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EQUUS TOTAL RETURN, INC.

EQUUS TOTAL RETURN, INC.EQSEarnings & Financial Report

NYSE

What changed in EQUUS TOTAL RETURN, INC.'s 10-K — 2022 vs 2023

Top changes in EQUUS TOTAL RETURN, INC.'s 2023 10-K

159 paragraphs added · 177 removed · 123 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

34 edited+7 added−6 removed72 unchanged
As such, we believe the fair value will not exceed the cost of the investment; however, we may perform a yield analysis to determine if a debt security has been impaired. Our Management may engage independent, third-party valuation firms to conduct independent appraisals and review Management’s preliminary valuations of each privately-held investment in order to make their own independent assessment.
As such, we believe the fair value will not exceed the cost of the investment; however, we perform a yield analysis to determine if a debt security has been impaired. Our Management may engage independent, third-party valuation firms to conduct independent appraisals and review Management’s preliminary valuations of each privately-held investment in order to make their own independent assessment.
Structuring Investments. We typically negotiate investments in private transactions directly with the owner or issuer of the securities acquired. Management structures the terms of a proposed investment, including the purchase price, the type of security to be purchased and our future involvement in the portfolio company’s business.
We typically negotiate investments in private transactions directly with the owner or issuer of the securities acquired. Management structures the terms of a proposed investment, including the purchase price, the type of security to be purchased and our future involvement in the portfolio company’s business.
We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 13 Table of Contents
We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 11 Table of Contents
Subject to the approval of our Board, we may compensate certain referrals with finder’s fees to the extent permissible under applicable law and consistent with industry practice. 6 Table of Contents Due Diligence. Once a potential investment is identified, we undertake a due diligence review using information provided by the prospective portfolio company and publicly available information.
Subject to the approval of our Board, we may compensate certain referrals with finder’s fees to the extent permissible under applicable law and consistent with industry practice. Due Diligence. Once a potential investment is identified, we undertake a due diligence review using information provided by the prospective portfolio company and publicly available information.
As a BDC, we may not acquire any asset other than qualifying assets, as defined by the 1940 Act, unless, at the time the acquisition is made, the value of our qualifying assets represent at least 70% of the value of our total assets.
As a BDC, we may not acquire any asset other than qualifying assets, as defined by the 1940 Act, unless, at the time the acquisition is made, the value of our qualifying assets represents at least 70% of the value of our total assets.
In addition, because of this competition, we may not be able to take advantage of attractive investment opportunities and may not be able to identify and make investments that satisfy our investment objectives or meet our investment goals. Properties Our principal executive offices are located at 700 Louisiana St., 48 th Floor, Houston, Texas 77002.
In addition, because of this competition, we may not be able to take advantage of attractive investment opportunities and may not be able to identify and make investments that satisfy our investment objectives or meet our investment goals. 8 Table of Contents Properties Our principal executive offices are located at 700 Louisiana St., 48 th Floor, Houston, Texas 77002.
For the year ended December 31, 2021, we incurred a capital gain related to the settlement of the escrow receivable in connection with the sale of our interest in PalletOne, Inc. that was not fully offset by our capital loss carryforward. We chose not to distribute this small amount for the current year and pay the RIC and excise tax.
For the year ended December 31, 2021, we incurred a capital gain related to the settlement of the escrow receivable in connection with the sale of our interest in PalletOne, Inc. that was not fully offset by our capital loss carryforward. We chose not to distribute this small amount for the current year and pay the associated tax.
As such, we are not required to pay corporate-level income tax on the Fund’s investment income. So long as we remain a BDC, we intend to maintain our RIC status, which requires that we qualify annually as a RIC by meeting certain specified requirements.
As such, we are not required to pay corporate-level income tax on the Fund’s investment income. So long as we remain a BDC, we intend, insofar as reasonably possible, to maintain our RIC status, which requires that we qualify annually as a RIC by meeting certain specified requirements.
In addition, should we choose not to distribute at least 98.2% of our capital gain net income for each one-year period ending on October 31, we will be subject to a 4.0% nondeductible Federal exercise tax.
In addition, should we choose not to distribute at least 98.2% of our net income consisting of capital gains for each one-year period ending on October 31, we will be subject to a 4.0% nondeductible Federal exercise tax.
In addition, provisions must be made to prohibit any distribution to common stockholders or the repurchase of any shares unless the asset coverage ratio is at least 150% at the time of the distribution or repurchase. Fund Share Sales Below Net Asset Value .
In addition, provisions must be made to prohibit any distribution to common stockholders or the repurchase of any shares unless the asset coverage ratio is at least 150% at the time of the distribution or repurchase. 9 Table of Contents Fund Share Sales Below Net Asset Value .
Accordingly, from time to time we may, but are not required to, repurchase our shares (including by means of tender offers) to attempt to reduce or eliminate any discount or to increase the net asset value of our shares. 11 Table of Contents Affiliated Transactions .
Accordingly, from time to time we may, but are not required to, repurchase our shares (including by means of tender offers) to attempt to reduce or eliminate any discount or to increase the net asset value of our shares. Affiliated Transactions .
The due diligence review will typically include, but is not limited to: • Review of historical and prospective financial information, including audits and budgets; • On-site visits; • Interviews with management, employees, customers and vendors; • Review of existing loan documents and credit arrangements, if any; • Background checks on members of management; and • Research relating to the company, its management, industry, markets, products and services and competitors.
The due diligence review will typically include, but is not limited to: • Review of historical and prospective financial information, including audits and budgets; • On-site visits; • Interviews with management, employees, customers and vendors; • Review of existing loan documents and credit arrangements, if any; • Background checks on members of management; and • Research relating to the company, its management, industry, markets, products and services and competitors. 6 Table of Contents Structuring Investments.
Notwithstanding the present authorization to withdraw our BDC election, we will require a separate affirmative vote of the holders of a majority of our outstanding voting securities to consummate a transformation of Equus and change the nature of our business (see “ Significant Developments−Authorization to Withdraw BDC Election” above). Temporary Investments.
Notwithstanding any future authorization to withdraw our BDC election, we will also require a separate affirmative vote of the holders of a majority of our outstanding voting securities to consummate a transformation of Equus and change the nature of our business (see “ Significant Developments−Authorization to Withdraw BDC Election” above). Temporary Investments.
The principal business office of our transfer agent is 6201 15th Avenue, 2nd Floor, Brooklyn, NY 11219. Certifications In July 2022, pursuant to Section 303A.12(a) of the NYSE Listed Company Manual, we submitted to the NYSE an unqualified certification of our Chief Executive Officer.
The principal business office of our transfer agent is 6201 15th Avenue, 2nd Floor, Brooklyn, NY 11219. Certifications In June 2023, pursuant to Section 303A.12(a) of the NYSE Listed Company Manual, we submitted to the NYSE an unqualified certification of our Chief Executive Officer.
While we are presently evaluating various opportunities that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period or at all. Moreover, we cannot assure you that the terms of any such transformative transaction would be acceptable to us. Increase in Authorized Shares .
While we are presently evaluating various opportunities that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period or at all. Moreover, we cannot assure you that the terms of any such transformative transaction would be acceptable to us. Outlook .
This authorization and others which preceded it were provided as a consequence of our plan to effect a transformation of Equus by: (i) acquiring or merging with an operating company based in the energy, natural resources, technology, or financial services sectors, and (ii) terminating the Fund’s election to be classified as a BDC under the 1940 Act.
This authorization was a consequence of our plan to effect a transformation of Equus by: (i) acquiring or merging with an operating company based in the energy, natural resources, technology, or financial services sectors, and (ii) terminating the Fund’s election to be classified as a BDC under the 1940 Act.
On November 1, 2022, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective as of a date designated by the Board and our Chief Executive Officer.
Holders of a majority of our outstanding common stock have previously approved our cessation as a BDC under the 1940 Act and have authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective as of a date designated by the Board and our Chief Executive Officer.
If we are unable to make follow-on investments due to lack of available capital, the portfolio company in need of the investment may be negatively impacted, we may be required to subordinate our debt interest in the portfolio company to a new lender, and/or our equity interest in the portfolio company may be diluted if outside equity capital is required. 7 Table of Contents Disposition of Investments The method and timing of the disposition of our investments in portfolio companies are critical to our ability to realize capital gains and minimize capital losses.
If we are unable to make follow-on investments due to lack of available capital, the portfolio company in need of the investment may be negatively impacted, we may be required to subordinate our debt interest in the portfolio company to a new lender, and/or our equity interest in the portfolio company may be diluted if outside equity capital is required.
The principal business office of Amegy Bank is 1717 West Loop South, Houston, Texas 77027. 12 Table of Contents Transfer and Disbursing Agent We employ Equiniti Group as our transfer agent to record transfers of our shares, maintain proxy records and to process distributions.
