EQS Net Assets Soar 33.7% on Unrealized Gains, Energy Focus Deepens

TL;DR

**EQS is making a high-stakes bet on energy, and it's paying off big with a 33.7% return on NAV, but the extreme concentration is a massive risk.**

AI Summary

EQUUS TOTAL RETURN, INC. (EQS) filed an amended 10-Q/A for the quarter ended September 30, 2023, solely to add Inline XBRL tagging, with no other changes to the original filing. The company reported a significant increase in net assets resulting from operations, reaching $11.89 million for the nine months ended September 30, 2023, a substantial improvement from a net decrease of $0.135 million in the same period of 2022. This was primarily driven by a net unrealized appreciation of portfolio securities totaling $15.00 million in 2023, compared to $2.50 million in 2022. Total investments in portfolio securities at fair value surged to $33.05 million as of September 30, 2023, up from $15.65 million at December 31, 2022. The company's net asset value per share increased to $3.49 from $2.61 over the same period. Expenses, however, also rose, with total expenses for the nine months ended September 30, 2023, reaching $3.19 million, up from $2.64 million in 2022, largely due to increased compensation expense of $1.50 million. EQS remains heavily concentrated in the Energy sector, which constituted 70.1% of its net asset value and 100% of its portfolio securities at fair value as of September 30, 2023, with control investments in Equus Energy, LLC and Morgan E&P, LLC. The company also increased its temporary cash investments to $17.99 million from $5.99 million. The company continues to operate as a non-diversified BDC, focusing on total return through capital appreciation and current income from debt and equity securities of companies with enterprise values between $5.0 million and $75.0 million.

Why It Matters

This filing highlights EQS's significant shift towards a concentrated energy portfolio, with 70.1% of net assets in the sector, primarily through its control investments in Equus Energy, LLC and Morgan E&P, LLC. The substantial unrealized appreciation of $15.00 million in portfolio securities has dramatically boosted net assets, increasing NAV per share to $3.49. For investors, this indicates a high-risk, high-reward strategy heavily tied to the performance of a few energy assets. Employees and customers of these portfolio companies will see increased stability and potential for growth, while the broader market will note EQS's continued commitment to its BDC structure and its non-diversified investment approach, contrasting with more diversified BDCs.

Risk Assessment

Risk Level: high — The company is classified as a "non-diversified" investment company, with 70.1% of its net asset value and 100% of its investments in portfolio company securities concentrated in the Energy sector as of September 30, 2023. This extreme concentration in two control investments, Equus Energy, LLC and Morgan E&P, LLC, means that changes in business or industry trends within the Energy sector or the financial condition of these specific companies will disproportionately affect EQS's net asset value and market price.

Analyst Insight

Investors should carefully evaluate their risk tolerance given EQS's highly concentrated energy portfolio. While recent unrealized gains are impressive, the lack of diversification exposes shareholders to significant sector-specific and company-specific risks. Consider this a speculative play on the energy sector, not a diversified income-generating BDC.

Financial Highlights

debt To Equity

0.39

revenue

$60K

operating Margin

N/A

total Assets

$65.54M

total Debt

$18.41M

net Income

$11.89M

eps

$3.49

gross Margin

N/A

cash Position

$31.66M

revenue Growth

N/A

Key Numbers

• $11.89M — Net increase in net assets from operations (For the nine months ended September 30, 2023, up from -$0.135M in 2022)
• $15.00M — Net unrealized appreciation of portfolio securities (For the nine months ended September 30, 2023, significantly higher than $2.50M in 2022)
• $33.05M — Total investments in portfolio securities at fair value (As of September 30, 2023, up from $15.65M at December 31, 2022)
• $3.49 — Net asset value per share (As of September 30, 2023, up from $2.61 at December 31, 2022)
• 70.1% — Percentage of net assets in Energy sector (As of September 30, 2023, indicating high concentration)
• $3.19M — Total expenses (For the nine months ended September 30, 2023, up from $2.64M in 2022)
• 33.72% — Return on net asset value (For the nine months ended September 30, 2023, a significant increase from -0.37% in 2022)
• $17.99M — Temporary cash investments (As of September 30, 2023, up from $5.99M at December 31, 2022)

Key Players & Entities

• EQUUS TOTAL RETURN, INC. (company) — Registrant
• Equus Energy, LLC (company) — Control investment, 100% member interest
• Morgan E&P, LLC (company) — Control investment, 100% member interest
• New York Stock Exchange (regulator) — Exchange where EQS shares trade
• Securities and Exchange Commission (regulator) — Recipient of the 10-Q/A filing
• Investment Company Act of 1940 (regulator) — Governing act for BDCs
• Delaware (regulator) — State of incorporation
• Bloomberg (company) — Financial news outlet

