Equus Total Return(EQS) - 2025 Q2 - Quarterly Report

Cover Page and General Information This section provides general information about the company, including its filing type, stock exchange listing, and key corporate details - The document is a Quarterly Report on Form 10-Q for the period ended June 30, 2025, filed by EQUUS TOTAL RETURN, INC[1][2] - Equus Total Return, Inc. is a Delaware corporation, listed on the New York Stock Exchange under the symbol 'EQS', and is classified as a non-accelerated filer[2][3][4] Common Stock Details | Metric | Value | | :--------------------- | :-------------- | | Common Stock Outstanding | 13,586,173 shares | | Par Value | $.001 | PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed financial statements and related disclosures for the reporting period Item 1. Unaudited Condensed Financial Statements This section presents the unaudited condensed financial statements, including balance sheets, statements of operations, changes in net assets, cash flows, selected per share data, schedules of investments, and detailed notes explaining the company's business, accounting policies, liquidity, and specific investment activities Condensed Balance Sheets This section details the company's financial position, including assets, liabilities, and net assets at specific dates Condensed Balance Sheet Highlights (in thousands) | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Total assets | $37,066 | $29,936 | | Total liabilities | $2,955 | $426 | | Total net assets | $34,111 | $29,510 | | Net asset value per share | $2.51 | $2.17 | - Total assets increased by $7,130 thousand (23.8%) from December 31, 2024, to June 30, 2025, primarily driven by an increase in investments in portfolio securities and accounts receivable from affiliates[9] - Total liabilities saw a significant increase of $2,529 thousand (593.7%) due to the introduction of notes payable and higher accounts payable to related parties[9] Condensed Statements of Operations This section details the company's financial performance over specific periods, including revenues, expenses, and net income or loss Condensed Statements of Operations Highlights (in thousands) | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------------------------- | :--------------------------- | :--------------------------- | | Total investment income | $695 | $614 | | Total expenses | $2,415 | $2,584 | | Net investment loss | $(1,720) | $(1,970) | | Net realized (loss) gain | $(4,266) | $75 | | Net change in net unrealized appreciation of portfolio securities | $9,843 | $3,400 | | Net increase (decrease) in net assets from operations | $3,857 | $1,505 | | Basic EPS | $0.28 | $0.11 | - Net increase in net assets resulting from operations significantly improved to $3,857 thousand for the six months ended June 30, 2025, compared to $1,505 thousand in the prior year, primarily driven by a substantial increase in net unrealized appreciation of portfolio securities[12] - Net realized loss increased to $(4,266) thousand in 2025 from a gain of $75 thousand in 2024, indicating dispositions at a loss[12] Condensed Statements of Changes in Net Assets This section outlines the changes in the company's net assets over a period, reflecting operational results and other transactions Condensed Statements of Changes in Net Assets Highlights (in thousands) | Metric (in thousands) | January 1, 2025 | June 30, 2025 | | :-------------------------------------------------- | :-------------- | :------------ | | Total Net Assets | $29,510 | $34,111 | | Issuance of warrants | — | $744 | | Net increase in net assets resulting from operations | — | $3,943 | | Net decrease in net assets resulting from operations | — | $(86) | - Total net assets increased by $4,601 thousand from January 1, 2025, to June 30, 2025, primarily due to a net increase from operations and the issuance of warrants[14] Condensed Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Statements of Cash Flows Highlights (in thousands) | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(2,193) | $(13,555) | | Net cash provided by financing activities | $2,000 | $8,989 | | Net decrease in cash and cash equivalents | $(193) | $(4,566) | | Cash and cash equivalents at end of period | $69 | $2,417 | - Net cash used in operating activities significantly decreased from $(13,555) thousand in 2024 to $(2,193) thousand in 2025, indicating improved operational cash management or reduced investment outflows[17] - Financing activities provided $2,000 thousand in 2025, primarily from the issuance of notes payable and warrants, a decrease from $8,989 thousand in 2024 which included significant borrowings under a margin account[17] Supplemental Information—Selected Per Share Data and Ratios This section provides key per share data and financial ratios, offering insights into the company's performance and valuation metrics Selected Per Share Data and Ratios | Metric | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Net assets at end of period, basic and diluted | $2.51 | $3.66 | | Market price per share: End of period | $1.36 | $1.32 | | Ratio of expenses to average net assets | (7.59%) | (5.27%) | | Ratio of net investment loss to average net assets | (5.41%) | (4.02%) | | Ratio of net increase in net assets resulting from operations to average net assets | 12.12% | 3.07% | | Return on net asset value | 15.59% | 3.12% | | Total return on market price | 23.64% | (8.97%) | - Return on net asset value significantly increased to 15.59% in 2025 from 3.12% in 2024, and total return on market price