SuRo Capital - Q2 2023

Transcript

Mark Klein (Chairman and CEO)

Thank you for joining us. We are pleased to share the results of SuRo Capital's second quarter 2023. The last four months have been among the most active periods SuRo has had in the last couple of years. We made five investments, three in new portfolio companies and two in follow-on investments. We have had one of our SPAC investments close its previously announced merger and two other SPACs announce agreements to merge.

On the shareholder initiative front, we completed our $13.5 million modified Dutch tender offer, and today announced the extension and increase of our share repurchase program to $60 million.

First of all, as to our new investments. In the private markets, we remain steadfast to our thesis that potential investments would become available in the secondary market.

We believe this has begun to come to fruition in the second quarter and to, and subsequent to quarter's end, as we made investments in 3 new portfolio companies as well as follow-on investments in 2 others.

During the quarter, we executed a $10 million investment in ServiceTitan, a software business home in commercial trades through a secondary transaction. Subsequent to quarter's end, we invested $5.8 million in FourKites, a supply chain visibility software company, again, through secondary transactions.

Also, subsequent to quarter's end, we invested $1 million in Stake Trade, a sports betting exchange, doing business as Prophet Exchange, through a primary transaction as part of the SuRo Capital Sports portfolio. We believe our remaining investable capital of over $100 million as of the quarter's end, will enable us to continue to act on opportunities such as these.

Please turn to slide 4. I would now like to provide more detail on our investments, starting with our $10 million secondary investment in ServiceTitan. ServiceTitan's cloud-based software platform is designed to empower trades, trade businesses in the residential and commercial HVAC, plumbing, electrical, and other sectors. ServiceTitan's comprehensive end-to-end solution equips contractors with essential tools to efficiently manage and expand their businesses while delivering exceptional customer experiences.

Currently serving over 11,800 businesses that have previously been reported to employ more than 100,000 contractors, ServiceTitan has established a strong presence in the market. Today, technology remains a vital tool for contractors to stay ahead.

According to a recent study conducted by Thrive Analytics on behalf of ServiceTitan, 66% of contractors see digital transformation as a critical component of their operations, and 59% of surveyed businesses reported using more than 4 distinct software solutions to manage their operations.

As we look ahead, we believe ServiceTitan is well-positioned to continue to provide to the trades market. Moving on, moving on to our $5.8 million secondary investment in FourKites.

FourKites is a leading real-time supply chain visibility solution. While the concept of supply chain visibility has been around for some time, the ability to track freight trucks and shipments in real time has only been available more recently.

FourKites 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, when they reach a final delivery destination. Executing against the idea of real-time visibility, FourKites now tracks more than three million shipments daily over 200 countries and territories.

The impact of FourKites technology is evidenced in its impressive clientele, which includes recognized brands such as nine of the top 10 consumer packaged good companies and 18 of the top 20 food and beverage companies. Today, FourKites 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.

They also have been named a leader in the Gartner Magic Quadrant for real-time transportation and visibility platforms for three years in a row.

Since 2021, FourKites has announced strategic investments from Qualcomm Ventures, Volvo Group Venture Capital, Zebra Technologies, FedEx, and Mitsui. We believe these collaborations and potential alliances help drive forward FourKites' position as a leader in automated, interconnected, and collaborative global supply chains.

We believe that FourKites is in a unique position to capture additional market share as they continue expanding their target customers with some of the most complex supply chain needs. Moving on to our $1 million investment in Prophet Exchange, through a primary transaction as part of the SuRo Capital Sports portfolio. Prophet Exchange is a peer-to-peer sports betting exchange focused on providing bettors the best pricing and 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 that are driven by other users and market makers.

The company has gone through extensive licensing and regulatory 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 that Betfair has had in the United Kingdom, and we believe Prophet Exchange has both the team and the technology to execute on a large market opportunity.

Next, I would like to speak to our follow-on investments. During the quarter, we made a $500,000 follow-on investment in Shogun Enterprises, which is doing business as Hearth.

Hearth is a financial technology company that provides over 20,000 home improvement professionals with the tools they need to win more jobs and provide excellent, excellent customer experience according to the company's website. We're excited to continue to support Hearth's goal of bringing the market of home improvement into the digi economy.