FAQ

Risk Factors

• Concentration Risk in Energy Sector [high — financial]: EQS is heavily concentrated in the Energy sector, with 70.1% of its net assets and 100% of its portfolio securities at fair value invested in this sector as of September 30, 2023. This includes significant control investments in Equus Energy, LLC and Morgan E&P, LLC. Such concentration exposes the company to significant risks associated with the volatility and cyclical nature of the energy industry.
• Reliance on Control Investments [high — financial]: The company's strategy involves control investments in companies with enterprise values between $5.0 million and $75.0 million. As of September 30, 2023, control investments in portfolio securities were valued at $33.05 million, representing a substantial portion of total assets. The performance of these specific investments significantly impacts the overall financial results and net asset value.
• Increased Leverage [medium — financial]: Total liabilities increased from $6.43 million at December 31, 2022, to $18.41 million at September 30, 2023, largely due to a rise in 'Borrowing under margin account' from $5.99 million to $17.99 million. This indicates increased financial leverage, which can amplify both gains and losses.
• Rising Operating Expenses [medium — operational]: Total expenses for the nine months ended September 30, 2023, increased to $3.19 million from $2.64 million in the prior year period. A significant driver of this increase was compensation expense, which rose from $1.14 million to $1.50 million, impacting overall profitability.
• Market Volatility and Unrealized Appreciation [medium — market]: The company experienced a substantial net unrealized appreciation of portfolio securities totaling $15.00 million for the nine months ended September 30, 2023, compared to $2.50 million in the same period of 2022. While this drove a significant increase in net assets, it also highlights the sensitivity of the company's performance to market fluctuations.
• Non-Diversified Business Development Company (BDC) Status [medium — financial]: As a non-diversified BDC, EQS is not subject to the same diversification requirements as diversified BDCs. This allows for greater concentration in specific investments but also increases the risk associated with the performance of those individual holdings.

Industry Context

EQUUS TOTAL RETURN, INC. operates as a non-diversified Business Development Company (BDC) focused on the energy sector. The BDC landscape generally involves providing capital to small and mid-sized companies, often through debt and equity. However, EQS's extreme concentration in the Energy sector, particularly through control investments, differentiates it and exposes it to sector-specific risks and opportunities.

Regulatory Implications

As a BDC, EQS is subject to regulations under the Investment Company Act of 1940. Its non-diversified status allows for concentrated investments, but this also means that regulatory scrutiny may focus on the management of these concentrated risks and the adequacy of disclosures regarding sector-specific exposures.

What Investors Should Do

1. Monitor Energy Sector Performance
2. Assess Leverage Strategy
3. Analyze Expense Structure
4. Evaluate Control Investment Performance

Key Dates

• 2023-09-30: Quarter ended September 30, 2023 — Reported a net increase in net assets of $11.89 million, driven by significant unrealized appreciation in portfolio securities and increased investment value.
• 2023-12-31: Fiscal Year End 2022 — Total investments in portfolio securities were $15.65 million, and net assets had a decrease of $0.135 million from operations.
• 2022-09-30: Quarter ended September 30, 2022 — Reported a net decrease in net assets of $0.135 million, with unrealized appreciation of $2.50 million.

Glossary

Net asset value per share

The value of a company's assets minus its liabilities, divided by the number of outstanding shares. It represents the per-share market value of the company. (Indicates the intrinsic value of each share of EQS, which increased from $2.61 to $3.49.)

Unrealized appreciation

The increase in the market value of an asset that has not yet been sold. It is a paper gain that becomes realized only upon sale. (A key driver of EQS's improved performance, contributing $15.00 million to net assets for the nine months ended September 30, 2023.)

Control investments

Investments where the company has the power to direct the activities of the investee that most significantly impact its returns. (These are a primary focus for EQS, valued at $33.05 million as of September 30, 2023, and are concentrated in the Energy sector.)

Non-diversified BDC

A Business Development Company that is not required to adhere to strict diversification requirements, allowing for higher concentration in fewer investments. (Explains EQS's significant concentration in the Energy sector and specific control investments.)

Accumulated deficit

The cumulative net losses of a company that have not been offset by net income. It represents a negative retained earnings balance. (EQS has an accumulated deficit of $27.57 million as of September 30, 2023, indicating historical unprofitability, though current operations are positive.)

