Suro Capital Corp. Q1 FY2021 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to SuRo Capital's First Quarter 2021 Earnings Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded today, Wednesday, May 5, 2021. I will now turn the conference over to today's speaker, Adam Bates of SuRo Capital. Please go ahead.

Thank you for joining us on today's call. I'm joined today by the Chairman and Chief Executive Officer of SuRo Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation 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 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, Adam. We are pleased to share the results of SuRo Capital’s first quarter of 2021. These are obviously unprecedented times we’re living through, but we are encouraged to see signs of a post-pandemic recovery throughout the economy. As more individuals are fully vaccinated, we are optimistic that the end of the pandemic is approaching. Today, I will discuss how our portfolio has performed during the first four months of the year, emphasizing how some of our larger positions have shown accelerated growth in their business. To conclude, I'll turn the call over to Allison Green for a brief financial overview. After our remarks, we will open the call for questions. Let's start with slide 3. This quarter, SuRo Capital achieved our highest absolute and dividend-adjusted net asset value per share since inception. As of March 31, 2021, the net asset value was $18.01 per share, which includes dividends declared during the quarter totaling $0.50 per share. This marks an increase from $15.14 per share at December 31, 2020. As of March 31, 2021, net assets totaled approximately $436 million compared to $302 million at year-end. In line with our commitment to being shareholder-friendly, SuRo Capital's Board of Directors declared a $2.50 per share dividend on May 4th to shareholders. This dividend will be payable on June 30th to shareholders of record on May 18th. Our Board is providing shareholders the choice to receive up to 100% of their dividend in stock, keeping the cash dividend at 50% of the total dividends payable. This $2.50 per share dividend follows previous dividends of $0.25 per share declared on January 26th and paid on February 19th, and another $0.25 per share dividend declared on March 8th and paid on April 15th. Allison will later provide details on this dividend. Looking ahead and depending on ongoing portfolio activity, the Board plans to declare at least two more significant dividends later this year in a similar cash and stock manner, with intentions to declare these dividends in August and November. Please turn to slides 4 and 5 for a review of significant developments in our investment portfolio during the first quarter and after the quarter's end. As of March 31st, our top five positions were Coursera, Course Hero, Nextdoor, Ozy Media, and Blink Health. These positions accounted for about 72% of the investment portfolio at fair value. Our top 10 positions made up around 87% of the portfolio. I'd like to spotlight our investment in Coursera, our largest position. On March 31st, Coursera completed its initial public offering and began trading on the New York Stock Exchange. Just before the IPO, Coursera priced its shares at $33, the top of the range, and started trading at $39. Coursera raised $519 million and ended its first day of trading, and the quarter, at $45 per share. SuRo Capital’s shares in Coursera have broad restrictions until mid to late August. Following our previous communications, we will assess the monetization of this investment as these shares become unrestricted. We have valued our investment in Coursera at $126.7 million as of the quarter-end closing price, reflecting an increase of approximately $74 million since year-end. As mentioned in Coursera's recent earnings call, the CEO indicated that Coursera's consumer, enterprise, and degree segments have all accelerated during the pandemic. With the shift towards digital learning and remote work, working professionals increasingly turn to Coursera for professional certificates. Instead of returning to traditional university campuses, learners can reskill remotely through Coursera’s offerings. Coursera believes we are at the beginning of a long-term trend in the $2 trillion higher education market. In Q1, over 5 million new learners joined Coursera, bringing the total to 82 million registered users on the platform. Besides offering professional certificates, Coursera has partnered with various enterprises to provide educational programs for employees, including a new collaboration with Microsoft. These programs address the evolving needs of the workplace, covering topics like data science and cloud computing. In Q1, Coursera experienced a 64% year-over-year revenue growth, generating over $88 million. Its consumer segment grew 61% year-over-year, the enterprise segment grew 63%, and the degree segment grew 81%. Coursera projects total revenue between $369 million and $381 million for 2021. Following the earnings release, at least 10 Wall Street firms have maintained their buy or outperform ratings for Coursera, with price targets ranging from $54 to $60 per share. We are thrilled with the performance of these two recent IPOs along with our exit from Palantir, which generated over $135 million in net proceeds and realized gains of about $119 million since September 2020. Course Hero, our second largest position, raised a $70 million tranche of Series B capital at a $1.1 billion pre-money valuation, bringing the total primary capital raised in this round to $80 million. This financing included investments from TPG, Goldman Sachs, Asset Management, and others. In October 2020, Course Hero acquired Symbolab, an AI-powered calculator to help students with complex math questions, enhancing its offerings. Due to the pandemic's impact, students have increasingly sought online learning