We have also entered into an agreement with Amegy Bank with respect to the safekeeping of our securities. The principal business office of Amegy Bank is 1717 West Loop South, Houston, Texas 77027. Transfer and Disbursing Agent We employ Equiniti Group as our transfer agent to record transfers of our shares, maintain proxy records and to process distributions.
There are a range of values that are reasonable for such investments at any particular time. 8 Table of Contents We base our adjustments to fair value upon such factors as the portfolio company’s earnings, cash flow and net worth, the market prices for similar securities of comparable companies, an assessment of the company’s current and future financial prospects and various other factors and assumptions.
We base our adjustments to fair value upon such factors as the portfolio company’s earnings, cash flow and net worth, the market prices for similar securities of comparable companies, an assessment of the company’s current and future financial prospects and various other factors and assumptions.
Qualifying assets may also include follow-on investments in a company that was a particular type of eligible portfolio company at the time of the BDC’s initial investment, but subsequently did not meet the definition; · Securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and · Cash, cash items, government securities, or high quality debt securities maturing in one year or less from the time of investment. 10 Table of Contents To include certain securities above as qualifying assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance, such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company.
Qualifying assets may also include follow-on investments in a company that was a particular type of eligible portfolio company at the time of the BDC’s initial investment, but subsequently did not meet the definition; · Securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and · Cash, cash items, government securities, or high quality debt securities maturing in one year or less from the time of investment.
Although this authorization expired on February 28, 2023, we expect to receive an additional authorization from our stockholders in the future. This authorization and others which preceded it are a consequence of our expressed intent to transform Equus into an operating company or a permanent capital vehicle.
Although this authorization has since expired, we expect to receive an additional authorization from our stockholders in the future. This authorization is a consequence of our expressed intent to transform Equus into an operating company or a permanent capital vehicle.
On November 1, 2022, we received this authorization from our shareholders to withdraw our BDC election and, although this authorization expired on February 28, 2023, we expect to receive an additional authorization by our stockholders in the future.
As noted above, we have previously received this authorization from our shareholders to withdraw our BDC election and, although this authorization has expired, we expect to receive an additional authorization by our stockholders in the future.
In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their respective market shares. In addition, many of our competitors are not subject to the regulatory restrictions imposed by the 1940 Act imposes on BDCs.
Our competitors may have a lower cost of funds and many have access to funding sources not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their respective market shares.
As such, as of December 31, 2021, we have accrued a $38,000 in corporate level income and excise tax in lieu of making a distribution of the net capital gain.
For the year ended December 31, 2021, we accrued a $38,000 in corporate level income and excise tax in lieu of effecting a distribution of the net capital gain. This tax was paid in March 2022.
To the extent not paid by the portfolio company, the Fund typically bears the costs of disposing of our portfolio investments. Current Portfolio Companies For a description of our current portfolio company investments, see “ Management’s Discussion and Analysis of Financial Condition and Results of Operations–Portfolio Securities .” Valuation On a quarterly basis, Management values our portfolio investments.
Current Portfolio Companies For a description of our current portfolio company investments, see “ Management’s Discussion and Analysis of Financial Condition and Results of Operations–Portfolio Securities .” 7 Table of Contents Valuation On a quarterly basis, Management values our portfolio investments. These valuations are subject to the approval and adoption of the Board.
We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
In addition, many of our competitors are not subject to the regulatory restrictions imposed by the 1940 Act imposes on BDCs. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
The substantial volatility in world markets has been prominent in the oil and gas sector, with crude prices falling to 18-year lows in mid-March 2020 as a result of the coronavirus pandemic, only to increase to multi-year highs in the first half of 2022, largely as a result of high industrial and consumer demand, a reluctance of U.S. producers and OPEC nations to generate additional supply, and the conflict in Ukraine.
The substantial volatility in world markets has been prominent in the oil and gas sector, with WTI oil prices reaching a multi-year high of $130.00 per barrel in March 2022, and gas prices also reaching a multi-year high in mid-year, both due in part to increased demand, the reluctance of U.S. producers and OPEC nations to generate additional supply, and the conflict in Ukraine.
In addition, in that case, all of our distributions to our stockholders will be characterized as ordinary income (to the extent of our current and accumulated earnings and profits). We have distributed and currently intend to distribute sufficient dividends to eliminate our investment company taxable income; however, none have been necessary in recent years.
In addition, in that case, all of our distributions to our stockholders will be characterized as ordinary income (to the extent of our current and accumulated earnings and profits).
The fair value of investments for which no market exists (which includes most of our investments) is determined through procedures established in good faith by the Board. As a general principle, the current “fair value” of an investment is the amount the Fund might reasonably expect to receive upon its sale in an orderly manner.
As a general principle, the current “fair value” of an investment is the amount the Fund might reasonably expect to receive upon its sale in an orderly manner. There are a range of values that are reasonable for such investments at any particular time.
Our Board reviews the valuation policies on a quarterly basis to determine their appropriateness and reserves the right to hire and, from time to time, utilizes independent valuation firms to review Management’s valuation methodology or to conduct an independent valuation. 9 Table of Contents Competition We compete with a large number of public and private equity and mezzanine funds and other financing sources, including traditional financial services companies such as finance companies and commercial banks.
Our Board reviews the valuation policies on a quarterly basis to determine their appropriateness and reserves the right to hire and, from time to time, utilizes independent valuation firms to review Management’s valuation methodology or to conduct an independent valuation.
These valuations are subject to the approval and adoption of the Board. Valuations of our portfolio securities at “fair value” are performed in accordance with accounting principles generally accepted in the United States (“GAAP”).
Valuations of our portfolio securities at “fair value” are performed in accordance with accounting principles generally accepted in the United States (“GAAP”). The fair value of investments for which no market exists (which includes most of our investments) is determined through procedures established in good faith by the Board.
Custodian We act as the custodian of our securities to the extent permitted under the 1940 Act and are subject to the restrictions imposed on self- custodians by the 1940 Act and the rules and regulations thereunder. We have also entered into an agreement with Amegy Bank with respect to the safekeeping of our securities.
We have distributed and currently intend to distribute sufficient dividends to eliminate our investment company taxable income; however, none have been necessary in recent years. 10 Table of Contents Custodian We act as the custodian of our securities to the extent permitted under the 1940 Act and are subject to the restrictions imposed on self- custodians by the 1940 Act and the rules and regulations thereunder.
Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources. Our competitors may have a lower cost of funds and many have access to funding sources not available to us.
Competition We compete with a large number of public and private equity and mezzanine funds and other financing sources, including traditional financial services companies such as finance companies and commercial banks. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources.
Removed
Recessionary headwinds, among other macroeconomic factors, led to a decrease in oil prices from their 2022 peak, and have traded within a much narrower range than in previous years (approximately $72.00 to $82.00 per barrel) since the beginning of 2023.
Added
Beginning in the second and third quarters of 2022, oil prices retreated substantially before stabilizing in the second quarter of 2023, increasing again in the third quarter of 2023, and largely returning to second quarter 2023 prices by year-end.
Removed
Meanwhile, gas prices have experienced even greater volatility recently, with gas prices increasing to $9.85 per MMBTU in August 2022, decreasing markedly to $3.52 per MMBTU as of December 31, 2022, and decreasing further during the first quarter of 2023.
Added
During the third quarter of 2023, oil prices increased from $70.64 to $90.79, and thereafter decreased to $71.65 by the end of the fourth quarter of 2023. Gas prices were volatile in the first half of 2023 before stabilizing in the second half of the year.
Removed
These pricing changes have had a significant effect on forward pricing curves and the corresponding outlook and prospects for remaining small oil and gas firms such as Equus Energy that hold development rights in low-cost production reservoirs such as those underlying the Permian Basin and the Eagle Ford Shale regions. 4 Table of Contents Authorization to Withdraw BDC Election .
Added
During the third quarter of 2023, gas prices increased from $2.48 to $2.68 before decreasing to $2.58 by the end of the fourth quarter of 2023.
Removed
On January 20, 2021, holders of a majority of the outstanding common stock of the Fund approved the restatement of our Certificate of Incorporation to increase the number of our authorized shares of common stock from 50,000,000 to 100,000,000, and the number of our authorized shares of preferred stock from 5,000,000 to 10,000,000.
Added
Recent oil price stability has been a significant factor in increased consolidation activity in the Permian Basin where Equus Energy holds most of its development rights, as well as in the Williston Basin region in North Dakota where Morgan E&P, LLC holds its development rights. 4 Table of Contents Authorization to Withdraw BDC Election .
Removed
The increase is intended to help facilitate the transformation of Equus into an operating company and provide sufficient authorized shares to evaluate larger business concerns as possible acquisition or merger candidates. Outlook .
Added
Disposition of Investments The method and timing of the disposition of our investments in portfolio companies are critical to our ability to realize capital gains and minimize capital losses.