Borrowing under margin account

Funds borrowed against the value of securities held in a brokerage account. This is a form of leverage. (Increased significantly from $5.99 million to $17.99 million, indicating increased use of leverage by EQS.)

Year-Over-Year Comparison

The amended 10-Q/A for the quarter ended September 30, 2023, shows a dramatic improvement in financial performance compared to the same period in 2022. Net assets from operations increased to $11.89 million from a decrease of $0.135 million. This surge was primarily driven by a substantial increase in net unrealized appreciation of portfolio securities, which grew to $15.00 million from $2.50 million. Total investments in portfolio securities at fair value more than doubled to $33.05 million from $15.65 million. While total expenses also rose to $3.19 million from $2.64 million, largely due to higher compensation costs, the significant gains in investment value have led to a strong positive return on net asset value of 33.72% compared to -0.37% in the prior year.

Key Financial Figures

• $130.00 — il prices reaching a multi-year high of $130.00 per barrel in March 2022, and gas price

Filing Documents

• equus_10qa.htm (10-Q/A) — 1055KB
• equus_ex311.htm (EX-31.1) — 12KB
• equus_ex312.htm (EX-31.2) — 12KB
• equus_ex321.htm (EX-32.1) — 4KB
• equus_ex322.htm (EX-32.2) — 5KB
• 0001096906-25-002128.txt ( ) — 5791KB
• equus-20230930.xsd (EX-101.SCH) — 50KB
• equus-20230930_lab.xml (EX-101.LAB) — 279KB
• equus-20230930_cal.xml (EX-101.CAL) — 38KB
• equus-20230930_pre.xml (EX-101.PRE) — 268KB
• equus-20230930_def.xml (EX-101.DEF) — 184KB
• equus_10qa_htm.xml (XML) — 1182KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Financial Statements 4 Condensed Balance Sheets 4 Condensed Statements of Operations 5 Condensed Statements of Changes in Net Assets 6 Condensed Statements of Cash Flows 7 Supplemental Information—Selected Per Share Data and Ratios 8 Schedules of Investments 9 Notes to Condensed Financial Statements 13 Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations 35 Item 3. Quantitative and Qualitative Disclosure about Market Risk 42 Item 4.

Controls and Procedures

Controls and Procedures 42

OTHER INFORMATION

PART II. OTHER INFORMATION Item 1.

Legal Proceedings

Legal Proceedings 43 Item 1A.

Risk Factors

Risk Factors 43 Item 6. Exhibits 44 SIGNATURE 45 3 Table of Contents

Financial Information

Part I. Financial Information

Unaudited Condensed Financial Statements

Item 1. Unaudited Condensed Financial Statements EQUUS TOTAL RETURN, INC. CONDENSED BALANCE SHEETS (Unaudited) September 30, 2023 December 31, 2022 (in thousands, except shares and per share amounts) Assets Investments in portfolio securities at fair value: Control investments (cost at $ 10,511 and $ 8,111 , respectively) $ 33,050 $ 15,650 Total investments in portfolio securities at fair value 33,050 15,650 Temporary cash investments 17,987 5,998 Cash and cash equivalents 13,672 19,224 Restricted cash 180 60 Accounts receivable from affiliates 140 350 Accrued interest 40 — Other assets 466 382 Total assets 65,535 41,664 Liabilities and net assets Accounts payable 113 107 Accrued compensation 2 321 Accounts payable to related parties 305 1 Borrowing under margin account 17,987 5,998 Total liabilities 18,407 6,427 Commitments and contingencies (See Note 2) Net assets Common stock, $ 0.001 par value per share; 100,000,000 shares authorized and 13,518,146 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively Preferred stock, $ 0.001 par value per share; 10,000,000 shares authorized as of September 30, 2023 and December 31, 2022 respectively Common stock, par value $ 13 $ 13 Capital in excess of par value 74,685 74,685 Accumulated deficit ( 27,570 ) ( 39,461 ) Total net assets $ 47,128 $ 35,237 Net asset value per share $ 3.49 $ 2.61 The accompanying notes are an integral part of these financial statements. 4 Table of Contents EQUUS TOTAL RETURN, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30, Nine Months ended September 30, (in thousands, except per share amounts) 2023 2022 2023 2022 Investment income: Control investments $ 32 $ — $ 40 $ — Total interest and dividend income 32 — 40 — Interest from temporary cash investments 10 — 2

View Full Filing

View this 10-Q/A filing on SEC EDGAR