supplements, including Course Hero's document library. Key competitor Chegg reported 64% growth in subscribers and 51% total revenue growth in Q1 2021. We believe Course Hero continues to benefit from long-term trends in online learning, with our investments in this area now representing 58% of our total portfolio. Recent reports and earnings from companies like Chegg indicate that the spike in online learning due to the pandemic is ongoing. We believe these changes will reshape how education is delivered and consumed, favoring online learning. Nextdoor, our third largest position, serves over 276,000 neighborhoods in 11 countries. In an April 2021 CNBC interview, Nextdoor’s CEO mentioned that demand has increased during the pandemic, with usage growing from one in four to one in three households in the U.S. User engagement has also risen, with a 45% year-over-year increase in daily active users and a 20% rise in impressions per user. Ms. Friar stated that she's focused on preparing for an IPO and mentioned that Nextdoor can leverage its scale and monetization potential. We see significant opportunities for Nextdoor to monetize its growing user base in the $161 billion U.S. local advertising market. With the rise of digital marketing, Nextdoor's substantial user base is attractive to advertisers. As the online learning and community landscapes evolve, SPACs have significantly impacted the financial markets. We've begun observing SPACs' effects not only on our current portfolio but also on our investment opportunities. On April 28th, Enjoy, a SuRo Capital portfolio company, announced plans to merge with Marquee Raine Acquisition Corp, a SPAC. This transaction is valued at an enterprise value of $1.2 billion, expected to provide around $450 million in gross proceeds and allows Enjoy to disrupt traditional retail by creating a personalized shopping experience at consumers' homes. Enjoy achieved a remarkable 100% compound annual growth rate from 2018 to 2020, and it anticipates surpassing $1 billion in annual revenue with a 30% adjusted EBITDA margin by 2025. We look forward to the completion of this significant transaction. On February 11, SuRo Capital portfolio company Rover announced plans to merge with Nebula Caravel Acquisition Corp, another SPAC. This transaction is valued at $1.35 billion and is expected to provide approximately $325 million in cash proceeds. We are excited about Rover's potential as a leading online pet care marketplace. Please turn to page 6. We have broadened our focus from our core equity strategy into private credit and pre-SPAC merger investments. Since the company's inception, we have aimed to expand access to asset classes generally unavailable to the public. The SPAC asset class has grown rapidly, with $81.5 billion in issuances last year, up from $13.5 billion in 2019. Already in 2021, over $100 billion has been issued across 312 IPOs. According to Cowen Research, 108 SPAC deals have been announced in 2021, with 28 already closed. The previous year saw 90 deals announced with 55 closed. We believe our exclusive access within the SPAC realm offers significant opportunities. While most investors can only purchase SPAC common shares and warrants in the open market, they lack access to other parts of the SPAC structure, such as sponsor equity and warrants, forward purchase agreements, and PIPEs. These components are often viewed as highly valuable, mostly available only to SPAC sponsors. We consider PIPE issuances in SPAC combinations akin to pre-IPO investments. Presently, 427 SPACs are seeking companies for business combinations, which should create numerous PIPE opportunities in the coming years. We maintain active discussions with sponsors and investment banks for participation in sponsor economics and PIPEs, enabling shareholders to benefit from unique access. The SPAC and PIPE markets have recently seen weakness due to over-saturation, unrealistic valuations, and regulatory scrutiny, leading to a broader market reset. We view this current weakness as an opportunity for selective capital deployment. In Q1, we made two investments in sponsor shares and warrants of Churchill Capital Sponsor VI and VII, and post-quarter, we invested in Colombier Acquisition Corp.'s sponsor economics. Churchill Capital is well-established, with a successful track record, and the current vehicles focus on high-growth technology and larger global opportunities, respectively. Our investments in these sponsor shares and warrants aim for meaningful returns upon successful mergers. Colombier Acquisition Corp. is also a SPAC led by a team focused on leveraging celebrity influence for branding, which we believe can create distinct advantages in a crowded marketplace. We continue discussions with other sponsor teams for similar investments. We view the SPAC market as a compelling opportunity, positioning ourselves to capitalize and deliver value to shareholders. Beyond SPACs, we see many attractive investment opportunities in areas including e-commerce, fintech, food tech, and logistics. We recently made new equity investments in Shogun Enterprises and Architect Capital PayJoy SPV, focused on financing smartphone leases. Additionally, we launched SuRo Capital Sports, a subsidiary targeting the sports betting sector. Our first investment from this entity was in BettorView, a software aimed at facilitating growth in the sports betting landscape by enhancing user experiences across venues. To date, BettorView has partnered with several prominent establishments and we believe there is significant upside in executing its vision amidst the changing legal landscape of sports betting in the U.S. Looking forward, we are confident that our portfolio is positioned to drive long-term value through exits and strategic investments across appealing industries. Our strong cash position puts us in an excellent position to capitalize on numerous attractive opportunities.

