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Item 8. Financial Statements and Supplementary Data

2026-04-20 compared with 2025-12-18 · 520 added, 346 removed, 479 unchanged (64% of the section changed)

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PCAOB ID# 243 )

Balance Sheets—As of December 31, 2023 and December 31, 2022

Balance Sheets As of December 31, 2025 and 2024

Statements of Operations For the years ended December 31, 2025, 2024 and 2023

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We have audited the accompanying balance sheets of Equus Total Return, Inc.

(the “Fund”), including the schedules of investments, as of December 31, 2023 and 2022, the related statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Table of Contents in Item 15(a)(1) (collectively referred to as the “ financial statements”) and the selected per share data and ratios for each of the five years in the period then ended.

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2023 and 2022, and the results of its operations, changes in net assets and its cash flows for each of the three years in the period ended December 31, 2023, and the selected per share data and ratios for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

(the “Fund”), including the schedules of investments, as of December 31, 2025 and 2024, the related statements of operations, changs in net assets, and cash flows for each of the three years in the period ended December 31, 2025, and the related notes and financial statement schedules listed in Tabe of Contents in Item 15(a)(1) (collectively referred to as the “ financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund at December 31, 2025 and 2024, and the results of its operations, changes in net assets, and its cash flows for each of the three years in the period ended December 31, 2025, and the selected per share data and ratios for each of the five years in the period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying financial statements have been prepared assuming that the Fund will continue as a going concern.

As discussed in Note 2 to the financial statements, the Fund has insufficient operating cash flows and cash on hand that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 2.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and the selected per share data and ratios.

Our procedures included confirmation of securities owned as of December 31, 2023, and 2022 by correspondence with the custodians.

Our procedures include confirmation of securities owned as of December 31, 2025, and 2024 by correspondence with the custodians.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the selected per share data and ratios.

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(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Control Investment

As described in Note 3 to the financial statements, the Fund’s control investment portfolio has a total estimated fair value of $40.9 million at December 31, 2023, which includes $32.6 million of limited liability company investments.

These limited liability company investments have been determined to be Level 3 investments and utilize inputs that are unobservable and significant to the fair value measurement.

Management engaged an independent third- party firm to assist in the determination of the fair value estimate of the Fund’s limited liability company Investments.

We identified the valuation of the Fund’s limited liability company investments as a critical audit matter.

The principal considerations for our determination are significant judgments involved in the determination of (i) the valuation techniques utilized to value these investments which include the guideline transaction method, guideline public company method and the discounted cash flow method, and (ii) the use of unobservable inputs in these valuation techniques which include acreage value, proved reserve multiple, daily production multiple and discount rate.

Auditing these elements was complex because it involved especially subjective auditor judgment, including the extent of specialized skills and knowledge needed.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Limited Liability Company Investments

As described in Note 3 to the financial statements, the Fund’s control investment portfolio has a total estimated fair value of $10.5 million as of December 31, 2025, which includes a $10.5 million investment in Morgan E&P, Inc.

(“Morgan”) debt and a $0.0 of investment in common stock of Morgan.

Management has determined that the investment is a Level 3 investment in accordance with Accounting Standards Codification Topic 820 and utilizes inputs that are unobservable and significant to the fair value measurement.

Management engaged an independent third-party valuation firm and reserve engineers to assist in the determination of the fair value estimate of the Fund’s investment in Morgan.

We identified the valuation of the Fund’s investment in Morgan as a critical audit matter.

The principal considerations for our determination are significant judgments involved in the determination of (i) the valuation techniques utilized to value the investment, which include the guideline transaction method and the discounted cash flow method, and (ii) the use of unobservable inputs in these valuation techniques, including acreage value multiples, production multiples, estimated future production, and discount rates.

Auditing these elements was complex because it involved especially subjective auditor judgment, including the use of personnel with specialized skills and knowledge.

The primary procedures we performed to address this critical audit matter included:

Testing the completeness and accuracy of the underlying information used as inputs in both the guideline transaction method, guideline public company method and the discounted cash flow method.