Removed
During the year ended December 31, 2021, according and pursuant to ASC 946-20-50, we recharacterized as a return of capital in excess of par certain accumulated undistributed net capital gains of $18.5 million for which we had loss carryforwards.
Added
To the extent not paid by the portfolio company, the Fund typically bears the costs of disposing of our portfolio investments.
Added
To include certain securities above as qualifying assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance, such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Investments in these types of companies involve a number of significant risks, including the following: · They typically have shorter operating histories, narrower product lines and smaller market shares than public companies, which tend to render them more vulnerable to competitors’ actions and market conditions as well as general economic downturns; · They may have no earnings or experienced losses or may have limited financial resources and may be unable to meet their obligations under their securities, which may be accompanied by a deterioration in the value of their equity securities or any collateral or guarantees provided with respect to their debt; · They are more likely to depend on the management talents and efforts of a small group of persons and, as a result, the death, disability, resignation or termination of one or more of those persons could have a material adverse effect on their business and prospects and, in turn, on our investment; · They may have difficulty accessing the capital markets to meet future capital needs; · They generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and · Generally little public information exists regarding these companies, and investors in these companies generally must rely on the ability of the equity sponsor to obtain adequate information for the purposes of evaluating potential returns and making a fully informed investment decision. 14 Table of Contents There is uncertainty regarding the value of our privately held securities.
Investments in these types of companies involve a number of significant risks, including the following: · They typically have shorter operating histories, narrower product lines and smaller market shares than public companies, which tend to render them more vulnerable to competitors’ actions and market conditions as well as general economic downturns; · They may have no earnings or experienced losses or may have limited financial resources and may be unable to meet their obligations under their securities, which may be accompanied by a deterioration in the value of their equity securities or any collateral or guarantees provided with respect to their debt; · They are more likely to depend on the management talents and efforts of a small group of persons and, as a result, the death, disability, resignation or termination of one or more of those persons could have a material adverse effect on their business and prospects and, in turn, on our investment; · They may have difficulty accessing the capital markets to meet future capital needs; · They generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and · Generally little public information exists regarding these companies, and investors in these companies generally must rely on the ability of the equity sponsor to obtain adequate information for the purposes of evaluating potential returns and making a fully informed investment decision. 12 Table of Contents There is uncertainty regarding the value of our privately held securities.
In the event Equus defaults under any of these borrowing arrangements, our business could be adversely affected as we may be forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations, the result of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. 21 Table of Contents The use of leverage will increase our exposure to changes in market rates of interest.
In the event Equus defaults under any of these borrowing arrangements, our business could be adversely affected as we may be forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations, the result of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. 18 Table of Contents The use of leverage will increase our exposure to changes in market rates of interest.
The operational results and financial condition of Equus Energy, as well as the economic attractiveness of future capital expenditures for new drilling and recompletions, may be materially adversely affected as a result of lower oil and gas prices.
The operational results and financial condition of Morgan and Equus Energy, as well as the economic attractiveness of future capital expenditures for new drilling and recompletions, may be materially adversely affected as a result of lower oil and gas prices.
A consequence of a limited number of investments is that changes in business or industry trends or in the financial condition, results of operations or the market’s assessment of any single portfolio company will affect our net asset value and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding a greater number of investments. 16 Table of Contents The lack of liquidity of our privately held securities may adversely affect our business.
A consequence of a limited number of investments is that changes in business or industry trends or in the financial condition, results of operations or the market’s assessment of any single portfolio company will affect our net asset value and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding a greater number of investments. 14 Table of Contents The lack of liquidity of our privately held securities may adversely affect our business.
As described above under “ Significant Developments – Authorization to Withdraw BDC Election ”, our shareholders have recently provided this authorization and may do so again in the future, although we will not withdraw our election as a BDC unless and until we have entered into a definitive agreement to effect the transformation of Equus into an operating company.
As described above under “ Significant Developments – Authorization to Withdraw BDC Election ”, our shareholders have previously provided this authorization and may do so again in the future, although we will not withdraw our election as a BDC unless and until we have entered into a definitive agreement to effect the transformation of Equus into an operating company.
We would be able to change the nature of our business and fundamental investment policies without having to obtain the approval of our stockholders. · Director and Officer Incentives . We would no longer require exemptive relief from the SEC before implementing incentive compensation plans for our key executives and non-executive directors. 28 Table of Contents
We would be able to change the nature of our business and fundamental investment policies without having to obtain the approval of our stockholders. · Director and Officer Incentives . We would no longer require exemptive relief from the SEC before implementing incentive compensation plans for our key executives and non-executive directors. 23 Table of Contents
The process is ongoing and, although we believe we will consummate a transaction that would result in the transformation of Equus into an operating company during 2023, we may be wrong. Our Board of Directors has not set a timetable for completion of the evaluation of a potential transaction.
The process is ongoing and, although we believe we will consummate a transaction that would result in the transformation of Equus into an operating company during 2024, we may be wrong. Our Board of Directors has not set a timetable for completion of the evaluation of a potential transaction.
Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. 24 Table of Contents Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. Our business requires a substantial amount of additional capital.
Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. 20 Table of Contents Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. Our business requires a substantial amount of additional capital.
If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous. Senior Securities .
If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous.
We would no longer be required to provide and maintain an investment company blanket bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. 27 Table of Contents · Director Independence .
We would no longer be required to provide and maintain an investment company blanket bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. 22 Table of Contents · Director Independence .
This could negatively impact our ability to pay dividends, could adversely affect our results of operation and financial condition and cause the loss of all or part of your investment. We expect to have limited public information regarding the companies in which we may invest. Our portfolio consists entirely of securities issued by privately-held companies.
This could negatively impact our ability to pay dividends, could adversely affect our results of operation and financial condition and cause the loss of all or part of your investment. 15 Table of Contents We expect to have limited public information regarding the companies in which we may invest. Our portfolio consists entirely of securities issued by privately-held companies.
Any of these events could have a material adverse effect on our business, financial condition and results of operations. 20 Table of Contents We may experience fluctuations in our quarterly results.
Any of these events could have a material adverse effect on our business, financial condition and results of operations. 17 Table of Contents We may experience fluctuations in our quarterly results.
If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline. 23 Table of Contents Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline. Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.
Our Board is taking a more opportunistic approach to our portfolio investment strategy, shifting our investment emphasis from manufacturing and services to other sectors, such as energy. In order to implement our investment strategy, Management must analyze, conduct due diligence, invest in, monitor and sell investment interests in industries in which many of them have not previously been involved.
Our Board is taking a more opportunistic approach to our portfolio investment strategy, shifting our investment emphasis to sectors such as energy. In order to implement our investment strategy, Management must analyze, conduct due diligence, invest in, monitor and sell investment interests in industries in which many of them have not previously been involved.
Given these factors, there is a risk that we will not realize gains upon the sale of those or other investment interests that we hold. 15 Table of Contents Our holdings in Equus Energy are subject to commodity price declines endemic to oil and gas companies. The oil and gas business is fundamentally a commodity-based enterprise.
Given these factors, there is a risk that we will not realize gains upon the sale of those or other investment interests that we hold. 13 Table of Contents Our holdings in Morgan E&P and Equus Energy are subject to commodity price declines endemic to oil and gas companies. The oil and gas business is fundamentally a commodity-based enterprise.
We have elected to be classified as a BDC under the 1940 Act. However, if we effect a reorganization of the Fund into an operating company or a permanent capital vehicle, we will seek to terminate our BDC classification.
If we reorganize as an operating company or a permanent capital vehicle, we will not continue to operate as a BDC. We have elected to be classified as a BDC under the 1940 Act. However, if we effect a reorganization of the Fund into an operating company or a permanent capital vehicle, we will seek to terminate our BDC classification.
As noted above, we may reorganize Equus as an operating company or a permanent capital vehicle. If we reorganize as an operating company or a permanent capital vehicle, we may lose our ability to offset future income against our cumulative capital losses.
If we reorganize as an operating company or a permanent capital vehicle, we may lose our ability to offset future income against our cumulative capital losses.
For Equus Energy and other investments we may make in the future, the market value of our equity investments may fall below our estimate of the fair value of such investments before we sell them.
For our present portfolio and other investments we may make in the future, the market value of our equity investments may fall below our estimate of the fair value of such investments before we sell them.
On November 1, 2022, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC.
Holders of a majority of the outstanding common stock of the Fund have previously approved our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC.
Leverage may impair the ability of our portfolio companies to finance their future operations and capital needs. As a result, the ability of our portfolio companies to respond to changing business and economic conditions and to business opportunities may be limited. 18 Table of Contents Our business depends on external financing.
Leverage may impair the ability of our portfolio companies to finance their future operations and capital needs. As a result, the ability of our portfolio companies to respond to changing business and economic conditions and to business opportunities may be limited. Our business depends on external financing. Our business requires a substantial amount of cash to operate.