Thank you, Mark. I would like to follow Mark's update with a more detailed review of our first quarter investment activity and financial results as of March 31, including results of our redemption notice for the 4.75% convertible senior notes due March 2021, recently declared dividend, our current liquidity position, and details of the upcoming Annual Shareholder Meeting. First, I will review our investment activity. During the first quarter, we invested a total of $9.5 million in new and follow-on investments. New investments during the quarter include a $200,000 investment in the share units and warrants of Churchill Capital Sponsor VI of the sponsor vehicle for Churchill Capital VI, and a $300,000 investment in share units and warrant units of Churchill Sponsor VII of the sponsor vehicle for Churchill Capital VII. A $7 million investment in the Series B1 and Series B2 preferred shares of Shogun Enterprises, the funding of a $500,000 capital call related to our $10 million commitment to Architect Capital PayJoy SPV, and a $1 million investment in a simple agreement for future equity or space in BettorView via our $10 million wholly-owned subsidiary SuRo Capital Sports. During the quarter, we also funded a follow-on investment of approximately $500,000 in the common shares of GreenAcreage Real Estate Corp., now known as NewLake Capital Partners. Please turn to Slide 11. During the first quarter, we sold our remaining unrestricted publicly traded Class A common shares of Palantir. On September 30, 2020, Palantir Technologies completed its IPO on the New York Stock Exchange under the ticker PLTR. Upon IPO, 80% of our shares remained restricted until the lockup period expired on February 18, 2021. After selling our initial 20% portion of unrestricted shares in 2020, and once the remaining 80% of our shares became unrestricted in mid-February of this year, we sold the remaining 4,618,952 shares as of March 4, 2021 for a net realized gain in the first quarter of $110.5 million. In total, since the IPO, we realized approximately $119 million in net gain from our Palantir investment, not including sales made in prior years. During the first quarter, we also received $1.6 million of proceeds related to our June 2020 investment in Palantir Lending Trust SPV. These additional proceeds are attributed directly to the equity participation in the underlying collateral. As of today, $10.3 million has been received from the Palantir Lending Trust SPV, and 712,290 shares of underlying collateral through which we retain an equity interest remains to be sold. As of December 31, 2020, the balance of the loan and all guaranteed interest had been fully repaid. Please turn to Slide 12. Segmented by 6 general investment themes, the top allocation of our investment portfolio at quarter end is to education technology, representing approximately 62% of the investment portfolio at fair value. Marketplaces was the second largest category, representing approximately 14% of the portfolio. The financial technology and services category accounted for approximately 13% of our investment portfolio, and approximately 11% of our portfolio is invested in social mobile companies. Big data, cloud, and sustainability each accounted for less than 1% of the fair value of our portfolio as of March 31. We are pleased to report we ended the first quarter 2021 with an NAV per share of $18.01. A breakdown of NAV per share as of quarter end is shown on Slide 13 and is consistent with our financial reporting. In sum, the increase in NAV per share during the first quarter was largely driven by the approximately $4.53 per share attributable to net realized gain on the sale of portfolio investment. This increase in NAV per share was offset by $1.10 per share attributable to the issuance of our common stock upon the conversion of our convertible senior notes in advance of the redemption. $0.50 per share in dividends declared during the quarter, approximately $0.11 per share attributable to net investment loss, and approximately $0.05 per share of net unrealized depreciation of our investment portfolio at quarter end. On February 19, we caused notices to be issued to the holders of our 4.75% convertible senior notes due 2023 regarding the company's exercise of our option to redeem, in whole, the issued and outstanding notes, pursuant to the Indenture, dated as of March 28, 2018, between the company and U.S. Bank, as trustee, and Section 15.02 of the First Supplemental Indenture thereto, dated as of March 28, 2018. The company established March 29, 2021, as the date on which all of the notes would be redeemed at 100% of their principal amount or $1,000 per note, plus the accrued and unpaid interest thereon from September 30, 2020, through, but excluding, the redemption date. Holders of the notes have the option to surrender their notes for conversion into shares of the company's common stock, par value of $0.01 per share, at the then existing conversion rate, in lieu of receiving cash, at any time prior to the close of business on the business day immediately preceding the redemption date. As of the redemption date, the company redeemed $0.3 million or $290,000 in aggregate principal amount of the notes at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest, which amounted to approximately $800,000. As a result of the election of certain holders to surrender their notes for conversion into shares of common stock prior to the redemption date, the company has issued a total of 4,272,696 shares of common stock since the notes were issued. As of March 31, 2021, there are 24,205,216 shares of the company's common stock outstanding. During the first quarter, SuRo Capital declared 2 dividends for a total of $0.50 per share. On January 26, our Board of Directors declared a dividend of $0.25 per share paid on February 19 to shareholders of record on February 5, and on March 8, our Board of Directors declared a dividend of $0.25 