Testing mathematical accuracy of the discounted cash flow method.

Utilizing personnel with specialized knowledge and skill in valuation to assist in:

(i) evaluating the appropriateness of the valuation models applied to each limited liability company investment (ii) evaluating whether unobservable inputs, including the acreage value, proved reserve multiple, daily production multiple, and discount rate were reasonable, and (iii) testing mathematical accuracy of the guideline transaction method and guideline public company method.

Testing the reasonableness of the estimated future production by:

(i) comparing to historical production volumes and future production decline analyses (ii) comparing to historical production volumes and historical production decline analyses derived from analogous wells and (iii) assessing the consistency with evidence obtained in other areas of the audit.

Utilizing personnel with specialized skill and knowledge in valuation to assist in:

(i) evaluating the appropriateness of the valuation techniques applied to the investment in Morgan, (ii) evaluating whether unobservable inputs utilized by management, including the acreage value multiples, production multiples, and discount rates were reasonable by comparing to independent data sources, and (iii) performing an independent evaluation of production multiples and acreage value multiples and comparing to management’s measurement of the fair value of Morgan.

/s/ BDO USA, P.C.

We have served as the Company's auditor since 2014.

We have served as the Fund's auditor since 2014.

Houston, Texas

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BALANCE SHEETS

December 31, 2025

December 31, 2024

(in thousands, except shares and per share amounts)

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Control investments (cost at $ 10,500 and $ 18,611 , respectively)

Non-affiliate investments (cost at $ 1,418 and $ 0 , respectively)

Total investments in portfolio securities at fair value

Treasury bills

Cash and cash equivalents

Restricted cash

Accounts receivable from affiliates

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Liabilities and net assets

Accounts payable

Accounts payable and other

Accrued compensation

Accounts payable to related parties

Borrowing under margin account

Notes payable

Warrant liability, at fair value

Total liabilities

Commitments and contingencies (See Note 7)

Common stock, $ 0.001 par value per share;

100,000,000 shares authorized as of December 31, 2023 and December 31, 2022, respectively, and 13,586,173 and 13,518,146 shares outstanding as of December 31, 2023 and December 31, 2022, respectively

Preferred stock, $ 0.001 par value per share;

10,000,000 shares authorized as of December 31, 2023 and December 31, 2022 respectively

10,000,000 shares authorized as of December 31, 2025 and December 31, 2024

Common stock, $ 0.001 par value per share;

100,000,000 shares authorized as of December 31, 2025 and December 31, 2024, and 13,966,696 and 13,586,173 shares outstanding as of December 31, 2025 and December 31, 2024, respectively

Common stock, par value

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Investment income:

Interest and dividend income:

Control investments

Total interest and dividend income

Interest from U.S.

Treasury bills

Non-affiliate investments

Total investment income

Interest income

Total investment income

Compensation expense

Professional fees

Transaction costs

Professional liability expenses

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Net investment loss

Net realized gain:

Escrow receivable

Net realized loss (gain):

Control investments

Non-affiliate investments

Treasury Bills

Net realized gain

Net unrealized appreciation of portfolio securities:

Net realized (loss) gain

Net unrealized appreciation (depreciation) of portfolio

Control investments

Net change in net unrealized appreciation of portfolio securities

Federal and state income, excise and other taxes

Net increase (decrease) in net assets resulting from operations

Net increase (decrease) in net assets resulting from operations per share:

Basic and diluted

Non-affiliate investments

Net change in net unrealized appreciation (depreciation) of portfolio securities

Net change in net unrealized depreciation on warrant liability

Net decrease in net assets resulting from operations

Net decrease in net assets resulting from operations per share:

Weighted average shares outstanding:

Basic and diluted

The accompanying notes are an integral part of these financial statements

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(in thousands)

Excess of Par Value

Number of Shares

Capital in Excess of Par Value

Accumulated Deficit

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Balances as of January 1, 2023

Recharacterization of net capital gains

Issuance of shares

Net increase in net assets resulting from operations

Balances as of December 31, 2023

Net decrease in net assets resulting from operations

Balances as of December 31, 2022

Issuance of shares

Net increase in net assets resulting from operations

Balances as of December 31, 2024

Share-based incentive compensation

Shares subscribed but not issued

Issuance of warrants

Net decrease in net assets resulting from operations

Balances as of December 31, 2025

The accompanying notes are an integral part of these financial statements.