Nevertheless, if we were to terminate our election to be classified as a BDC and were still determined by the SEC to constitute an “investment company,” we would be subject to significantly greater regulatory requirements and constraints than under those which we presently operate, the result of which could have a material adverse effect on our results and financial condition. 26 Table of Contents If we reorganize as an operating company or a permanent capital vehicle, we may not be able to utilize our capital losses.
Nevertheless, if we were to terminate our election to be classified as a BDC and were still determined by the SEC to constitute an “investment company,” we would be subject to significantly greater regulatory requirements and constraints than under those which we presently operate, the result of which could have a material adverse effect on our results and financial condition.
Although this authorization expired on February 28, 2023, we expect to receive a further such authorization from our stockholders in the future.
Although this authorization has expired, we expect to receive a further such authorization from our stockholders in the future.
If the asset coverage for debt securities issued by the Fund declines to less than 150% (as a result of market fluctuations or otherwise), we may be required to sell a portion of our investments when it is disadvantageous to do so.
If the asset coverage for debt securities issued by the Fund declines to less than 150% (as a result of market fluctuations or otherwise), we may be required to sell a portion of our investments when it is disadvantageous to do so. See Management’s Discussion and Analysis of Financial Condition and Results of Operations .
If we are wrong, we would have to obtain capital from other sources to pay Fund expenses, which could involve selling our portfolio holdings at an inopportune time and at a price that may be less than would be received if such holding were sold in a more competitive and orderly manner.
If we are wrong, we would have to obtain capital from other sources to pay Fund expenses, which could involve selling our portfolio holdings at an inopportune time and at a price that may be less than would be received if such holding were sold in a more competitive and orderly manner. 16 Table of Contents The costs of borrowing money may exceed the income from the portfolio securities we purchase with the borrowed money.
As noted above, on November 1, 2022, our stockholders authorized our Board and Chief Executive Officer to withdraw our election to be classified as a BDC and, although this authorization expired on February 28, 2023, we expect to receive a further authorization from our stockholders in the future.
As noted above, our stockholders have previously authorized our Board and Chief Executive Officer to withdraw our election to be classified as a BDC and, although this authorization has expired, we expect to receive a further authorization from our stockholders in the future.
A principal category of qualifying assets relevant to our business is securities purchased in transactions not involving any public offering from issuers that qualify as eligible portfolio companies under the 1940 Act.
A principal category of qualifying assets relevant to our business is securities purchased in transactions not involving any public offering from issuers that qualify as eligible portfolio companies under the 1940 Act. Investments in companies organized outside of the United States or having a principal place of business outside of the United States are also not considered eligible portfolio companies.
A decline in net asset value could affect our ability to make distributions on our common stock. Our failure to distribute a sufficient portion of our net investment income and net realized capital gains could result in a loss of pass-through tax status or subject us to a 4% excise tax.
Our failure to distribute a sufficient portion of our net investment income and net realized capital gains could result in a loss of pass-through tax status or subject us to a 4% excise tax.
If we fail to qualify as a RIC, we will be subject to corporate income tax, which would substantially reduce the amount of income we might otherwise distribute to our shareholders. If we reorganize as an operating company or a permanent capital vehicle, we will not continue to operate as a BDC.
If we were to reorganize as an operating company, we would lose our status as a RIC. If we fail to qualify as a RIC, we will be subject to corporate income tax, which would substantially reduce the amount of income we might otherwise distribute to our shareholders.
You could lose all or a substantial amount of your investment in the Fund as a result. We do not currently intend to recommence our managed distribution policy and you might not receive dividends on your shares. On March 24, 2009, we announced a suspension of our managed distribution policy and payment of quarterly dividends for an indefinite period.
We do not currently intend to recommence our managed distribution policy and you might not receive dividends on your shares. On March 24, 2009, we announced a suspension of our managed distribution policy and payment of quarterly dividends for an indefinite period.
As noted elsewhere herein, on November 1, 2022 we received authorization from our stockholders to withdraw our election to be classified as a BDC. Although this authorization expired on February 28, 2023, we expect to receive an additional authorization from our stockholders in the future.
As noted elsewhere herein, we have previously received an authorization from our stockholders to withdraw our election to be classified as a BDC. Although this authorization has since expired, we expect to receive an additional authorization from our stockholders in the future.
We cannot assure you that we will be able to increase our net assets or generate net investment income. If we fail to increase the Fund’s net assets or generate net investment income, such failure will likely have a material adverse effect upon the Fund, our results of operation, and our financial condition.
If we fail to increase the Fund’s net assets or generate net investment income, such failure will likely have a material adverse effect upon the Fund, our results of operation, and our financial condition. You could lose all or a substantial amount of your investment in the Fund as a result.
We do not currently intend to disclose further developments with respect to this process, unless and until our Board of Directors approves a specific transaction or otherwise concludes the review of strategic alternatives. If we are unable to effectively manage the strategic review process, our business, financial condition, liquidity and results of operations could be adversely affected.
We do not currently intend to disclose further developments with respect to this process, unless and until our Board of Directors approves a specific transaction or otherwise concludes the review of strategic alternatives.
Should a portfolio company make business decisions with which we disagree, of the stockholders and management of that company take risks or otherwise act in ways that do not serve our interests, the value of our portfolio holdings could decrease and have an adverse effect on our financial position and results of operations. 17 Table of Contents We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies.
Should a portfolio company make business decisions with which we disagree, of the stockholders and management of that company take risks or otherwise act in ways that do not serve our interests, the value of our portfolio holdings could decrease and have an adverse effect on our financial position and results of operations.
The costs of borrowing money may exceed the income from the portfolio securities we purchase with the borrowed money. We will suffer a decline in net asset value if the investment performance of the additional securities purchased with borrowed money fails to cover their cost to the Fund (including any interest paid on the money borrowed).
We will suffer a decline in net asset value if the investment performance of the additional securities purchased with borrowed money fails to cover their cost to the Fund (including any interest paid on the money borrowed). A decline in net asset value could affect our ability to make distributions on our common stock.
As a matter of policy, we generally have not initially invested more than 25% of the value of our net assets in a single portfolio company.
As a matter of policy, we generally have not initially invested more than 25% of the value of our net assets in a single portfolio company. However, we would expect that any new investments may exceed this percentage for the immediate future.
In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition. 25 Table of Contents Risks Related to Our Plan to Transform Equus Into an Operating Company In our efforts to pursue the transformation of Equus into an operating company, we are exploring and evaluating strategic alternatives for the Fund and we cannot assure you that we will be successful in identifying a strategic alternative, that such strategic alternative will yield additional value for our stockholders or that the process will not have an adverse impact on our business.
Risks Related to Our Plan to Transform Equus Into an Operating Company In our efforts to pursue the transformation of Equus into an operating company, we are exploring and evaluating strategic alternatives for the Fund and we cannot assure you that we will be successful in identifying a strategic alternative, that such strategic alternative will yield additional value for our stockholders or that the process will not have an adverse impact on our business.
We are permitted under the 1940 Act to borrow if, immediately after the borrowing, we have an asset coverage ratio of at least 150%. That is, we may borrow an amount equal to double the fair value of our total net assets (including investments made with borrowed funds).
That is, we may borrow an amount equal to double the fair value of our total net assets (including investments made with borrowed funds).
Because we intend to distribute substantially all of our income and net realized capital gains to our stockholders, if we continue to operate as a BDC and as a RIC, we will need additional capital to finance our growth.
The loss of our RIC qualification would have a material adverse effect on the total return, if any, obtainable from an investment in our common stock. 19 Table of Contents Because we intend to distribute substantially all of our income and net realized capital gains to our stockholders, if we continue to operate as a BDC and as a RIC, we will need additional capital to finance our growth.
Our business requires a substantial amount of cash to operate. We may borrow funds to pay contingencies or expenses or to make investments, to maintain our pass-through tax status as a RIC under Subchapter M of the Code.
We may borrow funds to pay contingencies or expenses or to make investments, to maintain our pass-through tax status as a RIC under Subchapter M of the Code. We are permitted under the 1940 Act to borrow if, immediately after the borrowing, we have an asset coverage ratio of at least 150%.
Equus Energy does not employ any hedging strategies in respect of its oil and gas holdings and is therefore subject to price fluctuations resulting from these and other factors.
Moreover, as a worldwide commodity, the price of oil and natural gas is also influenced by global demand, changes in currency exchange rates, interest rates, and inflation. Neither Morgan nor Equus Energy employs any hedging strategies in respect of its oil and gas holdings and is therefore subject to price fluctuations resulting from these and other factors.
This means that the operations and earnings of Equus Energy may be significantly affected by changes in prices of oil, gas and natural gas liquids. The prices of these products are also dependent upon local, regional and global events or conditions that affect supply and demand for the relevant commodity.
