Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (Equus)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Business Overview: Equus is a Business Development Company (BDC) and a Regulated Investment Company (RIC) seeking total return through capital appreciation and current income. The company is currently pursuing a "Plan of Reorganization" to transition from a BDC to a publicly-traded operating company, potentially via merger with an operating company in the energy, natural resources, technology, or financial services sectors. The portfolio is heavily concentrated, with the "Shipping products and services" sector (PalletOne, Inc.) representing 64.1% of net assets.
Key Financial Metrics
| Metric | Sept 30, 2020 | Dec 31, 2019 |
|---|---|---|
| Total Assets | $64.7 million | $75.1 million |
| Total Liabilities | $27.3 million | $29.1 million |
| Net Assets | $37.4 million | $46.0 million |
| Net Asset Value (NAV) per Share | $2.77 | $3.40 |
| Cash and Cash Equivalents | $1.6 million | $4.0 million |
| Temporary Cash Investments | $27.0 million | $29.0 million |
| Borrowings (Margin Account) | $27.0 million | $29.0 million |
Results of Operations (Nine Months Ended Sept 30, 2020)
- Total Investment Income: $0.3 million (vs. $0.2 million in 2019)
- Total Expenses: $2.6 million (vs. $2.8 million in 2019)
- Net Investment Loss: $2.3 million (vs. $2.6 million in 2019)
- Net Realized Gain: $8,000 (vs. $2.8 million loss in 2019)
- Net Change in Unrealized Appreciation: $(8.1) million (vs. $10.3 million gain in 2019)
- Net Decrease in Net Assets from Operations: $(8.6) million (vs. $5.3 million increase in 2019)
- Net Decrease in Net Assets per Share: $(0.64) (vs. $0.39 increase in 2019)
Material Changes vs. Prior Period
- Portfolio Valuation Decline: Net assets decreased by approximately $8.6 million, driven primarily by a $6.3 million decrease in unrealized appreciation. Key drivers included:
- Equus Energy, LLC: Fair value decreased by $3.0 million due to declines in mineral acreage prices and crude oil prices (WTI dropped from $61.06 in Dec 2019 to a low of $20.48 in March 2020, recovering to $40.22 by Sept 2020).
- PalletOne, Inc.: Fair value decreased by $2.5 million due to a less favorable outlook.
- MVC Capital, Inc.: Fair value decreased by $0.8 million due to share price declines.
- Realized Gains/Losses: Unlike the prior year which saw a $2.8 million realized loss from the dissolution of Equus Media Development Company, the current period recorded a nominal $8,000 gain from temporary cash investments.
- Expense Reduction: Total expenses decreased slightly year-over-year, primarily due to a modest decline in compensation expense.
- Market Price Discount: As of September 30, 2020, the common stock traded at a 56.3% discount to NAV, widening from a 46.5% discount at year-end 2019.
Guidance, Outlook, Risks, and Contingencies
- Plan of Reorganization: The company continues to evaluate opportunities to merge with an operating company to exit BDC status. However, the authorization to withdraw the BDC election expired on March 31, 2020, and a new shareholder vote is required. The process is constrained by the COVID-19 pandemic, which limits travel and in-person due diligence.
- Liquidity and Going Concern:
- Equus believes it has sufficient liquidity to meet operating requirements for the next 12 months.
- Equus Energy, LLC: The subsidiary faces substantial doubt regarding its ability to continue as a going concern due to low oil prices and reduced cash flows. It may need to shut in wells, sell assets, or secure financing.
- COVID-19 Impact: The pandemic has constrained the ability to source new investments or consummate transactions. While day-to-day operations are remote, the economic dislocation negatively impacts portfolio company valuations and the broader energy sector.
- RIC Status Maintenance: The company utilizes a margin loan (currently $27.0 million) to purchase U.S. Treasury bills to maintain diversification requirements for RIC tax status. Failure to maintain this status would subject the company to corporate income tax.
- Subsequent Events:
- On October 8, 2020, the $27.0 million margin loan was repaid using proceeds from maturing Treasury bills.
- During October and November 2020, the company sold a portion of its MVC Capital, Inc. shares for approximately $3.0 million in gross cash proceeds.
Investor Verification Checklist
- Going Concern Status of Equus Energy: Verify the subsidiary's ability to generate cash flow or secure financing given the volatility in oil prices and the explicit "substantial doubt" disclosure.
- Reorganization Timeline: Confirm the status of the shareholder vote required to withdraw the BDC election and the feasibility of a merger given pandemic-related travel restrictions.
- Portfolio Concentration Risk: Assess the impact of PalletOne, Inc. (64.1% of net assets) and Equus Energy (14.7% of net assets) on overall portfolio performance.
- NAV vs. Market Price: Monitor the widening discount to NAV (56.3%) and its implications for potential capital raises or merger negotiations.
- Subsequent Sales: Verify the final proceeds and impact of the MVC Capital, Inc. share sales reported as a subsequent event.