Additionally, during the quarter, we made a $500,000 follow-on investment in PayJoy. PayJoy is a provider of smartphone locking technology that has raised over $213 million of equity and debt funding to date, according to PitchBook. We're pleased to continue to invest in PayJoy's goal of expanding smartphone access to emerging markets through this technology. Please turn to slide 5.

Subsequent to quarter end, Colombier Acquisition Corp, a SPAC in which we own both stock and warrants, successfully closed its business combination with PSQ Holdings, also known as PublicSquare. PublicSquare is a leading marketplace of patriotic businesses and consumers.

According to the company's merger closing announcement, the company has seen quick adoption of its platform, with more than 1 million users and 55,000 businesses signing up in less than a year. PublicSquare began trading on the New York Stock Exchange under the symbol PSQH on July 20th. At quarter end, we valued our investment at approximately $17 million.

Our cost basis in Colombier is approximately $2.7 million. As of the business combinations closing on July 19th, our warrants are subject to a lock-up period equal to the later of 30 days or the registration statement's effectiveness.

The registration statement was filed this afternoon. Our common shares are subject to a one-year lock-up period with a pricing condition that would unlock our shares earlier. Allison will provide additional details on our Colombier investment later in the call. On July 11th, 2023, AltC Acquisition Corp, a SPAC whose Chief Executive Officer is Sam Altman, and in which we own share units, announced it signed a definitive agreement to merge with Oklo, an advanced fission technology and nuclear fuel recycling company. A

According to the merger announcement press release, the company has achieved significant deployment and regulatory milestones, including securing a site use permit from the United States Department of Energy and receiving a fuel award from the Idaho National Laboratory for a commercial-scale advanced fission power plant in Idaho, targeted to go online in either 2026 or 2027.

The combined company will be named Oklo and intends to list on the New York Stock Exchange with the ticker symbol OKLO. The merger is expected to provide Oklo with up to $500 million of gross capital from AltC's trust account.

This assumes no redemptions by AltC shareholders. The transaction, which has been approved by the board of directors of Oklo and AltC, is expected to close in late 2023 or early 2024, subject to approval by AltC shareholders, Oklo shareholders, AltC having available cash at closing of at least $250 million, and other customary closing conditions.

On August 1st, 2023, Churchill Capital Seven, a SPAC in which we own and direct shares and warrant units through the sponsor vehicle, announced it signed a definitive agreement to merge with CorpAcq, a corporate compounder specializing in acquiring small and medium-sized enterprises, also known as SMEs in the United Kingdom. A

According to the merger announcement press release, CorpAcq has delivered meaningful financial returns and sustained value over multiple economic cycles. It has achieved a compound annual growth rate for revenue of 16% from 2018 to 2022, with average organic growth outpacing the U.K. GDP's growth during the same period. CorpAcq's portfolio consists of 41 businesses in various industries, providing diversification and contributing to the resilience through economic cycles.

Upon closing of the transaction, the combined company will be named CorpAcq and intends to be listed on the New York Stock Exchange. The transaction is expected to deliver up to $592 million in gross proceeds from Churchill Seven's trust account, assuming no redemptions. T

The transaction has been approved by the board of directors of CorpAcq and Churchill Seven and is expected to close in late 2023 or early 2024, subject to various approvals, and at least $350 million delivered net of transaction fees. At quarter end, the value of our investments in AltC and Churchill Seven were marked equal to our cost basis of approximately $250,000 and $300,000, respectively.

Turning to the second quarter, we ended the quarter with a net asset value of $186.7 million, or $7.35 per share. This NAV compares to a net asset of $7.59 per share in Q1 2023, and $9.24 in Q2 2022. Please turn to slide 6. 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 investment were approximately $100 million, representing 38% of our gross assets. A

As we have previously discussed, we believe having cash in this environment advantageously positions us to continue seeking out new opportunities emerging from current market conditions....

SuRo Capital's top five positions as of June thirtieth were Learneo, Colombier, now PSQ Holdings, Blink Health, StormWind, and Locus Robotics. These positions accounted for approximately 51% of the investment portfolio at fair value. Additionally, as of June thirtieth, our top 10 positions accounted for 78% of the investment portfolio. Transitioning to our public investments.

As previously stated, it is our objective to sell our public positions when restrictions expire and there's relatively stability in a given public position's trading. In line with this approach, we've continued to monetize our public unrestricted positions. During this quarter and throughout the last month, we monetized a sizable portion of our position in Nextdoor and plan to continue optimistically monetizing our public position, positions as market conditions improve. As previously discussed, we continue to focus on shareholder-friendly initiatives.