The prices of these products are also dependent upon local, regional and global events or conditions that affect supply and demand for the relevant commodity. In addition, the pricing of these commodities is highly dependent upon technological improvements in energy production and development, energy efficiency, and seasonal weather patterns.
Investments in companies organized outside of the United States or having a principal place of business outside of the United States are also not considered eligible portfolio companies. 22 Table of Contents Any failure on our part to maintain the Fund’s status as a BDC could reduce our operating flexibility.
Any failure on our part to maintain the Fund’s status as a BDC could reduce our operating flexibility.
If we reorganize as an operating company, we will likely not continue to qualify as a RIC under the Code. If we were to reorganize as an operating company, we would lose our status as a RIC.
If we are unable to effectively manage the strategic review process, our business, financial condition, liquidity and results of operations could be adversely affected. 21 Table of Contents If we reorganize as an operating company, we will likely not continue to qualify as a RIC under the Code .
See Management’s Discussion and Analysis of Financial Condition and Results of Operations . 19 Table of Contents We have had net investment losses in the past five years. We have had net investment losses in the past five years, with a net investment loss of $3.6 million for the year ended December 31, 2022.
We have had net investment losses in the past five years. We have had net investment losses in the past five years, with a net investment loss of $4.0 million for the year ended December 31, 2023. We cannot assure you that we will be able to increase our net assets or generate net investment income.
Removed
In addition, the pricing of these commodities is highly dependent upon technological improvements in energy production and development, energy efficiency, and seasonal weather patterns. Moreover, as a worldwide commodity, the price of oil and natural gas is also influenced by global demand, changes in currency exchange rates, interest rates, and inflation.
Added
This means that the operations and earnings of Morgan E&P, LLC (“Morgan”) and Equus Energy, LLC (“Equus Energy”), our two remaining portfolio investments, may be significantly affected by changes in prices of oil, gas and natural gas liquids.
Removed
In view of the net asset value of the Fund as of December 31, 2022 and the fact that our sole portfolio investment consists of our equity holding in Equus Energy, however, we would expect that any new investments may exceed this percentage for the immediate future.
Added
We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies.
Removed
The loss of our RIC qualification would have a material adverse effect on the total return, if any, obtainable from an investment in our common stock.
Added
In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.
Removed
As a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred securities, they would rank “senior” to common stock in our capital structure.
Added
If we reorganize as an operating company or a permanent capital vehicle, we may not be able to utilize our capital losses. As noted above, we may reorganize Equus as an operating company or a permanent capital vehicle.
Removed
Preferred stockholders would have separate voting rights and may have rights, preferences or privileges more favorable than that of our common stockholders.
Removed
Furthermore, the issuance of preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for our common stockholders or otherwise be in your best interest. Additional Common Stock.
Removed
Our Board of Directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a BDC, we are generally not able to issue our common stock at a price below net asset value without first obtaining required approvals from our stockholders and our independent directors.
Removed
In any such case, the price at which our securities are to be issued and sold may not be less than a price, that in the determination of our Board of Directors, closely approximates the market value of such securities (less any commission or discount).
Removed
We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to the 1940 Act.
Removed
If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and you may experience dilution.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+3 added−0 removed4 unchanged
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securitie s Our common stock is listed on the NYSE under the symbol “EQS”. We had approximately 2,400 stockholders as of December 31, 2022, 640 of whom were registered holders. Registered holders do not include those stockholders whose stock has been issued in street name.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securitie s Our common stock is listed on the NYSE under the symbol “EQS”. We had approximately 1,600 stockholders as of December 31, 2023, 607 of whom were registered holders. Registered holders do not include those stockholders whose stock has been issued in street name.
As of December 31, 2022, our net asset value per share was $2.61.
As of December 31, 2023, our net asset value per share was $3.55.
Consequently, most of the companies in which we invest do not have established policies of paying annual dividends. However, a portion of the investments in portfolio securities held by the Fund consists of interest-bearing subordinated debt securities or dividend-paying preferred stock.
However, a portion of the investments in portfolio securities held by the Fund consists of interest-bearing subordinated debt securities or dividend-paying preferred stock.
The following table reflects the high and low closing sales prices per share of our common stock on the NYSE, and net asset value (“NAV”) per share for each of the three years ended December 31, 2022, by quarter: 2022 2021 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 High $ 2.71 $ 2.70 $ 2.63 $ 1.83 $ 2.23 $ 1.96 $ 2.75 $ 2.48 $ 1.79 $ 1.28 $ 1.51 $ 2.30 Low 2.20 2.35 1.49 1.39 1.61 1.82 1.88 2.12 0.95 0.95 1.14 1.10 NAV 2.77 2.75 2.68 2.61 2.52 2.57 2.68 2.69 2.88 3.07 2.77 2.50 As a RIC, we are required to distribute to our stockholders, in a timely manner, at least 90% of our taxable net investment income each year.
The following table reflects the high and low closing sales prices per share of our common stock on the NYSE, and net asset value (“NAV”) per share for each of the three years ended December 31, 2023, by quarter: 2023 2022 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 High $ 1.75 $ 1.65 $ 1.55 $ 1.51 $ 2.71 $ 2.70 $ 2.63 $ 1.83 $ 2.23 $ 1.96 $ 2.75 $ 2.48 Low 1.44 1.46 1.35 1.38 2.20 2.35 1.49 1.39 1.61 1.82 1.88 2.12 NAV 2.52 2.96 3.49 3.55 2.77 2.75 2.68 2.61 2.52 2.57 2.68 2.69 Stock Performance Graph The following graph compares the cumulative total return on our common stock with the cumulative total return of the NYSE Composite Index and the S&P 500 Index for the five years ended December 31, 2023.
Stockholders will also be entitled to increase the adjusted tax basis of their fund shares by the difference between their undistributed capital gains and their tax credit. 29 Table of Contents We invest in companies that are believed to have a high potential for capital appreciation, and we intend to realize the majority of our profits upon the sale of our investments in portfolio companies.
Stockholders will also be entitled to increase the adjusted tax basis of their fund shares by the difference between their undistributed capital gains and their tax credit.
Added
This comparison assumes $100.00 was invested in our common stock at the closing price of our common stock on December 31, 2018 and in the comparison groups and assumes the reinvestment of all cash dividends on the ex-dividend date prior to any tax effect.
Added
The stock price performance shown on the graph below is not necessarily indicative of future price performance. 26 Table of Contents As a RIC, we are required to distribute to our stockholders, in a timely manner, at least 90% of our taxable net investment income each year.
Added
We invest in companies that are believed to have a high potential for capital appreciation, and we intend to realize the majority of our profits upon the sale of our investments in portfolio companies. Consequently, most of the companies in which we invest do not have established policies of paying annual dividends.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

38 edited+22 added−38 removed60 unchanged
Such change in unrealized appreciation resulted primarily from the increase in the fair value of our holdings in Equus Energy, LLC of $6.0 million, principally due to an increase in the cost basis of this investment, as well as increases in oil and gas prices, as well as increases in the short- and long-term foward pricing curves for these commodities during 2021.
Such change in unrealized appreciation resulted primarily from the increase in the fair value of our holdings in Equus Energy, LLC of $6.0 million, principally due to an increase in the cost basis of this investment, as well as increases in oil and gas prices, as well as increases in the short- and long-term forward pricing curves for these commodities during 2021.
Because of the nature and size of our portfolio investments, we periodically borrow funds to make qualifying investments in order to maintain our qualification as a RIC. During 2022 and 2021, we borrowed such funds by accessing a margin account with a securities brokerage firm. We invest the proceeds of these margin loans in high-quality securities such as U.S.
Because of the nature and size of our portfolio investments, we periodically borrow funds to make qualifying investments in order to maintain our qualification as a RIC. During 2023 and 2022, we borrowed such funds by accessing a margin account with a securities brokerage firm. We invest the proceeds of these margin loans in high-quality securities such as U.S.
During 2022, 2021 and 2020, we did not incur any non-recurring expenses. Non-Operating Subsidiary. We have established Equus Total Return (Canada) Inc. as a wholly-owned subsidiary to facilitate payments to Canadian personnel and contractors who provide services to the Fund.
During 2023, 2022 and 2021, we did not incur any non-recurring expenses. Non-Operating Subsidiary. We have established Equus Total Return (Canada) Inc. as a wholly-owned subsidiary to facilitate payments to Canadian personnel and contractors who provide services to the Fund.
We are not required to undertake, and we have not previously undertaken, any such share repurchases, nor do we further anticipate taking any such action in 2023. 2016 Equity Incentive Plan On June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”).
We are not required to undertake, and we have not previously undertaken, any such share repurchases, nor do we further anticipate taking any such action in 2024. 2016 Equity Incentive Plan On June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”).