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(in thousands)

Reconciliation of increase (decrease) in net assets resulting from operations to net cash (used in) provided by operating activities:

Net increase (decrease) in net assets resulting from operations

Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash (used in) provided by operating activities:

Net realized (gain):

Escrow receivable

Cash flow from operating activities:

Net decrease in net assets resulting from operations

Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:

Net realized loss:

Control investments

Non-affiliate investments

Treasury Bills

Net change in unrealized appreciation of portfolio securities:

Net change in unrealized (appreciation) depreciation of portfolio securities:

Control investments

Non-affiliate investments

Net change in unrealized appreciation of warrant payable

Share-based incentive compensation

Purchase of portfolio securities

Write-off of receivable from portfolio company

PIK interest payable

Amortization of debt discount

Transaction costs

Net proceeds from dispositions of portfolio securities

(Purchases) sales of U.S.

Sales (purchases) of U.S.

Treasury Bills, net

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Accounts receivable from affiliates

Accrued interest and dividend receivable

Accrued escrow receivable

Accrued interest receivable

Accounts payable and accrued liabilities

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Repayments under margin account

Issuance of common stock

Issuance of notes payable and warrants liability

Net cash provided by (used in) financing activities

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Cash and cash equivalents and restricted cash at end of period

Non-cash operating and financing activities:

Shares subscribed but not issued

Supplemental disclosure of cash flow information:

Interest paid

Income taxes paid

Interest paid in kind on note payable

The accompanying notes are an integral part of these financial statements.

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Net change in unrealized appreciation of portfolio securities

Net change in unrealized depreciation of portfolio securities - related party

Net increase (decrease) in net assets resulting from operations

Net change in unrealized depreciation of warrant liability

Net (decrease) increase in net assets resulting from operations

Capital transactions:

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Dilutive effect of shares issued

Decrease in net assets resulting from capital transactions

Dilutive effect of warrants issued

Decrease (increase) in net assets resulting from capital transactions

Net increase (decrease) in net assets

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Net assets at end of period, basic and diluted

Weighted average number of shares outstanding during period, in thousands

Weighted average number of shares outstanding during period,

Market price per share:

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SCHEDULE OF INVESTMENTS

DECEMBER 31, 2023

D ECEMBER 31, 2025

(in thousands, except share data)

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Majority-owned (3) :

Equus Energy, LLC (4)

December 2011

Member interest ( 100 %)

Morgan E&P, LLC (4)

Member interest ( 100 %)

12 % senior secured

promissory note due 5/26 (5)

Morgan E&P, Inc.

6,800,000 common stock (5)

12 % senior secured promissory note due 5/26 (5)(6)

Total Control Investments:

Majority-owned (represents 60.8% of total investments at fair value)

Treasury Bills

December 2023

Treasury bills (represents 52.4% of total investments at fair value)

Non-Affiliate Investments:

Less than 5% owned (4) :

CitroTech, Inc.

Environmental

February 2025

Warrants (exercisable into 312,500 common stock) (5)

591,039 shares common stock

Total Non-Affiliate Investments (represents 39.2% of total investments at fair value)

Total Investments

(1) Under Section 55 (a) of the 1940 Act, qualifying assets must represent at least 70% of total assets at the time of acquisitions of any non-qualifying assets.

As of none of the Fund's total assets were considered non-qualifying assets.

See Note 3 to the financial statements, Valuation of Investments.

Under Section 55(a) of the 1940 Act, qualifying assets must represent at least 70% of the total assets at the time of acquisitions of any non-qualifying.

As of December 31, 2025, none of the Fund’s total assets were considered non-qualifying assets.

See Note 3 to the financial statements, Valuation of Investments.