turned positive at 23.64% from (8.97%) in the prior year[18] - The ratio of expenses to average net assets increased to (7.59%) in 2025 from (5.27%) in 2024, indicating higher relative expenses[18] Schedules of Investments This section details the company's investment portfolio, categorizing holdings by type and industry, and their fair values Investment Portfolio by Category (in thousands) | Investment Category | June 30, 2025 (Fair Value, in thousands) | December 31, 2024 (Fair Value, in thousands) | | :---------------------------- | :--------------------------------------- | :------------------------------------------- | | Total Investments | $33,482 | $27,500 | | Control Investments | $22,850 (68.3%) | $27,500 (100%) | | Non-Affiliate Investments | $10,632 (31.7%) | $0 | Investment Portfolio by Industry (June 30, 2025, in thousands) | Industry (June 30, 2025) | Fair Value (in thousands) | Percentage of Net Assets | | :----------------------- | :------------------------ | :----------------------- | | Energy | $22,850 | 67.0% | | Environmental | $10,632 | 31.2% | | Total | $33,482 | 98.2% | - The portfolio diversified in 2025 with the introduction of non-affiliate investments, while control investments decreased in fair value and as a percentage of total investments[22][33] Notes to Condensed Financial Statements This section provides detailed explanations and disclosures supporting the condensed financial statements (1) Description of Business and Basis of Presentation Equus Total Return, Inc. operates as a Business Development Company (BDC) with a total return investment objective, focusing on debt and equity securities of small to medium-sized companies. The company elected to cease qualifying as a Regulated Investment Company (RIC) in Q4 2024, making it subject to corporate income taxes - Equus aims to maximize stockholder return through current investment income and long-term capital gains by investing in debt and equity securities of companies with enterprise values between $5.0 million and $75.0 million[45] - The company elected to not qualify as a Regulated Investment Company (RIC) in Q4 2024, which means it will be subject to normal corporate income taxes and will not be permitted to deduct distributions paid to stockholders[46] - The company uses wholly-owned taxable subsidiaries to hold certain income-producing investments or LLCs to satisfy the RIC tax requirement (when applicable) that 90% of gross revenue must be investment income[47] (2) Liquidity and Financing Arrangements; Going Concern The company faces substantial doubt about its ability to continue as a going concern due to critically low cash reserves and a lack of committed financing to fund operations for the next twelve months. It is evaluating market conditions and potential asset dispositions to address liquidity challenges - As of June 30, 2025, cash and cash equivalents totaled $0.07 million, down from $0.3 million as of December 31, 2024[52][53][59] - Substantial doubt exists about the company's ability to continue as a going concern due to insufficient cash on hand and lack of projected future cash flows to fund operating activities for at least twelve months[59] - The company's shareholders approved a reduction in the asset coverage ratio to 150% in November 2019, allowing it to borrow up to twice its net assets, though additional borrowings beyond a convertible note in February 2025 have not been undertaken[55] (3) Significant Accounting Policies This note details the company's significant accounting policies, including the use of estimates, non-consolidation of portfolio investments, and a multi-step process for valuing investments, particularly those without readily available market quotations (Level 3). It also covers fair value measurement hierarchy, investment transactions, income recognition, and recent accounting standard adoptions - The company does not consolidate portfolio company investments, including those with controlling interests, in accordance with Article 6 of Regulation S-X and ASC 946[49][62] - Investments without readily available market quotations are valued using a multi-step process involving yield analysis, enterprise value (EV) analysis, net asset value analysis, liquidation analysis, and discounted cash flow analysis, with independent valuation firms assisting for larger, older investments[64][65][68] Fair Value Measurement Category (in thousands) | Fair Value Measurement Category | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------------ | :--------------------------- | :------------------------------- | | Total Investments | $33,482 | $27,500 | | Level 3 Investments | $26,169 | $27,500 | - The company adopted ASU 2023-07 (Segment Reporting) on January 1, 2024, and ASU 2023-09 (Income Taxes) on January 1, 2025, with the latter affecting only financial statement disclosures not required until year-end 2025[104][105] (4) Related Party Transactions and Agreements Independent Directors receive annual fees, meeting fees, and additional annual fees for committee chairs. Directors are also compensated at an hourly rate for services provided outside their direct board duties - Independent Directors receive an annual fee of $40,000, $2,000 for in-person meetings, and $1,000 for telephonic meetings. Committee chairs receive an additional $50,000 annual fee[106] - Directors are compensated at a rate of $300 per hour for services provided to the Fund not in connection with their roles as directors[107] (5) Issuance of Equus Securities In February 2025, the Fund issued a $2.0 million senior