The Company deems that certain money market funds, U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents (See Note 2 to the financial statements.) 35 Table of Contents We generate cash primarily from maturities, sales of securities and borrowings, as well as capital gains realized upon the sale of portfolio investments.
The Company deems that certain money market funds, U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents (See Note 2 to the financial statements.) We generate cash primarily from maturities, sales of securities and borrowings, as well as capital gains realized upon the sale of portfolio investments.
From time to time, we generate income in the form of commitment, origination, structuring, and extension fees in connection with our investments. We recognize all such fees when earned. 30 Table of Contents Expenses. Currently, our primary operating expenses include director fees and expenses, professional fees, compensation expense, and general and administrative fees.
From time to time, we generate income in the form of commitment, origination, structuring, and extension fees in connection with our investments. We recognize all such fees when earned. Expenses. Currently, our primary operating expenses include director fees and expenses, professional fees, compensation expense, and general and administrative fees.
Further, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business. See Significant Developments – Authorization to Withdraw BDC Election above. As a BDC, we are required to comply with certain regulatory requirements.
Further, we will also require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business. See Significant Developments – Authorization to Withdraw BDC Election above. 27 Table of Contents As a BDC, we are required to comply with certain regulatory requirements.
The Incentive Plan is also intended to enhance the ability of the Fund and its affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the Fund. 31 Table of Contents The Incentive Plan permits the award of restricted stock as well as common stock purchase options.
The Incentive Plan is also intended to enhance the ability of the Fund and its affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the Fund. The Incentive Plan permits the award of restricted stock as well as common stock purchase options.
We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. Valuation of Investments For most of our investments, market quotations are not available.
We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. 29 Table of Contents Valuation of Investments For most of our investments, market quotations are not available.
Also, any failure by a portfolio company to achieve its business plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid change in its value. Our general intent is to hold our loans to maturity when appraising our privately held debt investments.
Also, any failure by a portfolio company to achieve its business plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid change in its value. 30 Table of Contents Our general intent is to hold our loans to maturity when appraising our privately held debt investments.
Changes in Unrealized Appreciation of Portfolio Securities Year Ended December 31, 2022 During 2022, we recorded an increase of $2.5 million in net unrealized appreciation, from an unrealized appreciation of $5.0 million at December 31, 2021 to a net unrealized appreciation of $7.5 million at December 31, 2022.
Year Ended December 31, 2022 During 2022, we recorded an increase of $2.5 million in net unrealized appreciation, from an unrealized appreciation of $5.0 million at December 31, 2021 to a net unrealized appreciation of $7.5 million at December 31, 2022.
On an ongoing basis, we carry our investments in our financial statements at fair value, as determined by our board of directors. See “ Critical Accounting Policies – Valuation of Investments ” below. As of December 31, 2022, we had invested 37.6% of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act.
On an ongoing basis, we carry our investments in our financial statements at fair value, as determined by our board of directors. See “ Critical Accounting Policies – Valuation of Investments ” below. As of December 31, 2023, we had invested 43.7% of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act.
Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $15.7 million and $13.0 million as of December 31, 2022 and 2021, respectively, our fair value determinations may materially differ from the values that would have been used had a ready market existed for the securities.
Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $40.9 million and $15.7 million as of December 31, 2023 and 2022, respectively, our fair value determinations may materially differ from the values that would have been used had a ready market existed for the securities.
In addition, our distributions to stockholders would be taxable as ordinary dividends to the extent paid from earnings and profits. See “ Federal Income Tax Considerations .” Distributions .
In addition, our distributions to stockholders would be taxable as ordinary dividends to the extent paid from earnings and profits. See “ Federal Income Tax Considerations .” 28 Table of Contents Distributions .
At that time, we had invested 100% in membership interests in limited liability companies. Commitments. Under certain circumstances, we make follow-on investments in some of our portfolio companies. As of December 31, 2022, we had no outstanding commitments in our portfolio companies. Financing Activities. From time to time, we use leverage to finance a portion of our investments.
At that time, we had invested 100% in membership interests in limited liability companies. Commitments. Under certain circumstances, we make follow-on investments in some of our portfolio companies. As of December 31, 2023, we had $1.7 million in outstanding commitments in our portfolio companies. Financing Activities. From time to time, we use leverage to finance a portion of our investments.
As of December 31, 2022, we also had $6.1 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $6.0 million was invested in U.S. Treasury bills and $0.06 million represented a required 1% brokerage margin deposit.
As of December 31, 2023, we also had $45.4 million of U.S. Treasury bills and restricted cash, including primarily the proceeds of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $45.0 million was invested in U.S. Treasury bills and $0.4 million represented a required 1% brokerage margin deposit.
These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured on January 4, 2022 and we subsequently repaid this margin loan. The margin interest was paid on February 3, 2022. Operating Activities. We provided $21.1 million in cash for operating activities in 2021.
These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured on January 4, 2024 and we subsequently repaid this margin loan. The margin interest was paid on February 4, 2024. Operating Activities.
Consistent with our announced intention to transform Equus into an operating company or a permanent capital vehicle, on November 1, 2022, our shareholders authorized our Board to withdraw our BDC election and, although this authorization expired on February 28, 2023, we expect to receive a further authorization from our stockholders in the future.
Consistent with our announced intention to transform Equus into an operating company or a permanent capital vehicle, our shareholders have previously authorized our Board to withdraw our BDC election and, although this authorization has since expired, we expect to receive a further authorization from our stockholders in the future.
The following table includes summarizes investment activity during the year ended December 31, 2022 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Equus Energy, LLC $ — $ — $ 150 $ — $ 150 $ — $ — $ 150 $ — $ 150 Year Ended December 31, 2021 During 2021, we made a $0.35 million non-cash follow-on investment in Equus Energy, LLC. 39 Table of Contents The following table includes summarizes investment activity during the year ended December 31, 2021 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Equus Energy, LLC $ — $ — $ 350 $ — $ 350 $ — $ — $ 350 $ — $ 350 Year Ended December 31, 2020 During 2020, we received 19,164 shares of MVC in the form of stock dividend payments.
The following table includes summarizes investment activity during the year ended December 31, 2022 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Equus Energy, LLC $ — $ — $ 150 $ — $ 150 $ — $ — $ 150 $ — $ 150 Year Ended December 31, 2021 During 2021, we made a $0.35 million non-cash follow-on investment in Equus Energy, LLC.
The following table includes summarizes investment activity during the year ended December 31, 2020 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Non-cash PIK Total MVC Capital, Inc. $ — $ — $ — $ 156 $ 156 Equus Energy, LLC — — 561 — 561 $ — $ — $ 561 $ 156 $ 717 Realized Gains and Losses Year Ended December 31, 2022 We realized capital gains of $1.0 thousand as a result of disposition of temporary cash investments.
The following table includes summarizes investment activity during the year ended December 31, 2021 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Equus Energy, LLC $ — $ — $ 350 $ — $ 350 $ — $ — $ 350 $ — $ 350 34 Table of Contents Realized Gains and Losses Year Ended December 31, 2023 We realized capital gains of $34 thousand as a result of disposition of U.S.
(Source: Bloomberg ) During 2022, our net asset value decreased from $2.69 per share as of December 31, 2021 to $2.61 per share as of December 31, 2022. As of December 31, 2021, our common stock was trading at a 11.6% discount to our net asset value as compared to 45.2% as of December 31, 2022.
(Source: PWC; Bloomberg ) During 2023, our net asset value increased from $2.61 per share as of December 31, 2022 to $3.55 per share as of December 31, 2023. As of December 31, 202, our common stock was trading at a 45.2% discount to our net asset value as compared to 59.2% as of December 31, 2023.
Year Ended December 31, 2021 During 2021, we received a combination of escrowed and contingent payments of $3.8 million from the sale of our interest in PalletOne, Inc. in December 2020, realizing a capital gain of $0.4 million. 40 Table of Contents Year Ended December 31, 2020 During 2020, we liquidated our investment in 5 th Element Tracking, LLC, receiving $1.2 million in cash, realizing a capital loss of $0.3 million.
Year Ended December 31, 2021 During 2021, we received a combination of escrowed and contingent payments of $3.8 million from the sale of our interest in PalletOne, Inc. in December 2020, realizing a capital gain of $0.4 million.
As a result of the factors described above, net investment loss after expenses was $4.9 million for 2020 as compared to a net investment loss of $3.4 million in 2019. 38 Table of Contents Summary of Portfolio Investment Activity Year Ended December 31, 2022 During 2022, we made a $0.15 million follow-on investment in Equus Energy, LLC.
As a result of the factors described above, net investment loss after expenses was $4.0 million for 2023 as compared to a net investment loss of $3.6 million in 2022. 33 Table of Contents Summary of Portfolio Investment Activity Year Ended December 31, 2023 During 2023, we made an $8.3 million investment in Morgan E&P, LLC.
