdraw your question for any reason, you may press star two. We kindly request that you limit yourself to one question. We'll pause for a moment. And it does not appear we have any questions coming through. I'd like to turn it back over to your host for any closing comments.
spk01: We at Server Capital thank you for spending the time with us this afternoon and thank you for your ongoing support. Thank you very much.
spk02: Thank you. That concludes today's conference. You may now disconnect.
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