Equus Total Return(EQS) - 2021 Q4 - Annual Report

Investment Strategy and Portfolio Management - The company has invested in private, small, and/or new companies, which typically have shorter operating histories and narrower product lines, making them more vulnerable to market conditions[39] - The company is shifting its investment emphasis from manufacturing and services to sectors such as energy, requiring management to analyze and invest in industries with which they have less experience[42] - Management's ability to successfully implement the investment strategy is crucial, as it involves due diligence and monitoring in a broader range of securities[42] - The company expects to have limited public information regarding the companies in which it invests, relying heavily on management's diligence for investment decisions[50] - The company may not be able to make additional investments in portfolio companies, which could dilute its interests and negatively impact those companies[46] - The company has a limited number of portfolio investments, which means changes in the financial condition or market assessment of any single portfolio company can greatly affect its net asset value[47] - The company is classified as a "non-diversified" investment company, allowing for concentrated investments in specific sectors[129] - The company seeks to maximize returns through investments in companies with a total enterprise value between $5.0 million and $75.0 million[161] Financial Performance and Position - The company has incurred a net investment loss of $3.4 million for the year ended December 31, 2021, indicating challenges in generating net investment income[54] - The company’s net asset value is significantly impacted by the fair value determinations of its portfolio investments, which may differ materially from market values due to the lack of readily ascertainable market values[40] - As of December 31, 2021, the net asset value (NAV) per share was $2.69, with a high closing price of $2.75 and a low of $1.61 during the year[83] - The company's net asset value increased from $2.50 per share as of December 31, 2020, to $2.62 per share as of December 31, 2021[98] - The common stock was trading at a 10.1% discount to net asset value as of December 31, 2021, compared to a 36.0% discount as of December 31, 2020[98] - The Fund recorded a net unrealized appreciation of $5.0 million as of December 31, 2021, an increase from an unrealized depreciation of $0.6 million at the end of 2020[119] - The Fund's net asset value was significantly impacted by the performance of its energy sector investments, which accounted for 33.9% of net asset value as of December 31, 2021[129] - The accumulated deficit increased to $(38,333,000) from $(22,378,000), indicating a growing loss position[138] Regulatory and Compliance Issues - The company must derive at least 90% of its gross income from qualifying sources to maintain its RIC status, which is crucial for tax benefits[67] - The company is required to maintain a coverage ratio of total assets to total senior securities of at least 150%, limiting its borrowing capacity[67] - If the company fails to maintain its status as a Business Development Company (BDC), it could face increased regulatory restrictions and reduced operational flexibility[65] - The company is exploring strategic alternatives to transform into an operating company, which may result in the loss of RIC status and subject it to corporate income tax[73] - Changes in laws or regulations governing BDCs could significantly impact the company's operations and profitability[71] Market Conditions and Economic Factors - An economic downturn could adversely affect small and medium-sized companies, which are the primary market for the company's investments, potentially leading to decreased revenues and increased funding costs[57] - The company may experience fluctuations in quarterly results due to various factors, including competition and general economic conditions, which could impact performance predictability[58] - The company faces significant competition from larger private equity funds and financial institutions, which may hinder its ability to secure attractive investment opportunities[56] - U.S. GDP growth for 2021 was reported at 5.5%, the highest annual increase since 1984, driven by consumer spending and inventory purchases[96] - Global merger and acquisition activity in 2021 reached an all-time record of over $5.0 trillion, a 38.9% increase from 2020[96] Liquidity and Capital Management - The lack of liquidity of privately held securities may adversely affect the company’s ability to liquidate investments when needed, impacting cash flow[48] - The company has historically relied on a revolving line of credit and a margin account for liquidity, but may face challenges in borrowing against illiquid private securities[53] - The company has been authorized to repurchase shares of its common stock to reduce market value discount or increase NAV, although no such actions are anticipated in 2022[87] - The company plans to withdraw its BDC election only after entering into a definitive agreement to convert into an operating company or permanent capital vehicle, requiring majority shareholder approval[85] Operational and Management Issues - The Board of Directors has the authority to modify operating policies without stockholder approval, which could affect business operations and stockholder value[68] - The company is subject to restrictions on transactions with affiliates, which may limit operational flexibility[70] - The exploration of strategic alternatives may incur substantial costs and disrupt business operations, affecting overall performance[73] - The company has implemented initiatives to enhance liquidity and lower operational costs, including internalizing management and modifying investment strategies[98] Valuation and Fair Value Measurement - The valuation process for investments includes a multi-step approach, with independent valuation firms engaged for investments exceeding $2.5 million held for more than one year[167] - Fair value measurements are categorized into three levels, with Level 1 representing quoted prices in active markets and Level 3 involving unobservable inputs[169] - The company assesses fair value based on various methodologies, including discounted cash flow analysis and market multiples from comparable companies[169] - The company emphasizes the uncertainty in determining fair value for Level 3 investments, which may differ significantly from recorded values due to lack of market activity[169] Compensation and Expenses - Compensation expenses related to share-based awards were recorded as $0.3 million, $0.08 million, and $0 for the years ended December 31, 2019, 2020, and 2021 respectively[88] - The total compensation expense related to share-based awards was recorded as $0 for 2021, compared to $0.08 million in 2020 and $0.3 million in 2019[184] - The company's operating lease rent expense was $90,000 in 2021, down from $104,000 in 2020, reflecting cost management efforts[188] Equus Energy Performance - Equus Energy's total assets increased to $859,000 as of December 31, 2021, compared to $698,000 in 2020, reflecting a growth of approximately 23%[196] - Operating revenue for Equus Energy reached $855,000 in 2021, a significant increase of 77% from $482,000 in 2020[197] - The company reported a net loss of $69,000 in 2021, an improvement from a net loss of $699,000 in 2020, indicating a reduction of approximately 90%[197] - Equus Energy is pursuing a recompletion program for existing wells to access the Wolfcamp formation, which contains oil, gas, and natural gas liquids[194]