SuRo Capital(SSSS) - 2020 Q4 - Annual Report

PART I Business SuRo Capital Corp. is an internally-managed BDC and RIC, maximizing portfolio return via capital gains from venture-backed emerging companies - The company is an internally-managed Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes[13] - The primary investment objective is to maximize total portfolio return, mainly by seeking capital gains from equity and equity-related investments in rapidly growing, venture-capital-backed emerging companies[16] - On March 12, 2019, the company internalized its operating structure, terminating its external investment advisory and administration agreements to better align management and stockholder interests[14] Portfolio Composition by Fair Value (December 31, 2020 vs. 2019) | Asset Class | Fair Value (2020) | Percentage of Portfolio (2020) | Fair Value (2019) | Percentage of Portfolio (2019) | | :--- | :--- | :--- | :--- | :--- | | Private Portfolio Companies | | | | | | Common Stock | $34,190,839 | 7.9% | $59,209,559 | 24.5% | | Preferred Stock | $141,235,987 | 32.8% | $125,448,358 | 51.9% | | Debt Investments | $4,845,340 | 1.1% | $1,644,155 | 0.7% | | Options | $5,872,210 | 1.4% | $5,283,506 | 2.2% | | Publicly Traded Portfolio Companies | | | | | | Common Stock | $94,635,398 | 22.0% | — | —% | | Non-Portfolio Investments | | | | | | U.S. Treasury Bills | $150,000,000 | 34.8% | $50,000,000 | 20.7% | | Total Investments | $430,779,774 | 100.0% | $241,585,578 | 100.0% | Regulation as a Business Development Company As a BDC, SuRo Capital is regulated by the 1940 Act, requiring 70% qualifying asset investment and 200% asset coverage, limiting leverage - The company must invest at least 70% of its gross assets in 'qualifying assets,' which are primarily securities of private or thinly-traded U.S. public companies[63] - The company is required to maintain an asset coverage ratio of at least 200% after each issuance of senior securities (debt or preferred stock), meaning it can generally borrow up to $1 for every $1 of investor equity[54] - The company is generally prohibited from issuing and selling its common stock at a price below its current net asset value per share without stockholder approval[60] Material U.S. Federal Income Tax Considerations SuRo Capital is taxed as a RIC, avoiding corporate-level tax by meeting income and asset diversification tests, and distributing taxable income - To qualify as a RIC, the company must derive at least 90% of its gross income from sources like dividends, interest, and gains from securities sales (the "90% Income Test")[97] - The company must also meet asset diversification tests at the end of each quarter, including having at least 50% of assets in cash, government securities, and diversified securities, and no more than 25% of assets in a single issuer (other than government securities)[97] - A key requirement for RIC status is the annual distribution of at least 90% of its investment company taxable income[87] - If the company fails to qualify as a RIC, it would be subject to tax on all of its taxable income at regular corporate rates, and distributions would not be deductible[109] Risk Factors The company faces significant risks from high-risk, illiquid venture investments, its internally managed BDC structure, and securities market volatility Risks Related to Our Investments Investment risks are substantial due to high-risk, illiquid, and concentrated venture-backed companies with uncertain valuations - Investments in rapidly growing venture-capital-backed emerging companies are extremely risky and could result in the loss of all or part of the investment due to limited financial resources, operating histories, and dependence on key management[121][123] - The value of investments is uncertain because they are generally not publicly traded, requiring fair value to be determined in good faith by the Board of Directors, which may differ materially from values realized in a market transaction[122][124] - The portfolio is concentrated in a limited number of companies and market sectors, with 82.8% of net asset value in ten portfolio companies as of December 31, 2020, increasing the risk of significant loss from a downturn in a specific company or sector[135][138] - The lack of liquidity and potentially extended holding periods for private investments may adversely affect the business and delay any distributions of gains[133] Risks Related to Our Business and Structure Business and structural risks include dependence on management, capital raising restrictions, and adverse impact of losing BDC/RIC status - As an internally managed BDC, the company is highly dependent on its management team and investment professionals for its success and may be limited in its ability to offer competitive compensation structures to attract and retain talent[156][157] - Regulations governing BDCs affect the ability to raise additional capital, limiting leverage to an asset coverage ratio of at least 200% (or 150% if certain conditions are met) and generally prohibiting the sale of common stock below NAV without shareholder approval[207] - Failure to qualify as a RIC would subject the company to corporate-level U.S. federal income tax, which could substantially reduce net assets and the amount of income available for distribution[212][213] - The company operates in a highly competitive market for direct equity investment opportunities, competing with larger entities that may have greater resources and fewer regulatory restrictions[196] Risks Related to the 4.75% Convertible Senior Notes due 2023 The 4.75% Convertible Senior Notes due 2023 pose risks of dilution, insufficient repurchase funds, and potential acquisition discouragement - Conversion of the 4.75% Convertible Senior Notes into common stock will cause dilution to existing stockholders' ownership percentage[238] - The company may not have the funds necessary to repurchase the notes upon a 'fundamental change' (such as a merger or delisting), and its ability to do so may be limited by law or other debt agreements[239] - Certain provisions, such as the repurchase right upon a fundamental change and potential conversion rate adjustments, could make a third-party acquisition of the company more difficult or expensive[241] Risks Related to an Investment in Our Securities Investing in company securities involves risks of stock price volatility, NAV discount, uncertain distributions, and management internalization challenges - The trading price of the company's common stock may be volatile and has recently traded, and may in the future trade, at a significant discount to its net asset value per share[249][251] - The company may not be able to pay distributions, and they may not grow over time, as investments are primarily in securities that do not produce current income. A portion of distributions may be a return of capital[253][254] - The internalization of the company's operating structure in March 2019 presents risks, including potentially higher direct expenses and challenges in replicating services previously provided by the external adviser and administrator[257][259] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[281] Properties The company does not own real estate, leasing its principal executive office in San Francisco - The company does not own any real estate and leases its primary office space in San Francisco, California[282] Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently a party to any material legal proceedings[283] Mine Safety Disclosures This item is not applicable to the company - Not applicable[284] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details SuRo Capital's common stock market performance, distribution history, share repurchases, and senior securities Quarterly Stock Price vs. NAV per Share (2020) | Fiscal 2020 | NAV per Share | High Close Price | Low Close Price | High Close as Premium/(Discount) to NAV | Low Close as Premium/(Discount) to NAV | | :--- | :--- | :--- | :--- | :--- | :--- | | Fourth Quarter | $15.14 | $13.29 | $8.16 | (12.2)% | (46.1)% | | Third Quarter | $12.46 | $14.31 | $8.63 | 14.8% | (30.7)% | | Second Quarter | $11.84 | $9.19 | $5.31 | (22.4)% | (55.2)% | | First Quarter | $10.22 | $7.00 | $3.61 | (31.5)% | (64.7)% | Distributions Declared per Share (Fiscal 2020) | Date Declared | Record Date | Payment Date | Amount per Share | | :--- | :--- | :--- | :--- | | July 29, 2020 | August 11, 2020 | August 25, 2020 | $0.15 | | September 28, 2020 | October 5, 2020 | October 20, 2020 | $0.25 | | October 28, 2020 | November 10, 2020 | November 30, 2020 | $0.25 | | December 16, 2020 | December 30, 2020 | January 15, 2021 | $0.22 | | Total Fiscal 2020 | | | $0.87 | - The company has a Share Repurchase Program, which was increased by $10.0 million on October 28, 2020, authorizing repurchases up to an aggregate of $40.0 million. As of December 31, 2020, approximately $9.6 million remained available under the program[307] Senior Securities Outstanding | Class and Year | Total Amount Outstanding | Asset Coverage Ratio Per Unit ($1,000) | | :--- | :--- | :--- | | 4.75% Convertible Senior Notes due 2023 | | | | Fiscal 2020 | $38,215,000 | $8,892 | | Fiscal 2019 | $40,000,000 | $5,998 | | Fiscal 2018 | $40,000,000 | $5,884 | Selected Financial Data This section presents a five-year summary of the company's key financial data from audited statements, including income and balance sheet Selected Financial Data (2016-2020) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $1.82M | $1.50M | $1.62M | $0.85M | $0.74M | | Net Investment Loss | ($14.51M) | ($9.45M) | ($7.63M) | ($20.88M) | ($1.26M) | | Net increase/(decrease) in net assets from operations | $75.34M | $23.95M | $0.89M | $17.57M | ($75.00M) | | Net Asset Value Per Share | $15.14 | $11.38 | $9.89 | $9.64 | $8.66 | | Total Assets | $478.88M | $288.56M | $330.22M | $381.68M | $300.96M | | Net Assets | $301.58M | $199.92M | $195.38M | $204.76M | $192.13M | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, portfolio activity, COVID-19 impact, liquidity, and the transition to an internally managed structure - The company's investment objective is to maximize total return, principally through capital gains on equity investments in high-growth, venture-backed companies[328] - The company continues to assess the impact of the COVID-19 pandemic on its portfolio companies, noting that the ultimate duration and magnitude of the economic impact remain uncertain[339] - On June 22, 2020, the company changed its name to SuRo Capital Corp. from Sutter Rock Capital Corp[334] Portfolio and Investment Activity The company's investment activity in 2020 included $31.2 million in new investments and exits, realizing a $16.4 million net gain Investment Activity for Year Ended December 31, 2020 | Activity | Amount | Net Gain/(Loss) | | :--- | :--- | :--- | | Investments Funded | $31,242,228 | N/A | | Investments Exited (Net Proceeds) | $31,245,944 | $16,441,223 | Investment Activity for Year Ended December 31, 2019 | Activity | Amount | Net Gain/(Loss) | | :--- | :--- | :--- | | Investments Funded | $25,530,000 | N/A | | Investments Exited (Net Proceeds) | $65,603,252 | $19,179,340 | Results of Operations In 2020, net assets from operations increased to $75.3 million, driven by $73.4 million in unrealized appreciation, despite higher net investment loss Comparison of Operating Results (Years Ended Dec 31) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Investment Income | $1,824,127 | $1,495,724 | $1,617,836 | | Net Operating Expenses | $16,338,543 | $10,946,792 | $9,252,413 | | Net Investment Loss | ($14,514,416) | ($9,451,068) | ($7,634,577) | | Net realized gain/(loss) on investments | $16,441,223 | $19,179,340 | ($7,433,619) | | Net change in unrealized appreciation | $73,410,631 | $13,339,859 | $9,641,050 | | Net Change in Net Assets from Operations | $75,337,438 | $23,953,697 | $891,743 | - The significant increase in net change in unrealized appreciation in 2020 was primarily driven by appreciation in Palantir Technologies, Inc. ($66.4M), Coursera, Inc. ($16.8M), and Course Hero, Inc. ($9.4M)[371] Liquidity and Capital Resources Liquidity is from investment sales and offerings, with $140.4 million in cash and liquid securities as of December 31, 2020, and ATM proceeds Cash Reserves and Liquid Securities | Category | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $45,793,724 | $44,861,263 | | Securities of publicly traded portfolio companies | $94,635,398 | $0 | | Total | $140,429,122 | $44,861,263 | - In 2020, the company raised $49.9 million in net proceeds from its At-the-Market (ATM) offering by selling 3.8 million shares[398] - As of December 31, 2020, the company had $38.2 million in principal outstanding on its 4.75% Convertible Senior Notes due 2023[391][392] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are valuation risk from illiquid private equity and low interest rate risk due to fixed-rate debt - The company's primary market risk is valuation risk, as its investments in private companies do not have readily available market prices and are valued in good faith by the Board of Directors. These estimated values may differ significantly from the values that would have been used had a ready market existed[406] - Interest rate risk is not expected to directly impact the return on the company's portfolio, as it invests primarily in equity. As of December 31, 2020, all debt investments and outstanding borrowings had fixed interest rates[407][408] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for FY2020, including balance sheets, operations, cash flows, and notes Consolidated Financial Statements Consolidated financial statements show total assets of $478.9 million, net assets of $301.6 million, and a $75.3 million increase in net assets from operations Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Investments at Fair Value | $430,779,774 | $241,585,578 | | Total Assets | $478,875,704 | $288,564,089 | | Total Liabilities | $177,292,631 | $88,646,800 | | Net Assets | $301,583,073 | $199,917,289 | | Net Asset Value Per Share | $15.14 | $11.38 | Consolidated Operations Highlights (Year Ended Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Investment Income | $1,824,127 | $1,495,724 | | Net Investment Loss | ($14,514,416) | ($9,451,068) | | Net Realized Gain on Investments | $16,441,223 | $19,179,340 | | Net Change in Unrealized Appreciation | $73,410,631 | $13,339,859 | | Net Change in Net Assets from Operations | $75,337,438 | $23,953,697 | Notes to Consolidated Financial Statements Notes detail accounting policies, related-party arrangements, Level 3 investment valuation, stock transactions, debt, compensation, and subsequent events - The majority of the company's investments are classified as Level 3, valued based on unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset[490] - Subsequent to year-end, from January 1 to March 11, 2021, the company exited its entire position in Palantir Technologies, Inc. for net proceeds of $123.4 million, realizing a gain of $110.5 million[702] - On February 19, 2021, the company issued a notice to redeem all of its outstanding 4.75% Convertible Senior Notes due 2023 on March 29, 2021[711] - On April 28, 2020, all stock option awards granted under the 2019 Equity Incentive Plan were canceled, resulting in an accelerated recognition of $1.96 million in compensation cost[689][693] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[726] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[727] - Based on an assessment using the COSO framework, management determined that the company's internal control over financial reporting was effective as of December 31, 2020[730] - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2020[732] Other Information This item is not applicable to the company - Not applicable[733] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the Registrant's 2021 Proxy Statement, to be filed within 120 days of the fiscal year-end[735] Executive Compensation Executive compensation information is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the Registrant's 2021 Proxy Statement[737] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the Registrant's 2021 Proxy Statement[738] Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the Registrant's 2021 Proxy Statement[739] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the Registrant's 2021 Proxy Statement[740] PART IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with or incorporated by reference into the annual report - This section lists all financial statements, schedules, and exhibits filed with or incorporated by reference into the Form 10-K[743][745] Form 10-K Summary This item is not applicable to the company - Not applicable[748]