(3) Majority-owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more than 50% of the voting secu

(4) Level 3 Portfolio Investments

Majority owned investments are generally defined under the 1940 Act as companies in which we own more than 50% of the voting securities of such company.

Non-affiliate investments are generally defined under the 1940 Act as companies in which we own less than 5% of the voting securities of such company.

Level 3 Portfolio Investment.

Income producing.

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(in thousands, except share data)

Our portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities Act”).

Our portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities Act”) or an exemption from registration thereunder.

We typically negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including registration rights and related costs.

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We are classified as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our assets that may be invested in the securities of a single issuer.

The value of one segment called “Energy” includes our two remaining portfolio companies and was 70.1% of our net asset value, 50.4% of our total assets and 100% of our investments in portfolio company securities (at fair value) as of December 31, 2023.

The value of one segment called “Energy” includes one portfolio company and was 63.4 % of our net asset value, 49.2 % of our total assets and 60.8 % of our investments in portfolio company securities (at fair value) as of December 31, 2025.

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.

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Type of Securities

Fair Value as Percentage of

Limited liability company investments

Fair Value as Percentage of Net Assets

Secured and subordinated debt

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Fair Value as Percentage of Net Assets

Environmental

EQUUS TOTAL RETURN, INC.

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Member interest ( 100 %)

Morgan E&P, LLC (4)

Member interest ( 100 %)

12 % senior secured promissory note due 5/26 (5)

Total Control Investments:

Majority-owned (represents 100% of total investments at fair value)

Temporary Cash Investments

Treasury Bills

December 2022

Total Temporary Cash Investments (represents 27.7% of total investments at fair value)

Total Investments

Under Section 55 (a) of the 1940 Act, qualifying assets must represent at least 70% of total assets at the time of acquisitions of any non-qualifying assets.

As of none of the Fund's total assets were considered non-qualifying assets.

See Note 3 to the financial statements, Valuation of Investments.

As of December 31, 2024, none of the Fund's total assets were considered non- qualifying assets.

See Note 3 to the financial statements, Valuation of Investments.

(3) Majority-owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more than 50% of the voting secu

Majority-owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more than 50% of the voting securities of the company.

Level 3 Portfolio Investments

Income-producing

The accompanying notes are an integral part of these financial statements.

SCHEDULE OF INVESTMENTS – (Continued)

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(in thousands, except share data)

Our portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities Act”) or other relevant regulatory authority.

We negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including registration rights and related costs.

As an investment company classified as a business development company (“BDC”) under the Investment Company Act of 1940 (hereafter, the “1940 Act”), we may invest up to 30% of our assets in non-qualifying portfolio investments, as permitted by the 1940 Act.

Our portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities Act”).

We typically negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including registration rights and related costs.

As a business development company (“BDC”), we may invest up to 30 % of our assets in non-qualifying portfolio investments, as permitted by the Investment Company Act of 1940 (the “1940 Act”).

Specifically, we may invest up to 30% of our assets in entities that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including companies located outside of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly-traded entities with a market capitalization exceeding $ 250 million.

As of December 31, 2024, we had invested 91.9 % of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act.

As of December 31, 2022, all of our investments are in enterprises that are considered eligible portfolio companies under the 1940 Act.

We provide significant managerial assistance to a portfolio company that comprises 100% of the total value of the investments in portfolio securities as of December 31, 2022.

As of December 31, 2024, none of our investments are considered non-qualifying assets as all of our investments are in enterprises that are considered eligible portfolio companies the 1940 Act.

We provide significant managerial assistance to our portfolio companies that comprise 100% of the total value of the investments in portfolio securities as of December 31, 2024.

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” included our two remaining portfolio companies and was 93.2 % of our net asset value, 91.9 % of our total assets and 100 % of our investments in portfolio company securities (at fair value) as of December 31, 2024.

