SuRo Capital Corp (SSSS) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to SuRo Capital's Second Quarter 2020 Earnings Call. (Operator Instructions) This call is being recorded today, Wednesday, August 5, 2020. I'd now like to turn the conference over to Claire Councill of SuRo Capital. Please go ahead.

Thank you for joining us on today's call. I am joined today by the Chief Executive Officer of SuRo Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation that corresponds 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. 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.

Thank you, Claire. We are pleased to share the results of SuRo Capital's second quarter 2020. These are obviously unprecedented times we are living through, and society is facing tremendous challenges. We at SuRo Capital would like to again thank the frontline workers and responders who have put themselves at risk throughout the COVID-19 pandemic.

We are fortunate to report that our employees and their families remain healthy and continue to function remotely like other firms. I will now discuss how our portfolio is fair during the ongoing COVID-19 pandemic and highlight how a few of our larger positions have even experienced degrees of business acceleration during the pandemic. To conclude, I will hand the call over to Allison Green for a brief financial overview. At the conclusion of our remarks, we will open the call for questions.

Let's start with Slide 3. This quarter, SuRo Capital reported its highest dividend adjusted net asset value per share in 5 years. At June 30, 2020, net asset value was $11.84 per share, an increase from $10.22 per share at March 31, 2020. Net asset value approximated $193 million at quarter end compared to $173 million in the first quarter.

Please turn to Slides 4, 5 and 6 for a review of notable developments in our investment portfolio in the second quarter and subsequent to quarter end. We continue to take initiatives to drive shareholder value. On July 29, SuRo Capital's Board of Directors declared a $0.15 per share dividend to stockholders.

Allison will provide additional details on the dividend later in the call. This dividend, in conjunction with the combined $0.32 of dividends previously declared in 2019, yields and aggregate of $0.47 per share of dividends distributed related to investment activity in 2019. SuRo Capital's top 5 positions as of June 30 were Coursera, Course Hero, Palantir, OZY Media and Nextdoor. These positions accounted for approximately 68% of the investment portfolio at fair value. As of June 30, our top 10 positions accounted for approximately 87% of the portfolio.

Now I would like to discuss notable developments in a few of our largest positions. First, I want to highlight our investment in Palantir, our third largest position. On July 6, Palantir announced that it confidentially submitted a draft registration statement on its Form S-1 with the SEC. This filing may be a precursor to an initial public offering in the near term.

As of June 30, SuRo Capital's net asset value does not include any change in the value of our part Palantir investment from the value we ascribed to it in Q1. We continue to hold our Palantir investment at an implied equity value of approximately $12 billion.

Next, I would like to note that our investments in online learning through our positions in Coursera and Course Hero represent over 1/3 of our invested portfolio. From recent media reports as well as earning reports from public online learning companies, it is evident that the COVID-19 pandemic has continued to spark surges in demand for online education.

We believe the effects of the pandemic have accelerated a long-term structural change in how education is being and will be consumed with a clear transition towards online education.

On July 17, Coursera, our largest position, announced that it's raised $130 million in a Series F financing. The round was led by NEA, and we participated with a $2.8 million pro rata follow on investment. The round also included existing investors, Kleiner Perkins, Seek Group, Learn Capital and others and brought the company's cash balance to more than $300 million according to the company's announcement.

The information and online publication reported the round values Coursera at approximately $2.5 billion. As previously announced, Coursera had last raised $103 million in April of 2019 at a $1.56 billion pre money valuation. This is according to pitch book. Coursera has continued to take initiatives to support students and universities during the COVID-19 pandemic.

In June 2020, Coursera announced it was extending college and university student's free access to over 3,800 courses, 150 guided projects, 400 specializations and 11 professional certificates on Coursera's platform. Through September 30, students can enroll had no cost in the program, which includes online instruction from the world's top universities and professional certificates from leading industry educators like Google and IBM.

With nearly 70% of the world's students impacted by campus closures, this program allows students to continue learning outside of the classroom.

As announced last February, Course Hero, our second largest position, raised a Series B financing round. As surge reported in February that Course Hero raised a $10 billion Series B round, led by NewView Capital at a $1.1 billion valuation.