The Board discusses valuations and determines the fair value of each portfolio investment in good faith based on the input of our Management, the respective independent valuation firm, as applicable, and the Audit Committee. 32 Table of Contents During the first twelve months after an investment is made, we rely on the original investment amount to determine the fair value unless significant developments have occurred during this twelve-month period which would indicate a material effect on the portfolio company (such as results of operations or changes in general market conditions).
During the first twelve months after an investment is made, we rely on the original investment amount to determine the fair value unless significant developments have occurred during this twelve-month period which would indicate a material effect on the portfolio company (such as results of operations or changes in general market conditions).
Global merger and acquisition activity in 2022 was $3.6 trillion, a 28% drop from 2021’s all-time high of $5.0 trillion, with larger M&A transactions dropping by 31% compared to 2021. Technology, energy, and healthcare were the sectors that experienced the most significant dealmaking activity during the year.
Global merger and acquisition activity in 2023 was $3.1 trillion, a 14% drop from $3.6 trillion in 2022 which itself was 28% lower than 2021’s all-time high of $5.0 trillion. Biotechnology, energy, and healthcare were the sectors that experienced the most significant dealmaking activity during the year.
We used $5.0 million in cash from financing activities for 2020. We did not declare any dividends in 2020. Results of Operations Investment Income and Expense Year Ended December 31, 2022 as compared to Year Ended December 31, 2021 Total income from portfolio securities was unchanged at $0 for 2022 and 2021.
We provided $39.1 million in cash from financing activities for 2023, principally in connection with borrowings on margin.. We did not declare any dividends in 2023. Results of Operations Investment Income and Expense Year Ended December 31, 2023 as compared to Year Ended December 31, 2022 Total income from portfolio securities was $0.3 million for 2023 and $0 for 2022.
Portfolio Securities As of December 31, 2022, we had active investments in the following portfolio company: 41 Table of Contents Equus Energy, LLC We formed Equus Energy, as a wholly-owned subsidiary of the Fund, to make investments in companies in the energy sector, with particular emphasis on income-producing oil& gas properties.
Equus Energy, LLC We formed Equus Energy, as a wholly-owned subsidiary of the Fund, to make investments in companies in the energy sector, with particular emphasis on income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus Energy.
GDP increased at an annualized rate of 2.7% in the fourth quarter of 2022, compared to an annualized increase of 7.0% for the fourth quarter of 2021, and 3.2% for the third quarter of 2022. Overall, GDP growth was 2.1% for all of 2022, as compared to 5.9% for all of 2021.
GDP growth in the fourth quarter of 2023 also compared favorably to an annualized increase of 2.7% for the fourth quarter of 2022, although down from 4.9% for the third quarter of 2023. Overall, GDP growth was 2.5% for all of 2022, as compared to 2.1% for all of 2022.
Off Balance Sheet Arrangements We had an operating lease for office space that expired in September 2014. Our current office space lease since December 31, 2020 is on a month-to-month basis. Rent expense, inclusive of common area maintenance costs, was $90,000 for the year ended December 31, 2022.
Off Balance Sheet Arrangements Our current office space lease since December 31, 2020 is on a month-to-month basis. Rent expense, inclusive of common area maintenance costs, was $94,000 for the year ended December 31, 2023. Contractual Obligations As of December 31, 2023, we had $1.7 million in outstanding commitments to our portfolio company investments.
Moreover, the labor participation rate remains at approximately 62.5%, below the pre-pandemic high of 63.3% of February 2020. Most of the recent employment gains in 2022 were due to gains in the leisure and hospitality industry, healthcare, construction, and social assistance. (Sources: Bureau of Labor Statistics; Forbes; Trading Economics ).
Most of the recent employment gains in 2022 and 2023 were due to gains in the leisure and hospitality industry, healthcare, construction, and social assistance. (Sources: Bureau of Labor Statistics; Trading Economics ).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Equus is a BDC that provides financing solutions for privately held middle market and small capitalization companies. We began operations in 1983 and have been a publicly traded closed-end fund since 1991.
Overview Equus is a BDC that provides financing solutions for privately held middle market and small capitalization companies. We began operations in 1983 and have been a publicly traded closed-end fund since 1991. Our investment objective is to seek the highest total return, consisting of capital appreciation and current income.
Further, we may borrow funds from financial institutions or other providers of debt capital to provide and pay for a part of the consideration and expenses necessary to effect a conversion of Equus into an operating company.
Further, we may borrow funds from financial institutions or other providers of debt capital to provide and pay for a part of the consideration and expenses necessary to effect a conversion of Equus into an operating company. 32 Table of Contents Year Ended December 31, 2023 As of December 31, 2023, we had total assets of $93.5 million, of which $40.9 million were invested in portfolio investments and $6.5 million were invested in cash and cash equivalents.
Year Ended December 31, 2020 During 2020, we recorded a decrease of $26.0 million in net unrealized appreciation, from $25.4 million at December 31, 2019 to a net unrealized depreciation of $0.6 million at December 31, 2020.
Changes in Unrealized Appreciation of Portfolio Securities Year Ended December 31, 2023 During 2023, we recorded an increase of $17.0 million in net unrealized appreciation, from an unrealized appreciation of $7.5 million at December 31, 2022 to a net unrealized appreciation of $24.5 million at December 31, 2023.
The slower GDP growth in 2022 was largely due to decreases in consumer spending, exports, and inventories. The Conference Board is projecting negative growth for the first three quarters of 2023 and an overall projected increase of only 0.3% for the entire year, increasing to 1.6% in 2024. The Congressional Budget Office is predicting 0.1% GDP growth for 2023.
The slower GDP growth in the fourth quarter of 2023 was largely due to decreases in private inventory investment, federal government spending, residential fixed investment, and consumer spending. The Conference Board is projecting GDP growth of 1.2% for 2024 and 1.4% for 2025. The Congressional Budget Office is predicting 1.5% GDP growth for 2024.
Contractual Obligations As of December 31, 2022, we had no outstanding commitments to our portfolio company investments. Dividends So long as we remain a BDC, we will continue to pay out net investment income and/or realized capital gains, if any, on an annual basis as required under the 1940 Act.
Dividends So long as we remain a BDC, we will continue to pay out net investment income and/or realized capital gains, if any, on an annual basis as required under the 1940 Act. 36 Table of Contents Subsequent Events Our Management performed an evaluation of the Fund’s activity through the date the financial statements were issued, noting the following subsequent events: On January 4, 2024, our holding in $45.0 million in U.
(Sources: The Conference Board, The Wall Street Journal; Congressional Budget Office ). 34 Table of Contents As of February 2023, the U.S. unemployment rate stood at 3.4%, the lowest since 1969. Most economists, however, do not project this level to continue, as recessionary headwinds and lower growth forecasts suggest an increase during the remainder of 2023.
Most economists, however, do not project this level to continue, as recessionary headwinds and lower growth forecasts suggest an increase during the remainder of 2024. Moreover, the labor participation rate remains at approximately 62.5%, below the pre-pandemic high of 63.3% of February 2020.
The slight downward trend has continued into January 2023, where the U.S. Bureau of Labor Statistics reported an annualized rate of 6.4%. (Sources: U.S. Bureau of Labor Statistics; Trading Economics ).
Beginning in 2021 and continuing through 2022, consumer prices increased the most in four decades, reaching a high of 8.3%, before steadily declining throughout 2023, finishing the year at 3.4%. This trend has continued into January 2024, where the U.S. Bureau of Labor Statistics reported an annualized rate of 3.1%.
In connection with these awards, we recorded compensation expense of $0, $0, and $0.08 million, respectively, for the years ended December 31, 2022, 2021 and 2020.
Inasmuch as all existing awards under the Incentive Plan became fully-vested prior to 2021, we recorded no compensation expense relating to awards made under the Incentive Plan for the years ended December 31, 2023, 2022 and 2021.
Removed
Our investment objective is to seek the highest total return, consisting of capital appreciation and current income.
Added
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations We are incorporating by reference Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K for management’s discussion and analysis of financial condition and results of operations for the fiscal year 2022 compared to fiscal year 2021.
Removed
As of December 31, 2019, one of our portfolio investments, MVC Capital, Inc., was publicly listed on the NYSE with 563,894 common shares. In the fourth quarter of 2020, we disposed of these shares, together with additional shares of MVC that were received as dividends during the first three quarters of that year.
Added
The Board discusses valuations and determines the fair value of each portfolio investment in good faith based on the input of our Management, the respective independent valuation firm, as applicable, and the Audit Committee.
Removed
Our net asset value appears in various publications, including Barron’s and The Wall Street Journal . 33 Table of Contents Federal Income Taxes Because we are not required to satisfy RIC requirements as a BDC, we may seek to grow the Fund as a BDC but not necessarily as a RIC.
Added
Our net asset value appears in various publications, including Barron’s and The Wall Street Journal . Current Market Conditions U.S. GDP increased at an annualized rate of 3.3% in the fourth quarter of 2023, substantially higher than consensus estimates for the quarter.
Removed
If we continue as a RIC, we will need to comply with the requirements of the Code necessary for us to qualify as a RIC. So long as we comply with these requirements, we generally will not be subject to corporate-level federal income taxes on otherwise taxable income (including net realized capital gains) distributed to stockholders.
Added
(Sources: Bureau of Economic Analysis; The Conference Board; Congressional Budget Office ). As of February 2024, the U.S. unemployment rate stood at 3.7%, and has remained largely stable for a considerable period, fluctuating between 3.4% and 3.8% for the previous 24 months.
Removed
For the year ended December 31, 2022, we have not accrued any income or excise tax. For the year ended December 31, 2021, we accrued $38,000 in corporate level income tax and excise tax in lieu of making a distribution of net capital gains for the sale of PalletOne, Inc. This tax was paid in March 2022.
Added
In view of lower growth projections and other economic headwinds, most analysts predict consumer price increases to taper further to approximately 2.4% for all of 2024. (Sources: U.S. Bureau of Labor Statistics; Forbes ).
Removed
We may borrow money from time to time to maintain our status as a RIC under the Code. See “ Overview – Financing Activities ” above. Interest Income Recognition We record interest income, adjusted for amortization of premium and accretion of discount, on an accrual basis to the extent that we expect to collect such amounts.
Added
Higher costs of capital were the principal cause of the continued decline in dealmaking. Most analysts expect consolidation activity in 2024 to increase slightly as a result of pent up demand and stable interest rates.
Removed
We stop accruing interest on investments when we determine that interest is no longer collectible. We may also impair the accrued interest when we determine that all or a portion of the current accrual is uncollectible.
Added
(Source: Dealogic ; Wall Street Journal ). 31 Table of Contents Private equity firms experienced a similar slowdown in activity during 2023 which continued a downward trend from 2022 and the highs experienced during the Covid-19 pandemic.
Removed
If we receive any cash after determining that interest is no longer collectible, we treat such cash as payment on the principal balance until the entire principal balance has been repaid, before we recognize any additional interest income. We accrete or amortize discounts and premiums on securities purchased over the life of the respective security using the effective yield method.
Added
Nevertheless, there remains ample undeployed cash, and strong, acquisitive companies, as well as emerging companies in the AI space, appear to be best positioned as some of the candidates for private equity activity in 2024.
Removed
The amortized cost of investments represents the original cost adjusted for the accretion of discount and/or amortization of premium on debt securities. Payment in Kind Interest We may have loans in our portfolio that may pay PIK interest.
Added
We used $51.4 million in cash for operating activities in 2023 principally due to $8.3 million in investments, $4.3 million in fees to professional advisors, director and other, $17.0 million increase in unrealized appreciation, along with $38.9 million increase in net investments in U.S. Treasury bills. Financing Activities .
Removed
We add PIK interest, if any, computed at the contractual rate specified in each loan agreement, to the principal balance of the loan and recorded as interest income.
Added
Compensation expense increased to $1.9 million in 2023 from $1.6 million in 2022.
Removed
To maintain our status as a RIC, we must pay out to our stockholders this non-cash source of income in the form of dividends even if we have not yet collected any cash in respect of such investments. Current Market Conditions U.S.
Added
The following table includes summarizes investment activity during the year ended December 31, 2023 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Morgan E&P, LLC $ 8,253 $ — $ $ — $ 8,253 $ 8,253 $ — $ $ — $ 8,253 Year Ended December 31, 2022 During 2022, we made a $0.15 million follow-on investment in Equus Energy, LLC.
Removed
Consumer prices, which had largely been held in check during the pandemic, began to rise steadily beginning in the second half of 2021. By the third quarter of 2022, inflation had increased to an annualized rate of 8.3%, the highest in over four decades, before tapering in the fourth quarter and rounding out 2022 at 6.5% for the entire year.
Added
Treasury bills. Year Ended December 31, 2022 We realized capital gains of $1.0 thousand as a result of disposition of U.S. Treasury bills.
Removed
Higher interest rates were the principal cause of the decline in dealmaking, which slowed considerably in the second half of 2022. (Source: Wall Street Journal ). Private equity firms experienced a similar slowdown in activity during 2022, with investment activity falling to $1.3 trillion, a 38.6% decrease from $2.21 trillion in 2021.
Added
Such change in unrealized appreciation resulted primarily from the increase in the fair value of our holdings in Morgan E&P, LLC of $22.6 million, principally due to substantial increases in Morgan’s reserves and the reclassification of certain of its proved reserves from undeveloped to producing.
Removed
First round investments comprised the largest component of PE activity, amounting to $452.3 billion across approximately 16,000 transactions. Technology, media, and telecommunications were again the industries most represented in private equity transactions in 2022.
Added
The increase in the fair value of Morgan was offset by the decrease in fair value of our holding in Equus Energy, LLC of $5.7 million, principally due to decreases in the forward curve for natural gas and its effect on the economic prospects of Equus Energy regarding future development of its gas properties.
Removed
Year Ended December 31, 2022 As of December 31, 2022, we had total assets of $41.7 million, of which $15.7 million were invested in portfolio investments and $19.3 million were invested in cash and cash equivalents.
Added
Portfolio Securities As of December 31, 2023, we had active investments in the following portfolio companies: 35 Table of Contents Morgan E&P, LLC Morgan E&P, LLC (“Morgan”) was organized by the Fund on April 3, 2023 as a Delaware limited liability company and a wholly-owned subsidiary of the Fund.
Removed
These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured on January 3, 2023 and we subsequently repaid this margin loan. The margin interest was paid on February 3, 2023. Operating Activities. We used $7.7 million in cash for operating activities in 2022.
Added
On May 22, 2023, Morgan completed the acquisition of 4,747.52 net acres, in the Bakken/Three Forks formation in the Williston Basin of North Dakota, and acquired approximately 1,100 additional acres on September 26, 2023.
Removed
In 2022, we made a $0.2 million investment in the form of a cash advance in a portfolio company. We paid fees to our professional advisers, directors, banks and others of $3.6 million. Financing Activities . We provided $3.5 million in cash from financing activities for 2022.
Added
The acreage and associated mineral rights were acquired from Pro Energy I LLC (“Pro Energy”), a company whose principals have decades of oil and gas experience and who have themselves drilled over 1,800 horizontal wells in the Williston Basin over a 10-year period.
Removed
We did not declare any dividends in 2022. 36 Table of Contents Year Ended December 31, 2021 As of December 31, 2021, we had total assets of $39.7 million, of which $13.0 million were invested in portfolio investments and $23.5 million were invested in cash and cash equivalents.
Added
In May 2023, we entered into an agreement with Morgan to provide it up to $10.0 million in senior debt financing, subject to a schedule of disbursements and draws that we determine.
Removed
As of December 31, 2021, we also had $2.5 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $2.5 million was invested in U.S. Treasury bills and $0.02 million represented a required 1% brokerage margin deposit.
Added
As of December 31, 2023, we advanced Morgan $8.3 million under this facility (See Subsequent Events below where we increased the total amount of the facility to $10.5 million and where we advanced, subsequent to year-end, an additional $2.0 million under the facility).
Removed
In 2021, we made a $0.3 million investment in the form of a cash advance in a portfolio company. We paid fees to our professional advisers, directors, banks and others of $3.4 million, while realizing a gain of $0.4 million from the disposition of one portfolio company. Financing Activities. We used $21.5 million in cash from financing activities for 2021.
Added
During 2023, Morgan substantially increased its reserves, completed the drilling of two new wells, and also reclassified certain of its proved reserves from undeveloped to producing. As a result, the fair value of this holding was $22.6 million at December 31, 2023.
Removed
We did not declare any dividends in 2021. Year Ended December 31, 2020 As of December 31, 2020, we had total assets of $58.8 million, of which $7.0 million were invested in portfolio investments and $23.6 million were invested in cash and cash equivalents.
Added
The fair value of our holding in Equus Energy decreased from $15.65 million at December 31, 2022 to $10.0 million at December 31, 2023, principally due to decreases in the forward curve for natural gas and its effect on the economic viability of Equus Energy’s gas reserves for future development.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Changes in business or industry trends or in the financial condition, results of operations, or the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding numerous investments. 43 Table of Contents
Changes in business or industry trends or in the financial condition, results of operations, or the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding numerous investments. 37 Table of Contents
The value of one segment called “Energy” includes one portfolio company and was 44.4% of our net asset value, 37.6% of our total assets and 100% of our investments in portfolio company securities (at fair value) as of December 31, 2022.
The value of one segment called “Energy” includes two portfolio companies and was 84.6% of our net asset value, 43.7% of our total assets and 100% of our investments in portfolio company securities (at fair value) as of December 31, 2023.