Business Overview Equus Total Return, Inc. (EQS) is a Delaware corporation that invests in the debt and equity securities of companies with a total enterprise value between $5 million and $75 million. The company was formed in 1991 and has a longstanding history of navigating the challenges of the private equity and venture capital markets.
Equus was founded on August 16, 1991, as Equus Investments II, L.P. On July 1, 1992, the partnership was reorganized, with all of its assets and liabilities transferred to Equus in exchange for shares of common stock. The company's shares have since been trading on the New York Stock Exchange under the symbol EQS.
In 2006, Equus underwent a significant change when its shareholders approved a shift in the company's investment strategy to a total return investment objective. This strategic move led to a change in the company's name from Equus II Incorporated to Equus Total Return, Inc. The new strategy focused on providing the highest total return through a combination of capital appreciation and current income.
Over the years, Equus has implemented various initiatives to enhance its operations and performance. These efforts include changing the composition of its Board of Directors and management, terminating certain follow-on investments, internalizing the management of the Fund, suspending its managed distribution policy, and modifying its investment strategy to pursue shorter-term liquidation opportunities. The company has also pursued non-cash investment opportunities and sold certain legacy and underperforming investment holdings.
Equus elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, although its shareholders have previously authorized the company to withdraw this election. Currently, Equus qualifies as a regulated investment company (RIC) for federal income tax purposes, which allows it to avoid corporate income taxes on income and gains distributed to shareholders.
The company invests primarily in the debt and equity securities of companies with a total enterprise value between $5 million and $75 million, although it may engage in transactions with smaller or larger investee companies as well.
Equus' portfolio consists of control investments, affiliate investments, and non-affiliate investments. As of September 30, 2024, the company's net assets were $40.2 million, with $37.5 million invested in portfolio securities. The company's largest investment is in Equus Energy, LLC, a wholly-owned subsidiary that focuses on investments in the energy sector, particularly income-producing oil and gas properties.
The company is currently evaluating opportunities to transform itself into an operating company, but has not yet entered into any definitive agreements to do so. There were no reported scandals, short seller reports, or CEO departures during the period covered.
Financials and Valuation Over the past few years, Equus has faced a number of challenges, including the impact of the COVID-19 pandemic and the volatility in the oil and gas industry. For the nine months ended September 30, 2024, the company reported a net investment loss of $2.7 million, compared to a net investment loss of $3.1 million for the same period in 2023. The decrease in net investment loss was primarily due to an increase in interest income from the company's investments.
The company's net asset value per share decreased from $3.55 as of December 31, 2023, to $2.96 as of September 30, 2024, a decline of 16.6%. This decrease was largely attributable to a decline in the fair value of the company's investment in Morgan EP, LLC, a wholly-owned subsidiary that holds acreage in the Bakken/Three Forks formation in the Williston Basin of North Dakota.
Despite these challenges, Equus remains focused on identifying and executing on opportunities that align with its investment strategy. The company has internalized its management team and made efforts to reduce its operational cost structure, which it believes will help to enhance shareholder value going forward.
For the fiscal year 2023, Equus reported annual revenue of $17.21 million, annual net income of $12.95 million, annual operating cash flow of -$51.36 million, and annual free cash flow of -$51.36 million. In the most recent quarter (Q3 2024), the company reported revenue of $322,000 and a net loss of $9.63 million. Year-over-year, revenue increased by 900%, while net income decreased from a profit to a loss. The company did not provide explanations for these changes.
Equus does not disclose performance by geographic market, as it appears to operate primarily in the United States.
Liquidity Equus Total Return, Inc. maintains a strong balance sheet and liquidity position, which provides a solid foundation for future growth and development. The company's focus on managing its existing portfolio and exploring opportunities to enhance shareholder value, including through potential strategic transactions or changes to its business model, is supported by its liquidity position.
As of September 30, 2024, the company had a debt-to-equity ratio of 0.007. Equus had $55.5 million in restricted cash and U.S. Treasury bills, which were used to secure a $55 million margin loan. It also had $1.15 million in unrestricted cash and cash equivalents.
The company's current ratio and quick ratio were both 0.35 as of September 30, 2024.
Product Segments Equus Total Return, Inc.'s investment portfolio primarily consists of two product segments:
1. Control Investments Majority-owned: This segment comprises Equus Energy, LLC and Morgan EP, LLC. Equus Energy was formed in 2011 to make investments in the energy sector, focusing on income-producing oil and gas properties. As of September 30, 2024, the fair value of the Fund's investment in Equus Energy was $8 million, representing 20% of the Fund's total net assets. Morgan EP, LLC was formed in 2023 to acquire oil and gas properties in the Bakken-Three Forks formation in the Williston Basin of North Dakota. As of September 30, 2024, the fair value of the Fund's investment in Morgan EP, which includes both equity and debt, was $19.5 million, representing 48.6% of the Fund's total net assets.
The performance of these control investments has been mixed. During the nine months ended September 30, 2024, the fair value of Equus Energy decreased by $2 million, or 20%, primarily due to a decline in oil prices. In contrast, the fair value of Morgan EP increased by $3.6 million, or 21.7%, driven by increases in proved and probable reserves as well as the commencement of production from its initial wells. However, Morgan EP continues to face liquidity challenges and substantial doubt exists about its ability to continue as a going concern.
2. U.S. Treasury Bills: In addition to the control investments, the Fund also holds U.S. Treasury bills, which represented 59.5% of the Fund's total investments at fair value as of September 30, 2024. The Fund utilizes these Treasury bills, along with a margin account, to maintain its status as a regulated investment company (RIC) for federal income tax purposes.
Risks and Outlook Equus faces a number of risks, including the ongoing volatility in the oil and gas industry, the impact of economic conditions on its portfolio companies, and the potential for further declines in the fair value of its investments. The company is also evaluating opportunities to transform itself into an operating company, which could involve significant changes to its business model and operations.
Despite these challenges, Equus remains committed to its investment strategy and is focused on identifying and capitalizing on opportunities that can drive long-term value for its shareholders. The company's management team has a proven track record of navigating challenging market conditions, and the company's strong balance sheet and liquidity position provide a solid foundation for future growth and development.
In the near term, Equus is expected to continue to focus on managing its existing portfolio and exploring opportunities to enhance shareholder value, including through potential strategic transactions or changes to its business model. The company's success will depend on its ability to effectively allocate capital, manage risk, and adapt to the evolving market landscape.
Conclusion Equus Total Return, Inc. is a diversified investment company that has a long history of investing in the private equity and venture capital markets. While the company has faced a number of challenges in recent years, it remains focused on identifying and executing on opportunities that align with its investment strategy and can drive long-term value for its shareholders.
Despite the volatility in the oil and gas industry and the ongoing impact of economic conditions, Equus' management team has demonstrated a strong track record of navigating challenging market environments. The company's strong balance sheet and liquidity position provide a solid foundation for future growth and development, and its commitment to adapting its business model to changing market conditions suggests that it is well-positioned to capitalize on opportunities going forward.
Overall, Equus Total Return, Inc. is a company that is worth watching as it continues to navigate the evolving landscape of the private equity and venture capital markets. With a focus on providing the highest total return through a combination of capital appreciation and current income, the company is well-positioned to deliver value for its shareholders over the long term.