per share paid on April 15 to shareholders of record on March 30. All of 2021 dividends declared to date are expected to be categorized as net long-term capital gains for tax purposes. The related realized gains are attributable to the monetization upon sale or exit of the investments in our portfolio. As Mark mentioned, yesterday SuRo Capital's Board of Directors declared a dividend of $2.50 per share payable on June 30, 2021, to the company's common stockholders of record as of the close of business on May 18, 2021. The dividend will be paid in half stock and half cash. As described more fully in today's press release, the dividend will be paid in cash or in shares of the company's common stock at the election of shareholders. Although the total amount of cash to be distributed to all shareholders will be limited to no more than 50% of the total dividend to be paid to all shareholders. This dividend is being made in accordance with certain applicable treasury regulation and guidance issued by the IRS to allow a publicly-traded regulated investment company to satisfy distribution requirements from a distribution paid partly in common stock, provided certain other requirements are satisfied. Each shareholder will have the opportunity to elect to receive the dividend in cash or in shares of the company's common stock. Shareholders electing to receive the dividend in shares of the company's common stock will receive their entire dividends in the form of shares of the company's common stock, regardless of the elections made by any other shareholders. However, the amount of cash to be distributed to all shareholders electing to receive the dividend in cash will be limited to no more than 50% of the total amount to be distributed to all shareholders. In the event that the amount of cash to be distributed to all shareholders electing to receive the dividend in cash would exceed 50% of the total dividend, each shareholder electing to receive cash will receive a pro rata portion of the total cash to be distributed based on the number of shares held by each such shareholder. The remainder of the dividend in excess of the shareholders' pro rata share of the total amount of cash to be distributed will be paid in the form of shares of the company's common stock. The number of shares of our common stock to be issued to shareholders receiving all or a portion of the dividend in shares of our common stock will be based on the volume-weighted average price per share of our common stock on the NASDAQ Capital Market on May 12, May 13, and May 14, 2021, to reflect the declared dividend. The Company will cause to be mailed an election form to receive cash or common stock only to registered shareholders promptly after the May 18, 2021 record date. Registered shareholders are those shareholders who own their stock directly and not through a bank, broker, or nominee. The completed election form must be received by SuRo Capital's transfer agent, American Stock Transfer, prior to 5:00 p.m. Eastern on June 16, 2021. Registered shareholders with questions regarding the dividend may call American Stock Transfer at 800-937-5449. Registered shareholders who do not make an election will be deemed to have elected to receive 100% of their dividend in shares of the company's common stock. Participants in the company's dividend reinvestment plan will also receive an election form. The investment feature of the dividend reinvestment plan will be suspended for this distribution and will be reinstated after this distribution has been completed. Shareholders who hold their shares through a bank, broker, or nominee will not receive an election form from the company and should contact their bank, broker, or nominee for instructions on how to make an election. Regardless of whether a shareholder receives the dividend in cash, stock, or some combination of cash and stock, the entire amount of this dividend will be fully taxable to shareholders, and SuRo Capital Corp. will report the actual tax characteristics of each year's dividends annually to shareholders and the IRS on Form 1099. The date of declaration and the amount of any dividends, including any future dividends, are subject to the sole discretion of SuRo Capital's Board of Directors. The aggregate amount of dividends declared and paid by SuRo Capital will be fully taxable to shareholders. The tax character of SuRo Capital's dividends cannot be finally determined until the close of SuRo Capital's taxable year. SuRo Capital will report the actual tax characteristics of each year's dividends annually to stockholders and the IRS, subsequent to year-end. Again, registered stockholders with questions regarding declared dividends may call American Stock Transfer at 800-937-5449. Finally, I would like to review SuRo Capital's current liquidity. We ended the quarter with approximately $292.4 million of liquid assets, including $155.7 million in cash and $126.7 million in public securities subject to certain lockup restrictions as of quarter end. Our cash balance of $165.7 million as of March 31, 2021, consisted primarily of the monetization of various portfolio positions throughout the 2020 and 2021 to date, in addition to proceeds generated during the third quarter of 2020 via ATM offering. The $126.7 million of public securities subject to lockup restrictions as of March 31, represent our shares in Coursera, valued at a closing price on March 31 of $45, plus the discount for lack of marketability related to the current lockup provision. Before I turn the call back to the operator, I wanted to note that our 2021 Annual Shareholder Meeting will be held on Wednesday, July 7 in New York City, pending COVID-related guidelines. The record date for the Annual Shareholder Meeting is April 28. And that concludes my comments, we would like to thank you for your interest and support of SuRo Capital. Now, I will turn the call over to the operator to start the Q&A session.