To that end, we completed our modified Dutch tender auction, which resulted in a purchase of 3 million shares of common stock at $4.50 per share. Allison Green will discuss the results of the tender offer in more detail shortly.

In addition to the tender offer, on August 7th, our board of directors authorized an additional $5 million per share repurchases and an extension of the share repurchase program through October 31, 2024. The expansion brings the total authorized under the share repurchase program to $69. Given the significant discount at which our stock is trading compared to net asset value, we determine the current continuation of the share repurchase 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. With that, I will hand it over to Allison Green, our Chief Financial Officer.

Allison Green (CFO)

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our recent shareholder initiative, our investment portfolio activity, our financial results as of June 30, 2023, and our liquidity position as of quarter end.

First, I will provide detail on the recent increase and extension of the share repurchase program. Please turn to slide 7. As Mark mentioned earlier, SuRo Capital is committed to initiatives that enhance shareholder value. As such, on August 7, our board of directors authorized a $5 million expansion to the share repurchase program to $60 million, and an extension of the share repurchase program through October 31, 2024.

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 $60 million authorized by the board. Approximately $21.4 million remain authorized under the share repurchase program, currently set to expire on October 31, 2024.

In addition to the share purchase program, as previously reported, on March 17, 2023, our board of directors approved a modified Dutch auction tender offer, which commenced on March 21, 2023, to purchase up to 3 million shares of our common stock at a price per share, not less than $3 and not greater than $4.50 per share, using available cash.

The tender offer expired on April 17, 2023. Pursuant to the terms of the tender offer, on April 21, 2023, we repurchased 3 million shares at a price per share of $4.50. This represents 10.6% of then outstanding shares. The per share purchase price of properly tendered shares represented 60.9% of net asset value per share as of December 31, 2022. The company used available cash to fund the purchase of shares of its common stock in the tender offer and to pay for all related fees and expenses.

The purchase price of $4.50 per share represents a 39.1% discount to the December 31, 2022, NAV per share, and a 40.7% discount to March 31, 2023, NAV per share. Again, the tender offer comes in addition to the previously discussed share repurchase program, originally authorized by our board of directors in August 2017. N

Next, I'd like to provide a more detailed update on our investment portfolio activity for the second quarter and subsequent to quarter end. This does not include investment in short-term U.S. Treasuries. During the second quarter, we invested a total of $10.5 million in new and follow-on investments.

New investments during the second quarter include: a $10 million investment in ServiceTitan's common shares via secondary transaction, a $500,000 follow-on investment in PayJoy's simple agreement for future equity, or SAFE. Over the course of the second quarter, we began to monetize our Nextdoor common shares. We sold 950,000 common shares of Nextdoor for approximately $2.9 million of net proceeds, resulting in a net realized loss of approximately $2.4 million. I

In addition to sales of Nextdoor public stock, 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 income.

During the quarter, we received a distribution of approximately $253,000 from our limited partner fund investment in True Global Ventures 4 Plus. Finally, as of May 4, we abandoned our investment in Ozy Media, Inc. Next, I would like to provide additional details on our investments in Colombier. In connection with this investment, as of the business combinations closing on July 19, we held 1,976,032 Class A common shares and 2.7 million warrants. O

Our Class A common shares are not transferable until the earlier of one year after the business combination's closing date, or if the closing price of the Class A common stock equals or exceeds $12 per share for any 20 trading days within any 30 trading day period, commencing at least 150 days after the business combination's closing.

Our warrants are subject to a 30-day lock-up period after the business combination's closing. Subsequent to quarter end, we invested a total of $7.3 million in new and follow-on investments. These include a $5.8 million investment in FourKites of common shares via secondary transactions, a $1 million new investment through SuRo Capital Sports, LLC into Stake Trade's Simple Agreement for Future Equity, again called the SAFE, and a $500,000 follow-on investment in Hearth Series B for preferred shares. Subsequent to quarter end, we sold 589,996 shares of Nextdoor for approximately $1.8 million of net proceeds, resulting in a net realized loss of approximately $1.4 million.

