Equus Total Return(EQS) - 2023 Q4 - Annual Report

Investment Strategy and Goals - Equus Total Return, Inc. aims to maximize total return for shareholders through current investment income and long-term capital gains by investing in debt and equity securities of companies with total enterprise values between $5.0 million and$ 75.0 million [14]. - The investment strategy focuses on cash-producing investments, primarily in debt or preferred equity financing, to generate regular income [21]. - The company seeks to invest in companies with experienced management teams and significant management ownership to align interests and maximize shareholder value [24]. - Equus targets companies with a history of profitability or a reasonable expectation of returning to profitability in the near future [26]. - The company conducts thorough due diligence on potential investments, including financial reviews and management interviews [30]. Market Conditions and Economic Impact - In Q3 2023, oil prices increased from $70.64 to$ 90.79 per barrel, while gas prices rose from $2.48 to$ 2.68 before ending the quarter at $2.58 [17]. - The company faces risks related to economic conditions, including the ongoing impact of the coronavirus, which may negatively affect financial resources [61]. - An economic downturn could adversely affect small and medium-sized companies, which are the primary market for the company's investments [93]. - The operational results of portfolio investments in oil and gas are subject to commodity price fluctuations, which can significantly impact financial performance [71]. Financial Performance and Valuation - The company reported a net investment loss of$ 4.0 million for the year ended December 31, 2023 [90]. - The net increase in net assets resulting from operations for 2023 was $12.9 million, compared to a net decrease of$ 1.1 million in 2022 [222]. - The net asset value per share rose to $3.55 in 2023, up from$ 2.61 in 2022, reflecting a growth of 36.0% [219]. - The fair value of total investments as of December 31, 2023, was $85,808,000, with control investments representing 47.6% of total investments [234]. - The fair value of control investments increased from$ 15,650,000 at the beginning of 2023 to $40,853,000 by year-end, reflecting a change in unrealized appreciation of$ 16,950,000 and purchases of $8,253,000 [278]. Regulatory Compliance and Taxation - Equus intends to maintain its status as a Business Development Company (BDC) and a Regulated Investment Company (RIC) to avoid corporate-level income tax on investment income [15]. - The company must maintain at least 70% of its total assets in qualifying assets as defined by the 1940 Act to retain its BDC status [46]. - The company incurs a 4.0% nondeductible Federal excise tax if it does not distribute at least 98.2% of its net income consisting of capital gains within a year [55]. - The company must derive at least 90% of its gross income from specific sources to maintain its status as a RIC under the Code [101]. - Failure to maintain RIC status could result in income tax liabilities and a loss of tax benefits for stockholders [103]. Investment Risks and Challenges - The company competes with numerous public and private equity funds, facing significant competition from larger firms with greater resources [43]. - The lack of liquidity in privately held securities may hinder the company's ability to liquidate investments when needed [76]. - The company may not realize gains from equity investments, as market values may fall below estimated fair values before sales occur [69]. - The company may not be able to raise additional capital on favorable terms due to regulatory constraints and market conditions [107]. - The company has historically faced challenges in borrowing against a portfolio of illiquid, private securities, impacting its ability to secure financing [88]. Corporate Governance and Management - Management believes current market conditions necessitate a more active role in managing investments and seeking liquidity events to enhance shareholder value [19]. - The Board reviews valuation policies quarterly and may engage independent valuation firms for assessments of privately-held investments [42]. - The Audit Committee reviews preliminary valuations and recommends fair values to the Board for final approval, ensuring a thorough oversight process [4]. Cash Flow and Capital Management - The company had a net cash provided by financing activities of$ 39,058,000 in 2023, compared to $3,498,000 in 2022 [227]. - The total cash and cash equivalents at the end of the period decreased to$ 6,983,000 from $19,284,000 in 2022, representing a decline of 63.7% [227]. - The company had$ 44.9 million in borrowing under margin accounts as of December 31, 2023, compared to $6.0 million in 2022 [219]. Sector Focus and Asset Allocation - As of December 31, 2023, the "Energy" segment accounted for 84.6% of the company's net asset value and 43.7% of total assets [203]. - The company’s investments in the energy sector accounted for 84.6% of total assets as of December 31, 2023 [240]. - The company invested 37.6% of its assets in qualifying investments under the Investment Company Act of 1940 as of December 31, 2022 [247]. Valuation Methodology - The fair value hierarchy categorizes investments into three levels, with Level 1 having the highest priority based on quoted prices in active markets, while Level 3 includes unobservable inputs requiring significant management judgment [268][270]. - The company employs a discounted cash flow method for Level 3 investments, considering factors such as market transactions, growth rates, and capitalization rates [272]. - The fair value of equity securities in portfolio companies may also be assessed using a market approach, applying valuation multiples from publicly-traded comparable firms [274].