And we'll go first to Devin Ryan of JMP Securities.

This is Kevin Fultz standing in for Devin Ryan. Regarding SuRo Capital Sports, the fund has $10 million in committed capital and has so far invested $1 million. Could you discuss your expectations for the pace of investments there and whether you see the $10 million as an initial investment with plans for future growth beyond that?

That's a great question. We are very excited about the direction of sports betting and the increasing adoption of it across the country, and we are looking for opportunities to take advantage of that. We have analyzed a number of companies so far and meet with them regularly. We are initially investing $10 million across several companies, with the expectation that they will continue to raise funds, and we plan to participate in those future rounds. The sports betting industry is quite fragmented, with some large players and many smaller ones, and we are focusing on identifying and engaging with them. In the case of BettorView, we not only invested but also secured a position on their Board.

And now we will take a question from Howard Kaminsky of Kaminsky Family LLC.

I'll limit this to one question, but I have a couple of them. On Page 4 of the presentation, you noted the valuation of Course Hero at $32.5 million. That's $2.5 million less than what was disclosed in the 10-K. Given all of the positive attributes and news concerning Coursera, as well as the online education space in general, why did you take the markdown in value?

Thank you for your question. We have a strict set of guidelines that we apply to our evaluations, starting with transactions in the secondary market, including both primary transactions and capital raises. Over time, we have incorporated these into our valuation process, considering secondary trades and public comparisons that impact our assessments. In the case of Course Hero, recent secondary transactions significantly affected this quarter's valuation, leading to a modest write-down. This may seem counterintuitive given the success of the Coursera IPO and the performance of companies like Chegg. However, we remain rigorous in our valuation approach, supported by our independent valuation firm Anderson and our auditors, Marcum, along with the Board's valuation committee.

And now, we will go to Jon Hickman of Ladenburg.

I have a question for Allison. On the last page of the presentation, where you discuss the NAV, I am a bit confused; I don't see how the unrealized gain from Coursera is included in your calculations. Could you explain that to me?

Let me just get my pen so I can assist you further. I think the unrealized gain was influenced by Palantir, as we recognized Palantir's value in the first quarter, which created a bit of a gap in the unrealized gains that offset the increase in gains from Coursera. This helped make the net unrealized gain for the quarter approximately 1.3, and you will see the significant Palantir gain reflected in the realized gains.

And that was all the questions that we had. I would like to turn the call back to our speakers for any additional or closing comments.

We appreciate you taking the time to listen to this call, for being investors, and for supporting SuRo Capital. If you have any further questions, please reach out to Allison or me, and we would be glad to discuss. Thank you very much for your time and effort; we truly appreciate it. Thank you. Goodbye.

And with that everyone, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.