Our investments in portfolio securities consist of the following types of securities as of December 31, 2024 (in thousands):

Fair Value as

Percentage of

Type of Securities

Fair Value as Percentage of Net Assets

Limited liability company investments

Secured and subordinated debt

The following is a summary by industry of the Fund’s investments in portfolio securities as of December 31, 2024 (in thousands):

Fair Value as Percentage of Net Assets

The accompanying notes are an integral part of these financial statements.

Fair Value as Percentage of Net

EQUUS TOTAL RETURN, INC.

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About the Company— Equus Total Return, Inc.

(“we,” “us,” “our,” “Equus” the “Company” and the “Fund”), a Delaware corporation, was formed by Equus Investments II, L.P.

(the “Partnership”) on August 16, 1991.

On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common stock of the Fund.

(“we,” “us,” “our,” “Equus” the “Company” and the “Fund”), a Delaware corporation, was formed on August 16, 1991.

Our shares trade on the New York Stock Exchange (“NYSE”) under the symbol ‘EQS’.

On August 11, 2006, our shareholders approved the change of the Fund’s investment strategy to a total return investment objective.

Our investment strategy, as approved by our shareholders, is based on a total return investment objective.

This strategy seeks to provide the highest total return, consisting of capital appreciation and current income.

In connection with this strategic investment change, the shareholders also approved the change of name from Equus II Incorporated to Equus Total Return, Inc.

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 .

We are authorized under our Certificate of Incorporation to issue up to 100,000,000 shares of common stock and up to 10,000,000 shares of preferred stock.

As of December 31, 2025, we had 13,966,696 shares of common stock outstanding and no shares of preferred stock outstanding.

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We elected to be treated as a BDC under the Investment Company Act of 1940 Act (“1940 Act”), although our shareholders have previously authorized us to withdraw this election and, although such authorization has expired, will likely do so again in the future.

We currently qualify as a regulated investment company (“RIC”) for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to our stockholders.

We have certain wholly owned taxable subsidiaries (“Taxable Subsidiaries”) each of which holds one or more portfolio investments listed on our Schedules of Investments.

The purpose of these Taxable Subsidiaries is to permit us to hold certain income- producing investments or portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income.

Prior to the fourth quarter of 2024, we qualified as a regulated investment company (“RIC”) for federal income tax purposes and, therefore, were not required to pay corporate income taxes on any income or gains that we would have distributed distribute to our stockholders.

During the fourth quarter of 2024, we elected to not qualify as a RIC and, consequently, we are subject to normal corporate rates of taxation of our income and gains and are not permitted to deduct distributions paid to our stockholders.

We have certain wholly owned taxable subsidiaries (“Taxable Subsidiaries”) that were created to help us maintain our RIC status, each of which holds one or more portfolio investments listed on our Schedules of Investments.

The purpose of these Taxable Subsidiaries was to permit us to hold certain income- producing investments or portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income.

Absent the Taxable Subsidiaries, a portion of the gross income of these income-producing investments or of any LLC (or other pass-through entity) portfolio investment, as the case may be, would flow through directly to us for the 90% test.

To the extent that such income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and, therefore, cause us to incur significant federal income taxes.

The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages.

We do not consolidate the Taxable Subsidiaries for income tax purposes, with the exception of Texas Margins Tax, which is an entity level tax.

Since we have elected to not qualify as a RIC, the income of these Taxable Subsidiaries may be taxable to Equus, which is now classified as a Subchapter C or corporation.

To the extent that such income did not consist of investment income, it could jeopardize our ability to requalify as a RIC and, therefore, cause us to incur federal income taxes as described above.

The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and does not flow through to us, thereby helping us obtain (or preserve, as the case may be) RIC status and the resultant tax advantages.

We do not consolidate the Taxable Subsidiaries for income tax purposes, with the exception of Texas Margin Tax, which is an entity level tax.

The Taxable Subsidiaries may generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies.

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As of December 31, 2025, we had cash and cash equivalents of $ 0.1 million.

We had $ 40.9 million of our net assets of $ 48.3 million invested in portfolio securities.

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.

Treasury bills matured January 4, 2024 and we subsequently repaid this margin loan.

The margin interest was paid on February 4, 2024.