We also received approximately $100,000 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. Please turn to slide 8. Segmented by six general investment themes, the top allocation of our investment portfolio at quarter end was to financial technology and services, representing approximately 35% of the investment portfolio at fair value. Education technology was the second largest category, representing approximately 28% of the portfolio. The marketplaces category accounted for approximately 16% of our investment portfolio. Approximately 14% of our portfolio was invested in cloud and big data companies. Social and mobile accounted for approximately 7% of the fair value of our portfolio. Sustainability accounted for less than 1% of the fair value of our portfolio as of June 30.

Please turn to slide 9. We are pleased to report we ended the second quarter, 2023, with an NAV per share of $7.35, which is consistent with our financial reporting. The decrease in NAV per share from $7.59 at the end of Q1, 2023, to $7.35 as of June 30th, was primarily driven by a $0.62 per share de- resulting from net realized losses on investments during the quarter.

Also contributing to the decrease was a $0.15 per share decrease due to net investment loss. The decrease in NAV per share was primarily and partially offset by a $0.34 per share increase related to the repurchase of common stock as a result of the tender offer, and a $0.06 per share increase related to quarterly adjustments to unrealized investment value in our portfolio.

Finally, I would like to take a moment to review SuRo Capital's liquidity position as of June thirtieth. We ended the quarter with approximately $112 million of liquid assets, including approximately $24.5 million in cash, $75.9 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 remaining shares in Forge Global, Nextdoor, NewLake Capital Partners and Skillsoft. At June thirtieth, 2023, there were 25,398,640 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. I will turn the call over to the operator to start the Q&A session. Operator?

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Please limit your question to only one. Thank you. We have our first question from Jon Hickman from Ladenburg Thalmann. Please go ahead.

Jon Hickman (Managing Director, Equity Research)

Hello?

Mark Klein (Chairman and CEO)

Hey, John.

Jon Hickman (Managing Director, Equity Research)

Yeah. Hi. Can you just clarify for me, I I'm sure Allison mentioned this, but I think I missed it in all the other numbers. Apart from the tender offer, how many dollars is remaining on the, the authorized share buyback program?

Mark Klein (Chairman and CEO)

Slightly in excess of, $21 million.

Jon Hickman (Managing Director, Equity Research)

$21 million. That's, like, totally up to whatever happens day-to-day with the stock price and whatever management wants to do?

Mark Klein (Chairman and CEO)

Yeah. John, as you know, we've discussed and we've discussed on these calls many times before, we're highly focused on shareholder initiatives, whether it's cost reductions or it's accretive purchases of our own securities. We've been doing it for, for years, and we've, you know, done 2 Dutch tender offers within, within almost a 12-month period of time. We recognize the discount that the stock is trading at, and we... the board authorized more to have at our disposal to deploy when we see that that's the most efficient use of our capital. Thanks again for your support. Really appreciate it. Thank you.

Operator (participant)

Thank you. Our second question comes from Jason Mumpant from Private Investor. Please go ahead.

Jon Hickman (Managing Director, Equity Research)

Hi, thanks for taking my question. I was hoping you could elaborate a little bit further on the Colombier holdings of in the fund, if I'm looking at the 10-Q, obviously, you know, showing Class B units and Class W units, but, you know, a lot of the action has happened subsequent to quarter end. Just curious if you could, you know, guide us a little bit on how to think about those holdings going forward or if they were marked today. Thank you.

Mark Klein (Chairman and CEO)

Sure. For your question. I think Allison Green did address it in her prepared remarks, but we own approximately slightly under 2 million common shares. We own 2.7 million warrants. The warrants have a lockup period that ends 30 days after the deal closed, which was July 19th, so approximately August 19th, assuming that there's a valid registration statement. They did file the registration statement today, so when that registration statement becomes effective or August 19th, whatever is latest, those warrants will become unlocked up. The stock is locked up for 1 year, unless the stock trades above $12 for 20 out of 30 days from the middle of December on. At the present time, we own just 1.9 some odd million shares and 2.7 million warrants.

Again, the action did occur, subsequent to quarter's, quarter's end. Thank you.

Operator (participant)

Thank you. There are no further questions. I would like to hand the call over to your host, Mark Klein, to conclude today's conference. Thank you.

Mark Klein (Chairman and CEO)

Thank you, everybody, for attending our call. Thank you for your support. If you have any other further questions, please reach out to us directly. Thank you very much.

Operator (participant)

Thank you for joining today's call. Thank you for your participation. You may now disconnect.