NewView Capital also contributed $30 million to the company's employee tender program. This financing round marked Course Hero's first financing since SuRo Capital's led it series A round in 2014.

Due to the impact of the COVID-19 pandemic and related quarantines and school closures, with less in-person student access to teachers or study groups, students have increasingly turned to online learning supplements for their studies, including Course Hero's online document library.

Chegg, a key competitor to Course Hero noted in its earnings call earlier this week, that its research indicates a majority of students now feel online learning can be as legitimate, effective and rigorous as in-person instruction. Half of the students surveyed who had no prior online learning experience now want the option of hybrid or a fully online education, and 72% of the students had already had online experience expect the same.

Students turned to Chegg in record numbers during the quarter with expectations for this trend to continue into the fall regardless of what college campuses will look like. We believe Course Hero is similarly positioned to capitalize on this long-term trend towards online learning.

In response to the COVID-19 pandemic, Coursera has offered educators pre access to its document library of more than 40 million teaching and learning resources. Last month, Course Hero announced the launch of an educator exchange, where college faculty can earn income by uploading and churn teaching, learning and study materials with peers and students. This exchange further expands Course Hero's efforts to partner with faculty by providing a platform with the value of lecture notes, practice types and teaching materials can be recognized and shared.

Nextdoor, our fifth largest position has gained notable traction during the COVID-19 pandemic. During our March 2020 CNBC interview, Nextdoor CEO, Sarah Friar, indicated that Nextdoor experienced an 80% month-over-month increase in daily active users in the month of March. Additionally, Nextdoor launched Nextdoor groups and Nextdoor help map to provide healthy individuals an opportunity to support neighbors in need. Nextdoor is an outstanding platform that serves over 210,000 neighborhoods across 11 countries. We believe Nextdoor has tremendous upside, both with an ability to expand internationally and with an opportunity to further monetize its hyper localized user base.

Segmented by 6 general investment themes, the top allocation of our investment portfolio is to education technology, representing approximately 48% of the investment portfolio at fair value. Big Data and cloud was the second largest, representing approximately 90% of the portfolio.

Our Financial Technologies and services category accounted for approximately of our portfolio in fair value. Our social mobile category accounted for approximately 11% of our portfolio and marketplaces accounted for approximately 9% of our investment portfolio at fair value.

In addition to our previous announcement, they were -- that we are expanding our strategy to include private credit investments through our appointment of Terry Finley as a Senior Managing Director and senior member of the Investment Committee. Our team has continued to expand our sourcing network in order to evaluate a wide range of equity investment opportunities in top VC and institutionally backed companies that demonstrate strong operating fundamentals.

I would like to highlight that due to the ongoing market dislocation, we are seeing tremendous investment opportunities in high-quality companies. This dislocation is presenting attractive opportunities in both equity and private credit. Our asset-backed credit investments are targeting capital-intensive high-growth technology businesses, particularly in the financial technology, insurance technology and property technology industries.

Asset backlogs in this space command attractive interest rates in the mid- to high teens, often coupled with the ability to participate in equity upside through warrants assigned to the lender upon funding. We believe this strategy represents a compelling opportunity to drive shareholder value as it will generate recurring investment interest income and over time, could drive a regular dividend stream for our shareholders. Our equity investments are targeting businesses that have been shown to provide scaled valuation growth before a potential IPO or strategic exit. A few industries of focus include e-commerce and retail, financial technology, food technology and transportation and logistics.

Please turn to Slide 7. Among these equity investment opportunities, our pipe investments via special purpose acquisition companies, also known as SPACs, which we view as similar to pre-IPO securities. SPACs for companies formed to raise capital in an initial public offering, whose proceeds are used solely to fund an acquisition of or merger with a private company, thereby taking the private company public.

In advance of signing an acquisition agreement, SPACs often arranged committed debt or equity financing in the form of a pipe commitment. Our unique access to these pipe financings are opportunities for SuRo Capital to invest in late-stage venture capital, private equity or institutionally backed companies with attractive investment time horizons. We feel we are uniquely positioned to leverage our proprietary access to pipe investments and to capitalize on a growing number of these opportunities as companies increasingly turn to SPACs as viable liquidity solutions.

