Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (NYSE: EQS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2019
Business Overview: Equus is a Business Development Company (BDC) and Regulated Investment Company (RIC) seeking total return through debt and equity investments in private companies. The company is currently executing a "Plan of Reorganization" to potentially merge with MVC Capital, Inc. or restructure as an operating company, having received shareholder authorization to withdraw its BDC election (expired July 31, 2019, with expectations of future re-authorization).
Key Financial Metrics
| Metric | Sept 30, 2019 | Dec 31, 2018 |
|---|---|---|
| Net Assets | $49.0 million | $43.5 million |
| Net Asset Value (NAV) per Share | $3.63 | $3.22 |
| Market Price per Share | $1.61 | $1.96 |
| Discount to NAV | 55.6% | 39.1% |
| Total Investments (Fair Value) | $42.9 million | $35.0 million |
| Cash and Cash Equivalents | $4.8 million | $7.4 million |
| Borrowings (Margin Account) | $27.0 million | $27.0 million |
Results of Operations (Nine Months Ended Sept 30, 2019)
- Net Investment Loss: $2.6 million (unchanged from prior year period).
- Investment Income: $0.2 million (decreased from $0.3 million in 2018 due to fewer interest-bearing investments).
- Total Expenses: $2.8 million (decreased from $3.0 million in 2018, primarily due to lower professional fees).
- Net Realized Loss: $2.7 million (driven by the dissolution of Equus Media Development Company, LLC).
- Net Change in Unrealized Appreciation: $10.3 million (increased from $5.9 million in 2018).
- Net Increase in Net Assets from Operations: $5.3 million ($0.39 per share).
Material Changes vs. Prior Period
- Portfolio Valuation: Total portfolio investments increased by $7.9 million (22.5%) to $42.9 million. This was driven by a $6.0 million increase in the fair value of PalletOne, Inc. (shipping products) and a $1.5 million increase in Equus Energy, LLC (energy sector) due to rising crude oil prices.
- Realized Losses: The company recorded a $2.8 million realized loss from the dissolution of Equus Media Development Company, LLC (EMDC), transferring its assets to the Fund. This contrasts with a negligible realized gain in the same period of 2018.
- Expense Reduction: Total expenses decreased by $0.2 million year-over-year, attributed to a reduction in professional fees.
- Market Discount: The discount of the market price to NAV widened significantly from 39.1% at year-end 2018 to 55.6% at September 30, 2019.
Outlook, Risks, and Contingencies
- Plan of Reorganization: The company continues to evaluate opportunities to merge with MVC Capital, Inc. or an operating company. While shareholder authorization to withdraw BDC status expired in July 2019, management expects to seek re-authorization. No definitive agreement has been reached.
- Liquidity Strategy: Management has shifted strategy from originating new investments to preserving liquidity. The company utilizes a margin account (currently $27.0 million) to maintain RIC tax status by holding qualifying investments (U.S. Treasury Bills). This loan was repaid in October 2019 following the sale of the T-bills.
- Concentration Risk: The portfolio is highly concentrated. PalletOne, Inc. represents 54.1% of Net Assets, and Equus Energy, LLC represents 21.4%. The company is classified as "non-diversified."
- Legal Proceedings: A shareholder lawsuit regarding the 2016 Equity Incentive Plan was dismissed by the Delaware Supreme Court in May 2019. No other material legal proceedings are expected to impact financial condition.
- Valuation Risks: Approximately $38.0 million of investments are Level 3 (unobservable inputs), making valuations subject to significant management judgment and potential volatility.
Investor Verification Checklist
- Reorganization Status: Verify if a definitive agreement for the Plan of Reorganization (merger or consolidation) has been signed, as this is critical for the company's long-term strategy.
- Margin Loan Renewal: Confirm the terms and availability of the margin facility used to maintain RIC status, as failure to borrow could trigger corporate income taxes.
- Portfolio Concentration: Assess the specific operational performance of PalletOne, Inc. and Equus Energy, LLC, given they comprise over 75% of Net Assets.
- Dividend Policy: Note that the company has suspended its managed distribution policy; verify if any dividends are declared in future periods.
- Market Discount: Monitor the widening discount to NAV (55.6%) and management's commentary on potential capital raising or buyback strategies.