As of December 31, 2022, we had cash and cash equivalents of $ 19.3 million.

We had $ 15.7 million of our net assets of $ 35.2 million invested in portfolio securities.

We also had $ 6.0 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, $ 6.0 million was invested in U.S.

Treasury bills and $ 0.06 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.

Treasury bills matured January 3, 2023 and we subsequently repaid this margin loan.

The margin interest was paid on February 3, 2023.

During 2023 and 2022, we borrowed sufficient funds to maintain the Fund’s RIC status by utilizing a margin account with a securities brokerage firm.

There is no assurance that such arrangement will be available in the future.

If we are unable to borrow funds to make qualifying investments, we may no longer qualify as a RIC.

We would then be subject to corporate income tax on the Fund’s net investment income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary dividends.

If we continue to be a BDC, failure to continue to qualify as a RIC could be material to us and our stockholders.

Our operating cash flow and cash on hand is not sufficient to meet operating requirements or to finance routine capital expenditures through the next twelve months.

We are therefore seeking liquidity from the sale of our portfolio interests, as well as seeking external debt and equity financing from third parties.

Should any or all of the foregoing events not occur as contemplated, the Fund will not have the necessary funds to maintain normal operations and, therefore, substantial doubt would exist about the Fund’s ability to continue as a going concern.

(3) SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements:

Earnings Per Share —Basic earnings per share is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted-average number of shares of common stock outstanding for the period.

Other potentially dilutive common stock, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

Use of Estimates —The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements.

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Under Accounting Standards Committee (“ASC”) 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.

Fair Value Measurements — Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability.

The three levels of the fair value hierarchy are described below:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly;

and fair value is determined through the use of models or other valuation methodologies.

Level 3—Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation.

Valuation of Investments— For most of our investments, market quotations are not available.

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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).

Investments are valued utilizing a yield analysis, enterprise value (“EV”) analysis, net asset value analysis, liquidation analysis, discounted cash flow analysis, or a combination of methods, as appropriate.

We determine the fair value of equity securities, warrants, and other ownership interests in our portfolio companies using valuation methods appropriate for each investment.

When an instrument is traded in an active public market, we generally use the quoted market price as of the measurement date.

For privately held or infrequently traded equity positions, we may consider factors such as the portfolio company’s financial performance, recent transactions, market conditions, and the rights and preferences of the security.

For derivative securities such as warrants, we estimate the value of warrant positions using option-pricing techniques.

Other investments are valued utilizing a yield analysis, enterprise value (“EV”) analysis, net asset value analysis, liquidation analysis, discounted cash flow analysis, or a combination of methods, as appropriate.

The yield analysis uses loan spreads and other relevant information implied by market data involving identical or comparable assets or liabilities.

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The measurement is based on the net present value indicated by current market expectations about those future amounts.

In estimating the fair value of our equity interest in Morgan, we have given equal emphasis to an income approach that examines expected cash flows from the development of leasehold interests held by Morgan, with a market approach that examines comparable acreage values.

Our management received advice and assistance from a third-party valuation firm to support our determination of the fair value of this investment.

In applying these methodologies, additional factors that we consider in fair value pricing our investments may include, as we deem relevant:

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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.

As such, we believe that the fair value will not exceed the cost of the investment.

However, in addition to the previously described analysis involving allocation of value to the debt instrument, we perform a yield analysis assuming a hypothetical current sale of the security to determine if a debt security has been impaired.

The yield analysis considers changes in interest rates and changes in leverage levels of the portfolio company as compared to the market interest rates and leverage levels.

Assuming the credit quality of the portfolio company remains stable, the Fund will use the value determined by the yield analysis as the fair value for that security if less than the cost of the investment.

In addition to the previously described analysis involving allocation of value to the debt instrument, we perform a yield analysis assuming a hypothetical current sale of the security to determine if a debt security has been impaired.

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We record unrealized depreciation on investments when we determine that the fair value of a security is less than its cost basis and will record unrealized appreciation when we determine that the fair value is greater than its cost basis.

Fair Value Measurement—Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy.