SuRo Capital(SSSS) - 2022 Q4 - Annual Report

Part I Business Overview SuRo Capital Corp. is an internally-managed BDC focused on maximizing total return through equity and equity-related investments in rapidly growing venture-backed companies - SuRo Capital Corp. is an internally-managed, non-diversified closed-end management investment company, regulated as a Business Development Company (BDC) and intending to qualify annually as a Regulated Investment Company (RIC)[13] - The company's investment objective is to maximize total return, primarily through capital gains on equity and equity-related investments, and secondarily from debt investment income[16] - Investments primarily target equity securities of rapidly growing venture-capital-backed emerging companies, with opportunistic allocations to private credit, SPACs, and select publicly traded equities[16] - Effective March 12, 2019, the company internalized its operating structure to align stockholder and management interests, transitioning from external adviser fees to direct employee compensation[15][342][343] - As of December 31, 2022, the company employed ten individuals, including executive officers, investment, finance, and administrative staff[25] - The investment philosophy targets high-growth, venture-backed companies across key industry themes including social mobile, cloud computing, big data, internet commerce, financial technology, mobility, and enterprise software[17][31][337] Portfolio Investments Fair Value by Asset Class (December 31, 2022 vs. 2021) | Asset Class | 2022 Fair Value ($) | 2022 % of Portfolio | 2021 Fair Value ($) | 2021 % of Portfolio | | :-------------------------- | :------------------ | :------------------ | :------------------ | :------------------ | | Private Portfolio Companies | $143,865,093 | 59.4% | $214,632,504 | 82.5% | | Publicly Traded Companies | $13,323,485 | 5.5% | $45,503,749 | 17.5% | | U.S. Treasury Bills | $85,056,817 | 35.1% | — | —% | | Total Investments | $242,245,395 | 100.0% | $260,136,253 | 100.0% | - The net asset value per share of common stock was $7.39 as of December 31, 2022[20] - As a BDC, the company must invest at least 70% of gross assets in 'qualifying assets' and maintain an asset coverage ratio of at least 200% (or 150% under certain conditions) for senior securities[22][23][60] - To qualify as a RIC, the company must meet specific income and asset diversification requirements and distribute at least 90% of its investment company taxable income annually[24][84][88] Risk Factors The company faces significant risks from speculative, illiquid venture-backed investments in volatile technology sectors, alongside business, structural, and securities-related challenges - Investments in rapidly growing venture-capital-backed emerging companies are highly risky, carrying potential for complete loss due to limited resources, unpredictable results, and complex capital structures[109][114][115][173] - The illiquid nature of private company securities and lack of market quotations introduce significant valuation uncertainty, materially impacting net asset value determination[109][116][126] - The portfolio is concentrated in a limited number of companies and sectors, with education technology (39.4%), financial technology (24.2%), and marketplaces (17.4%) as of December 31, 2022, increasing susceptibility to industry downturns[110][128][131] - As an internally managed BDC, the company relies heavily on its management team and investment professionals, facing compensation limitations that could impact talent attraction and retention[111][159][160] - Leverage, including the 6.00% Notes due 2026, magnifies potential gains and losses, increasing investment risk, with the Notes being unsecured and structurally subordinated[208][209][213][244][247] - The common stock price may be volatile and trade at significant discounts to net asset value, as shown by a 59.3% discount on March 15, 2023, relative to the December 31, 2022 NAV of $7.39[266][270] - Economic, political, and market conditions, including interest rate changes, inflation, and global events, can significantly and adversely affect the company's business, financial condition, and results of operations[177][184][188][192][202] - Failure to maintain RIC status would result in U.S. federal income tax at corporate rates, substantially reducing net assets and distributions[222][223] - The company's high dependency on information systems means failures or cyber-attacks could disrupt business, negatively impacting stock price and distribution capabilities[242][284][285] Unresolved Staff Comments This item is not applicable, indicating no unresolved comments from the SEC staff Properties The company does not own any material real estate or physical properties, leasing its principal executive office in New York, NY, and an additional office in San Francisco, CA - The company does not own any real estate or other physical properties materially important to its operations[293] - The principal executive office is in New York, NY, with an additional leased office in San Francisco, CA[293] Legal Proceedings The company is not currently involved in any material legal proceedings, nor are any material legal proceedings threatened against it - The company is not currently subject to any material legal proceedings, nor are any material legal proceedings threatened against it[294] - Routine legal proceedings may occur in the ordinary course of business but are not expected to materially affect the company's financial condition or results of operations[294] Mine Safety Disclosures This item is not applicable to the company Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SuRo Capital's common stock trades on Nasdaq, often at a discount to NAV, with the company actively managing share repurchases and capital gains-based distributions to maintain RIC status - The company's common stock trades on the Nasdaq Global Select Market under the symbol 'SSSS'[297] - Common stock has historically traded at prices both above and below its net asset value (NAV) per share, with a 59.3% discount observed on March 15, 2023, relative to the December 31, 2022 NAV of $7.39[297][270] Common Stock Price and NAV per Share (Fiscal 2022) | Quarter | NAV per Share ($) | High Close Price ($) | Low Close Price ($) | High Close Price as % Premium/(Discount) to NAV | Low Close Price as % Premium/(Discount) to NAV | | :------------- | :---------------- | :------------------- | :------------------ | :---------------------------------------------- | :--------------------------------------------- | | Fourth Quarter | $7.39 | $4.38 | $3.67 | (40.7)% | (50.3)% | | Third Quarter | $7.83 | $6.81 | $3.87 | (13.0)% | (50.6)% | | Second Quarter | $9.24 | $8.94 | $6.33 | (3.2)% | (31.5)% | | First Quarter | $12.22 | $13.36 | $8.27 | 9.3% | (32.3)% | - To maintain RIC tax treatment, the company must annually distribute at least 90% of its ordinary income and realized net short-term capital gains exceeding net long-term capital losses[301] - Distributions are primarily capital gains-based, not quarterly or predictable, and may be paid in common stock under its dividend reinvestment plan, which are taxable even if no cash is received[308][309] Total Distributions Declared (2015-2022) | Fiscal Year | Total Amount per Share ($) | | :---------- | :------------------------- | | 2015 | $2.76 | | 2016 | $0.04 | | 2019 | $0.32 | | 2020 | $0.87 | | 2021 | $9.75 | | 2022 | $0.11 | | Total | $12.10 | - During 2022, the company repurchased 1,008,676 shares under its Share Repurchase Program, with approximately $16.4 million remaining available for repurchase[319][396] - In 2022, a modified 'Dutch Auction' tender offer repurchased 2,000,000 shares (6.6% of outstanding) at $6.60 per share, funded by available cash[317][399] Senior Securities: 6.00% Notes due 2026 (Fiscal Years 2020-2022) | Fiscal Year | Total Amount Outstanding ($) | Asset Coverage Ratio Per Unit ($) | Average Market Value Per Unit ($) | | :---------- | :--------------------------- | :-------------------------------- | :-------------------------------- | | 2022 | $75,000,000 | $3,800 | $24.83 | | 2021 | $75,000,000 | $5,865 | $25.52 | | 2020 | — | $8,892 | N/A | Total Annual Expenses (as % of Net Assets Attributable to Common Stock, 2022) | Expense Category | Percentage (%) | | :---------------------- | :------------- | | Operating expenses | 5.55% | | Interest payments | 2.34% | | Other expenses | 0.76% | | Total annual expenses | 8.65% | [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews the company's financial performance, investment activities, liquidity, and capital resources for 2022, 2021, and 2020, highlighting a net investment loss and unrealized depreciation in 2022 - The company's investment objective is to maximize total return, primarily through capital gains on equity and equity-related investments, and secondarily from debt investment income[335] - The investment strategy focuses on non-controlling equity and equity-related investments in high-growth, venture-backed companies, which typically do not generate current income, necessitating future capital raising for operations[338] - After internalization in March 2019, the company ceased paying investment advisory and administration fees, now covering operating costs for employed investment management professionals, including compensation[343] Operating Results Summary (Years Ended December 31) | Metric | 2022 ($) | 2021 ($) | 2020 ($) | | :------------------------------------------ | :--------------- | :--------------- | :--------------- | | Total Investment Income | $3,456,193 | $1,470,842 | $1,824,127 | | Total Operating Expenses | $18,164,201 | $11,401,661 | $16,338,543 | | Net Investment Loss | $(14,708,008) | $(9,930,819) | $(14,514,416) | | Net realized gain/(loss) on investments | $(5,905,453) | $218,735,504 | $16,441,223 | | Net change in unrealized appreciation/(depreciation) of investments | $(111,563,592)$ | $(61,732,964)$ | $73,410,631 | | Net Increase/(Decrease) in Net Assets Resulting from Operations | $(132,177,053) | $147,071,721 | $75,337,438 | - Investment income increased to $3.46 million in 2022 from $1.47 million in 2021, primarily driven by higher interest income from U.S. Treasury Bills and other entities, and increased dividend income from NewLake Capital Partners, Inc[374] - Total operating expenses increased to $18.16 million in 2022 from $11.40 million in 2021, primarily due to higher interest, compensation, and professional fees[377] - The company recognized a net realized loss on investments of $(5.91) million in 2022, a significant decrease from the $218.74 million net realized gain in 2021[381] - Net change in unrealized appreciation/(depreciation) of investments resulted in a depreciation of $(111.56) million in 2022, worsening from $(61.73) million depreciation in 2021[383] - From January 1, 2023, to March 15, 2023, the company exited investments totaling $2.78 million in net proceeds, realizing a net loss of $(1.25) million, and made a follow-on investment of $2.0 million in Orchard Technologies, Inc[664][665] - The company agreed to terminate custody agreements with U.S. Bank Trust Company and U.S. Bank National Association, effective May 9, 2023, transitioning to new custodians without expected material adverse impact[390][668] Cash Reserves and Liquid Securities (December 31) | Category | 2022 ($) | 2021 ($) | 2020 ($) | | :-------------------------------- | :---------------- | :---------------- | :---------------- | | Cash | $40,117,598 | $198,437,078 | $45,793,724 | | U.S. Treasury bills | $85,056,817 | — | — | | Publicly Traded Portfolio Companies | $13,323,485 | $44,573,225 | $94,635,398 | | Total Cash Reserves and Liquid Securities | $138,497,900| $243,010,303| $140,429,122| - Cash decreased significantly in 2022, primarily due to new investment purchases (including U.S. Treasury bills), dividend payments, the Modified Dutch Auction Tender Offer, share repurchases, and interest on the 6.00% Notes due 2026[393] Contractual Obligations (as of December 31, 2022, in millions) | Obligation | Total ($ millions) | Less than 1 year ($ millions) | 1–3 years ($ millions) | 3–5 years ($ millions) | More than 5 years ($ millions) | | :------------------ | :----------------- | :---------------------------- | :--------------------- | :--------------------- | :----------------------------- | | Notes | $75.0 | $— | $— | $75.0 | $— | | Operating lease liability | $0.3 | $0.2 | $0.1 | $— | $— | | Total | $75.3 | $0.2 | $0.1 | $75.0 | $— | - The company has an At-the-Market (ATM) offering program with approximately $98.8 million in shares available for sale as of December 31, 2022; 17,807 shares were sold in 2022 for $0.23 million in gross proceeds[401][403][604] - The $75.0 million aggregate principal amount of 6.00% Notes due 2026 were issued in December 2021, bearing a fixed interest rate of 6.00% per year and maturing on December 30, 2026[410][633] Quantitative and Qualitative Disclosures About Market Risk The company's market risk primarily stems from illiquid equity investments in growth companies, with significant valuation uncertainty for non-public assets, while fixed-rate borrowings mitigate direct interest rate impact - The company's market risk primarily stems from its equity investments in growth companies, which are generally illiquid and highly susceptible to capital market disruptions[415] - Valuation risk is high for investments lacking readily available market quotations, as fair value is determined by the Board using judgment and unobservable inputs, potentially differing materially from actual realized values[416] - Interest rate risk is less direct for equity investments but can adversely affect portfolio companies and borrowing costs; as of December 31, 2022, all debt investments and outstanding borrowings bore fixed rates of interest[417][418] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2022, 2021, and 2020, including statements of assets, operations, cash flows, and investments, with Marcum LLP's report highlighting Level 3 investment valuation as a critical audit matter - This section includes the Report of Independent Registered Public Accounting Firm (Marcum LLP) and consolidated financial statements for the years ended December 31, 2022, 2021, and 2020[421][422] - A critical audit matter is the valuation of Level 3 investments (preferred stock, common stock, debt investments, and options) due to significant management judgment and unobservable inputs[427][428] Consolidated Statements of Assets and Liabilities (December 31) | ASSETS | 2022 ($) | 2021 ($) | | :------------------------------------------ | :--------------- | :--------------- | | Total Investments | $242,245,395 | $260,136,253 | | Cash | $40,117,598 | $198,437,078 | | Total Assets | $284,412,858 | $462,315,827 | | LIABILITIES | | | | 6.00% Notes due December 30, 2026 | $73,387,159 | $73,029,108 | | Total Liabilities | $74,392,156 | $97,469,203 | | Net Assets | $210,020,702 | $364,846,624 | | Net Asset Value Per Share | $7.39 | $11.72 | Consolidated Statements of Operations (Year Ended December 31) | Metric | 2022 ($) | 2021 ($) | 2020 ($) | | :------------------------------------------ | :--------------- | :--------------- | :--------------- | | Total Investment Income | $3,456,193 | $1,470,842 | $1,824,127 | | Total Operating Expenses | $18,164,201 | $11,401,661 | $16,338,543 | | Net Investment Loss | $(14,708,008) | $(9,930,819) | $(14,514,416) | | Net Realized Gain/(Loss) on Investments | $(5,905,453) | $218,735,504 | $16,441,223 | | Net Change in Unrealized Appreciation/(Depreciation) of Investments | $(111,563,592)$ | $(61,732,964)$ | $73,410,631 | | Net Change in Net Assets Resulting from Operations | $(132,177,053) | $147,071,721 | $75,337,438 | | Net Change in Net Assets Resulting from Operations per Common Share (Basic) | $(4.40) | $5.69 | $4.21 | Investment Portfolio Composition by Security Type (Fair Value as of December 31, 2022) | Security Type | Fair Value ($) | % of Net Assets | | :------------------------ | :------------- | :-------------- | | Private Preferred Stock | $117,214,465 | 55.8% | | Private Common Stock | $18,692,931 | 8.9% | | Private Debt Investments | $4,488,200 | 2.1% | | Private Options | $3,469,497 | 1.7% | | Publicly Traded Common Stock | $13,323,485 | 6.3% | | U.S. Treasury Bills | $85,056,817 | 40.5% | | Total Investments | $242,245,395 | 115.3% | Geographic and Industrial Composition (Fair Value as of December 31, 2022) | Geographic Region | Fair Value ($) | % of Portfolio | % of Net Assets | | :---------------- | :------------- | :------------- | :-------------- | | West | $94,996,805 | 60.4% | 45.1% | | Northeast | $46,944,432 | 29.9% | 22.4% | | Midwest | $8,183,281 | 5.2% | 3.9% | | International | $7,064,060 | 4.5% | 3.4% | | Total | $157,188,578 | 100.0% | 74.8% | | Industry | Fair Value ($) | % of Portfolio | % of Net Assets | | :---------------- | :------------- | :------------- | :-------------- | | Education Technology | $61,841,493 | 39.4% | 29.4% | | Financial Technology | $38,096,753 | 24.2% | 18.1% | | Marketplaces | $27,291,467 | 17.4% | 13.0% | | Big Data/Cloud | $14,927,819 | 9.5% | 7.1% | | Social/Mobile | $14,047,018 | 8.9% | 6.7% | | Sustainability | $984,028 | 0.6% | 0.5% | | Total | $157,188,578 | 100.0% | 74.8% | Level 3 Investments by Asset Type (Fair Value as of December 31, 2022) | Asset Type | Fair Value ($) | | :------------------ | :------------- | | Private Preferred Stock | $117,214,465 | | Private Common Stock | $18,692,931 | | Debt Investments | $4,488,200 | | Options | $3,469,497 | | Total Level 3 | $143,865,093 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure to report for the period Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes during the fiscal year - As of December 31, 2022, management, including the CEO and CFO, concluded that disclosure controls and procedures were effective, providing reasonable assurance for timely and accurate SEC filings[680] - Management assessed and determined that internal control over financial reporting was effective as of December 31, 2022, based on the COSO Internal Control—Integrated Framework (2013)[681][683] - No material changes in internal control over financial reporting occurred during the fiscal year ended December 31, 2022[685] Other Information On March 10, 2023, the company agreed to terminate its custody agreements with U.S. Bank entities, transitioning to new custodians without expected material adverse impact or termination fees - On March 10, 2023, the company agreed to terminate its Custody Agreement and Document Custody Agreement with U.S. Bank Trust Company, National Association and U.S. Bank National Association, effective May 9, 2023[686] - The company is transitioning to new custodians and does not anticipate a material adverse impact on its operations or financial condition from the termination[687] - No termination or other fees are payable in connection with the termination of the Custody Agreements[688] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance will be provided in the 2023 Proxy Statement, with the company having adopted a Code of Business Conduct and Ethics - Information for this item will be included in the 2023 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2022[693] - The company has adopted a Code of Business Conduct and Ethics for its employees and directors, including executive officers, available on its website[694] Executive Compensation Executive compensation details will be provided in the 2023 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2022 - Information for this item will be included in the 2023 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2022[695] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management, along with related stockholder matters, will be disclosed in the 2023 Proxy Statement - Information for this item will be included in the 2023 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2022[696] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be provided in the 2023 Proxy Statement - Information for this item will be included in the 2023 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2022[697] Principal Accountant Fees and Services Information concerning principal accountant fees and services will be disclosed in the 2023 Proxy Statement - Information for this item will be included in the 2023 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2022[698] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and exhibits filed or incorporated by reference, including the independent auditor's report, consolidated financial statements, and various corporate and governance documents - Financial statements are incorporated by reference from Part II, Item 8 of this Form 10-K[700] - No financial statement schedules are required or applicable, as all necessary information is presented in the financial statements or notes[702] - Exhibits include Articles of Amendment, Bylaws, Indentures for the 6.00% Notes due 2026, Dividend Reinvestment Plan, Equity Incentive Plan, Custody Agreements, Employment Agreements, At-the-Market Sales Agreement, Codes of Ethics and Business Conduct, List of Subsidiaries, Consent of Marcum LLP, and CEO/CFO certifications[702][703] Form 10-K Summary This item is not applicable to the company