convertible promissory note (Equus Note) with a 10.0% interest rate, convertible into common stock at $1.50 per share, collateralized by holdings in General Enterprise Ventures, Inc. Concurrently, 1,999,999 common stock purchase warrants were issued at an exercise price of $1.50 per share - On February 7, 2025, the Fund issued a one-year senior convertible promissory note for $2.0 million cash, bearing 10.0% interest, convertible into common stock at $1.50 per share[108] - The Equus Note is collateralized by the Fund's holdings in General Enterprise Ventures, Inc[112] - Concurrently, the Fund issued two common stock purchase warrants to acquire 1,999,999 shares at an exercise price of $1.50 per share, expiring February 3, 2030[114][116] (6) Portfolio Securities During the first half of 2025, the company made a new investment in General Enterprise Ventures, Inc. (GEVI) through a convertible note and warrants, and divested its interest in Equus Energy by selling it to North American Energy Opportunities Corp. (NAEOC) - On February 10, 2025, the Fund purchased a $1.5 million 1-year senior convertible promissory note from General Enterprise Ventures, Inc. (GEVI) at 10% interest, convertible at $0.40 per share, and received warrants for 1,875,000 GEVI common shares at $0.50 per share[117] - On March 3, 2025, the Fund sold Equus Energy to North American Energy Opportunities Corp. (NAEOC) for $1.25 million cash and 27,500 shares of preferred stock, redeemable within 6 months upon certain conditions[118] (7) Conversion to an Operating Company The company is actively pursuing a transformation into an operating company and may seek shareholder authorization to withdraw its BDC election, though no definitive agreement or withdrawal is expected before December 31, 2025. This strategic shift is supported by an increase in authorized shares - The Fund intends to transform into an operating company and may seek shareholder authorization to withdraw its BDC election, but will not submit withdrawal until a definitive agreement for a transformative transaction is reached[119] - Shareholders approved an increase in authorized common stock to 100,000,000 shares and preferred stock to 10,000,000 shares to facilitate the transformation and evaluate larger acquisition/merger candidates[120] (8) 2016 Equity Incentive Plan The 2016 Equity Incentive Plan, approved by shareholders, allows for awards of restricted stock and common stock purchase options to encourage equity ownership and retain key personnel. All previously granted awards under the plan were fully vested as of June 30, 2020 - The 2016 Equity Incentive Plan aims to promote the interests of the Fund by encouraging officers, employees, and directors to acquire or increase their equity interest[121] - The plan permits awards of restricted stock and common stock purchase options, with a maximum of 2,434,728 shares subject to awards[121] - All awards granted under the Incentive Plan as of March 17, 2017, were fully vested by June 30, 2020[121] (9) Morgan E&P, LLC Morgan E&P, LLC, a wholly-owned energy subsidiary, continues to expand its acreage in the Williston Basin but faces a going concern issue due to insufficient cash resources and is actively seeking external financing. The Fund does not consolidate Morgan's financials but values its investment based on reserve reports and comparable transactions - Morgan E&P, LLC, a wholly-owned subsidiary, acquired additional acreage in the Bakken/Three Forks formation of the Williston Basin in North Dakota in 2023 and 2024[122] - Morgan faces substantial doubt about its ability to continue as a going concern due to insufficient cash resources to fund present operations and is seeking external financing[126] Morgan E&P, LLC Financials (in thousands) | Morgan E&P, LLC Financials (in thousands) | June 30, 2025 | December 31, 2024 | | :---------------------------------------- | :------------ | :---------------- | | Total assets | $9,386 | $9,353 | | Total liabilities | $24,058 | $22,916 | | Member's deficit | $(14,672) | $(13,563) | Morgan E&P, LLC Statement of Operations (in thousands) | Morgan E&P, LLC Statement of Operations (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----------------------------------------------------- | :--------------------------- | :--------------------------- | | Oil and gas revenue | $205 | $2,466 | | Total operating costs and expenses | $680 | $3,945 | | Net loss | $(1,109) | $(2,080) | (10) Subsequent Events Subsequent to the reporting period, the Board of Directors approved the issuance of additional restricted shares under the 2016 Equity Incentive Plan, and Morgan E&P, LLC secured a $3 million loan facility for drilling operations - On July 1, 2025, the Fund's Board of Directors approved the issuance of 419,523 restricted shares of common stock under the 2016 Equity Incentive Plan[147] - On August 14, 2025, Morgan E&P, LLC secured a $3 million loan facility to fund near-term drilling and work-over operations in the Bakken Shale formation[146] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources, discussing key drivers of investment income and expenses, changes in portfolio valuations, and the impact of broader economic and geopolitical events, particularly in the oil and gas sector. It also reiterates the company's strategic shift towards becoming an operating company - The company's investment strategy focuses on maximizing total return through capital appreciation and current income by investing in debt and equity of companies with enterprise values between $5.0 million and $75.0 million[153] - The company elected to not qualify as a Regulated Investment Company (RIC) in Q4 2024, making it subject to corporate income taxes and unable to deduct distributions to stockholders[154] - Management is evaluating opportunities to transform Equus into an operating company and may seek shareholder authorization to withdraw its BDC election, though no definitive agreement or withdrawal is expected before December 31, 2025[156] Key Financial Performance Indicators (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net investment loss | $(610) | $(880) | $(1,720) | $(1,970) | | Total investment income | $357 | $331 | $695 | $614 | | Compensation expense | $433 | $477 | $1,003 | $905 | | Professional fees | $229 | $367 | $582 | $934 | | Transaction costs | $0 | $0 | $307 | $0 | | Net change in unrealized appreciation/depreciation of portfolio securities | $524 | $4,750 | $9,843 | $3,400 | - Net asset value increased by 15.7% to $2.51 per share as of June 30, 2025, and the common stock traded at a 45.8% discount to NAV, an improvement from 49.3% at December 31, 2024[170] - Crude prices stabilized at $65.11 and natural gas prices increased to $3.26 per MMBTU as of June 30, 2025, contributing to consolidation in the Williston Basin where Morgan E&P, LLC operates[161] Item 3. Quantitative and Qualitative Disclosure about Market Risk This section outlines the company's exposure to financial market risks, including interest rate fluctuations for debt securities and outstanding debt, and changes in marketable equity security prices. It notes that the company does not use derivative financial instruments to mitigate these risks and that a significant portion of its portfolio consists of private company investments, whose valuations are less directly impacted by public market fluctuations but are sensitive to significant market changes - The company is subject to financial market risks from changes in interest rates (debt securities and outstanding debt) and marketable equity security prices[190] - The company does not use derivative financial instruments to mitigate market risks[190] - A major portion of the investment portfolio consists of debt and equity investments in private companies, whose estimated fair values are generally not significantly impacted by modest changes in public market equity prices but can be affected by significant market shifts[192] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting related to the valuation of portfolio investments. The company is actively implementing remediation efforts to enhance these controls - Management concluded that the Fund's disclosure controls and procedures were not effective as of June 30, 2025[194] - A material weakness exists in internal control over financial reporting, specifically relating to the design and operation of management review over the valuation of the Fund's portfolio investments, including the completeness and accuracy of underlying data[196] - Remediation efforts include enhancing existing controls for data completeness and accuracy supplied to third parties for valuation, and improving policies and procedures for review precision and evidence[199] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, exhibits, and the official signature for the report Item 1. Legal Proceedings The Fund is occasionally involved in legal proceedings as part of its normal business operations, but management does not anticipate these proceedings will have a material adverse effect on the Fund's financial condition or results of operations - The Fund is a party to certain legal proceedings incidental to the normal course of its business, including enforcing contractual rights with portfolio companies[201] - Management does not expect these legal proceedings to have a material effect on the Fund's financial condition or results of operations[201] Item 1A. Risk Factors This section highlights risks associated with the company's planned conversion to an operating company, including those related to the transformation process, potential transactions, and the commercial enterprise it may combine with. Readers are directed to the annual report on Form 10-K for a comprehensive discussion of risks - Efforts to convert Equus into an operating company may subject the Fund to risks associated with the transformation process, potential transactions, and the commercial enterprise it may combine with[202] - Readers should carefully consider risks detailed in the annual report on Form 10-K for the year ended December 31, 2024, including those related to the operating company transformation and the impact of the coronavirus pandemic on the Fund and its energy investments[203] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including articles of incorporation, bylaws, material contracts (like the 2016 Equity Incentive Plan), and certifications by the Chief Executive Officer and Chief Financial Officer - Exhibits include Articles of Incorporation, Bylaws, Material Contracts (e.g., Safekeeping Agreement, Indemnification Agreement, Code of Ethics, 2016 Equity Incentive Plan), Rule 13a-14(a)/15d-14(a) Certifications, Rule 1350 Certifications, and Policy Relating to Recovery of Erroneously Awarded Compensation[206][207][208] SIGNATURE This section contains the official signature of the registrant, Equus Total Return, Inc., by its Chief Executive Officer, John A. Hardy, certifying the filing of the report on August 15, 2025 - The report is signed by John A. Hardy, Chief Executive Officer of Equus Total Return, Inc., on August 15, 2025[210][211]