In 2020, there have been $9 billion worth of pipe commitments and announced and completed SPAC merger deals. 65% of all SPAC merger announcements in 2020 have an associated pipe commitment, of which $3.4 billion have been associated with completed SPAC mergers. Year-to-date, 55 SPACs have been issued for over $22 billion and at least 30 additional SPACs of live S1 registration statements.

As of now, there are approximately 100 SPACs outstanding that are actively pursuing merger opportunities. During the second quarter, as announced on July 2, we invested $5 million in rent the runway, extended a $6.9 million collateralized loan with equity upside potential to Palantir lending SPV and invested our pro rata of $500,000 in a junior preferred convertible note to line.

Please turn to Slide 8. Rental runway is a subscription fashion service allowing women to rent unlimited designer cells for work, events and everyday work. Founded in 2009 and headquartered in New York City, Rent the Runway offers hundreds of thousands of apparel and accessories by 700-plus designers on its best-in-class platform.

We believe that the company's exclusive design relationships and its unparalleled engineering and logistics infrastructure, provided with a strong competitive mode and position it well for future growth. Rent the Runway raised $125 million in March of 2019 at a $1 billion valuation led by Bain Capital Ventures with participation from Franklin Templeton and T Roll Price.

We invested in preferred stock during the second quarter as we believe the company has the financing to bridge itself to future profitability and take advantage of the challenged retail environment. As Rent the Runway is a well-capitalized, highly innovative market leader, we believe this investment presents a compelling opportunity to participate in the eventual rebound of the Fashion and the subscription rental industry after the COVID-19 outbreak subsides. Not only does Rent the Runway have the financial backing to withstand the impact of COVID-19, but we also believe that Rent the Runway's unique subscription model and wild word-of-mouth marketing uniquely positions it to capitalize on the outside market growth that they may -- that may arise following a COVID-19 rebound as traditional retail models will continue to remain challenged.

Please turn to Slide 9. Palantir Lending Trust is SuRo Capital's first debt investment since announcing our new strategy and partnership with Terry Finley in the first quarter. This debt instrument is a $6.9 million nonrecourse collateralized loan to Palantir Lending Trust, a trust owned by a former Senior Palantir employee. Proceeds from this loan were used to finance the exercise and taxes associated with 2.26 million Class B common shares of Palantir as well as prepaid interest. A compelling feature of this investment is that the loan not only provides SuRo capital with a regular -- with regular interest payments accruing at 15% annually, but allows us to participate in the appreciation of the Palantir shares above $5.29 per share.

Please turn to Slide 10. Additionally, as previously announced, Uber closed $170 million financing rounds in line and existing SuRo Capital Portfolio Company during the second quarter. As part of the transaction, Uber will transfer jump Uber's bike and scooter business to line.

We invested our pro rata mounted to this financing now, which represents an approximate $500,000 follow on investment. Given the attractive valuation with SuRo Capital's making this follow on investment, we are comfortable that at a modest improvement in Lime's business, we will generate a profit on our total investment.

With the support of Uber, we believe Lime is financially and strategically positioned to further establish a leadership position in the micro mobility industry, particularly after social distancing requirements are lifted or removed.

As a global ride sharing leader, Uber is a natural fit for Lime's business, and we believe that this partnership can accelerate the success Lime was experienced prior to the onset of COVID-19.

We have already begun to see positive momentum in Lime's business as Tech Crunch reported in July that Lime was among 3 scooter providers to win a permit to operate shared electric scooters in Paris, following a 7-month tender process that included as many as 16 competing companies.

Please turn to Slide 11. As discussed earlier in the call, we have executed a $2.8 million pro rata investment in Coursera's Series F financing round. This investment was made alongside NEA, client of Perkins, Learn Capital and others. We are excited by the tremendous momentum behind the Coursera's business and look forward to supporting Coursera as it continues to lead a fundamental shift in consumer behavior toward high-quality learning outside of the classroom.

Looking ahead, we believe that SuRo Capital's well positioned to deliver long-term shareholder value. We are executing against a disciplined growth investment strategy with strong tailwinds, and we believe that the fundamentals of our portfolio are strong.

Thank you for your attention. And with that, I'll hand it over to Allison.

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our financial results as of June 30, 2020. Our recently declared dividend, our share repurchase program, our continued expense reduction initiatives and our current liquidity position.

We are pleased to report, we ended the second quarter with an NAV per share of $11.84. A breakdown of NAV per share as of quarter end is shown on Slide 12 and is consistent with our financial reporting. In some, the increase in NAV per share during the second quarter was largely driven by $1.52 per share, a net unrealized depreciation of our portfolio investments and a net $0.17 per share increase attributable to the accretive effects of common stock repurchase during the quarter through the share repurchase program.

These increases to NAV per share were offset by a net $0.17 per share decrease in net investment loss. Subsequent to quarter end, on July 29, 2020, our Board of Directors declared a dividend of $0.15 per share payable on August 25, 2020, to shareholders of record on August 11, 2020. This dividend was related to investment activity in 2019, and brings the total dividends declared related to 2019 investment activity to $0.47 per share. These dividends have been categorized as net realized capital gains for tax purposes.

Please refer to Slide 13, as I review the current status of the share repurchase program. During the second quarter, the company repurchased 594,637 shares for approximately $3.6 million. Since inception of the share repurchase program in August 2017 to date, we have repurchased 4,452,049 shares of our common stock for approximately $27.3 million, excluding the modified Dutch auction tender offer effectuated in the fourth quarter of 2019.

The total funds allocated by our Board of Directors to the share repurchase program to date is $30 million. Considering share repurchases through the second quarter, this leaves approximately $2.7 million for future repurchases under the program.

As of today, between the share repurchase program and the Q4 2019 modified Dutch option tender offer, SuRo Capital has repurchased 5,901,324 shares of common stock for approximately $37.3 million since inception of the share repurchase program in August 2017. This represents nearly 27% of the shares outstanding at that time.

During the second quarter, we continued to see the cost saving effects from the internalization of the management of SuRo Capital. As previously discussed, as an internally managed BDC, we have a significantly reduced cost structure. Upon termination of the investment advisory agreement on March 12, 2019, we no longer pay management fees each month as management is now employed directly by the BDC, and we no longer accrue an incentive fee.

Total adjusted operating expenses for the second quarter were approximately $2.9 million. Adjusted for the impact of accounting guidance that requires acceleration of the recognition of all unrecognized compensation costs related to stock-based compensation in the event of a cancellation of such stock-based compensation without a repurchase exchange or replacement. This accelerated cost recognition upon cancellation of approximately $2 million is offset in the equity section of the balance sheet.

Total adjusted operating expenses of $2.9 million for the second quarter of 2020 represent a decrease of approximately 10% in operating expenses from $3.3 million during the second quarter of 2019. When compared to our last second quarter as an externally managed entity, the second quarter 2020 adjusted total operating expense of $2.9 million represents a nearly 54% decrease from total operating expenses before waivers of $6.3 million in the second quarter of 2018.

Similarly, the adjusted total operating expense for the first half of 2020 was $6.2 million, compared with $7.6 million in the first half of 2019, adjusted for the reversal of the incentive fee accrual and $11.7 million in total operating expenses before waivers for the first half of 2018, the last year we were fully externally managed.

The continued decrease in operating expenses is primarily due to the elimination of management fees, incentive fees and costs under the prior administration agreement and further supported by ongoing expense reduction initiatives separate from the inherent statement of the internalized management structure.

We anticipate operating expenses to further decrease in 2020 as we will be fully internalized for the entire year and is costs related to the internalization have generally been absorbed in 2019.

Together, we believe our ongoing meticulous efforts to reduce operating expenses and the meaningful cost savings we are realizing as an internally managed BDC will have continued positive impacts on NAV. We remain diligent about managing our expense base moving forward.

Finally, I would like to review SuRo Capital's current liquidity. We ended the quarter with approximately $23.3 million of cash and restricted cash. We did not hold any public securities at quarter end. Our cash balance of $23.3 million as of June 30, 2020, consisted primarily of proceeds generated by the monetization of various portfolio positions from the first quarter of 2017 through the first quarter of 2020 and Remaining proceeds from the issuance of $40 million, up 4.75% convertible senior notes due in 2023, issued during the first quarter of 2018.

That concludes my comments. We would like to thank you for your interest in support of SuRo Capital. Now I will turn the call over to the operator to start the Q&A session. Operator?

(Operator Instructions) And we'll take our first question today from Mark Palmer with BTIG.

Earlier in your commentary, you talked about the potential to take advantage of dislocations stemming from the pandemic. If you could talk a little bit about what you're seeing in the environment for the verticals that you're pursuing, particularly with regard to valuations. We see the equity markets been very robust of late. What are you seeing on the private side of the market?

Thanks, Mark, and thanks for your ongoing support to us and you and I have talked about this. In the earlier part of the pandemic cycle, there was clearly a bit of fear-driven selling and fear-driven capital raising. And at that point in time, similar to what was going on in the public markets, we were seeing significant discounts to prior rounds in various different investments including -- in some things we know, obviously, in the case of Lime, they did a significant down round, and we were fortunate to participate on a pro rata basis in very attractive terms. We did take advantage of some of the dislocation and in the case of Rent the Runway, where we were able to purchase stock at a discount to the round that we noted in our comments earlier. I think that -- I think on a case-by-case basis, there continues to be some of that. I think it's not -- obviously, with the NASDAQ making record highs, there's a lot less fear in the secondary market in selling. And there is starting to be some robustness in the primary rounds. So we've looked at discounted rounds. We've looked at primary rounds. Obviously, we know that Coursera did a significant up round in which we participated as well.

So I would say, on the equity side, the secondary side, selectively, as people are trying to realign their portfolios. We are seeing certain secondary needs come out of the discounts to prior rounds. We did earlier see some primary rounds coming at discounted levels intendedly right now. I think a lot of the primary rounds that we've seen and that are picked up in the press are clearly coming at premiums to rounds that there is before.

On the debt side, it's a little bit -- it's a case-by-case basis. We are seeing opportunities for companies that the like of which we outlined in our commentary that given need capital to deploy against their strategy that would rather borrow against assets rather than raise equity capital at a -- perhaps a discounted rate than what they would like to. So it's more of a mixed bag than it was earlier on in March and April, even until earlier May.

Next we'll have from Alex Paris with Barrington Research.

Mark and Alex -- Allison, I'm sorry. I just had a few questions for you. First off, and not necessarily in any order. You mentioned, Mark, in your prepared comments, equity investment focus in e-com and retail, fintech, foodtech, transportation and logistics. Is that on the pipe side, the private credit side or just in general? And the reason I ask is given the investment themes, how do they fit within those?

Sure. That's very fair question. And Alex, thank you again for your ongoing support to me, to SuRo. We greatly appreciate it. I think, certainly, on the VC side and the institutional backed secondaries and other primaries that we've been doing, those are areas that we are seeing interesting opportunities and continue to do that.

We're not pigeonholed into those industries. We just wanted to highlight those a bit. On the debt side, we made a pretty clear Fintech insurance tech Proptech is where we're spending much more of the time. On the pipe side and the SPAC business combination, again, we're going to stick to our knitting. We're not going to -- you're not going to see us participate in the sort of bridge pipes into industrial-oriented companies or life science type of companies. We'll very much stay into the ones that are technology based, financial technology, consumer base, prop tech base in [George’s] consumer, in general.

That will conclude today's question-and-answer session. I will now turn the conference over to Mike Klein for any additional or closing remarks.

Thank you all very much for taking the time out this afternoon to listen to our conference call and for your support as shareholders, analysts and friends on the team. We greatly appreciate it. And we hope you and your families stay safe in this difficult environment. Thank you all very much.

That will conclude today's conference. Thank you for your participation. You may now disconnect.