Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (Equus)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 a merger with an operating company or a subsidiary of MVC Capital, Inc. The portfolio is heavily concentrated, with significant exposure to the energy sector and a single affiliate investment.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | As of June 30, 2020 |
|---|---|---|---|
| Total Assets | $68.8 million | $75.1 million (Dec 31, 2019) | $68.8 million |
| Net Assets | $41.5 million | $46.0 million (Dec 31, 2019) | $41.5 million |
| Net Asset Value (NAV) per Share | $3.07 | $3.40 (Dec 31, 2019) | $3.07 |
| Investment Income | $0.2 million | $0.1 million | - |
| Total Expenses | $1.8 million | $1.9 million | - |
| Net Investment Loss | $(1.6) million | $(1.8) million | - |
| Net Realized Gain/Loss | $8,000 | $(2.8) million | - |
| Net Change in Unrealized Appreciation/Depreciation | $(3.0) million | $8.8 million | - |
| Net (Decrease) Increase in Net Assets from Operations | $(4.6) million | $4.3 million | - |
| Cash and Cash Equivalents | $2.3 million | $4.0 million (Dec 31, 2019) | $2.3 million |
| Borrowings (Margin Account) | $27.0 million | $29.0 million (Dec 31, 2019) | $27.0 million |
| Market Price per Share (End of Period) | $1.17 | $1.64 | $1.17 |
| Discount to NAV | 61.9% | 46.5% (Dec 31, 2019) | 61.9% |
Material Changes vs. Prior Period
- Net Asset Value Decline: NAV per share decreased 9.7% from $3.40 to $3.07, driven primarily by unrealized depreciation in portfolio securities.
- Portfolio Valuation Shifts:
- Equus Energy, LLC: Fair value decreased by $2.5 million due to a collapse in crude oil prices (falling from $61.06/bbl in Dec 2019 to a low of $20.48/bbl in March 2020) and lower mineral acreage prices.
- MVC Capital, Inc.: Fair value decreased by $1.4 million due to a decline in MVC's share price.
- PalletOne, Inc.: Fair value increased by $1.0 million due to improved operating performance.
- Realized Gains/Losses: The six months ended June 30, 2020, showed a small realized gain of $8,000 from temporary cash investments, contrasting with a $2.8 million realized loss in the prior year period resulting from the dissolution of Equus Media Development Company (EMDC).
- Expense Reduction: Total expenses decreased slightly to $1.8 million from $1.9 million in the prior year, primarily due to a reduction in compensation expense.
- Market Discount: The trading discount to NAV widened significantly to 61.9% from 46.5% at the end of 2019.
Guidance, Outlook, Risks, and Contingencies
- Plan of Reorganization: Equus intends to terminate its BDC election and restructure as an operating company. Shareholder authorization to withdraw the BDC election expired on March 31, 2020, and the company expects to seek additional authorization in the future. No definitive agreement for a consolidation has been reached.
- COVID-19 Impact: The pandemic has constrained the company's ability to source new investments, facilitate dispositions, or consummate transactions due to travel restrictions. While day-to-day operations continue remotely, the economic dislocation poses significant risks to portfolio company valuations and cash flows.
- Energy Sector Risk: The company faces substantial risk from the volatility in oil and gas prices. Equus Energy, LLC (13.3% of net assets) faces a "substantial doubt" regarding its ability to continue as a going concern due to low commodity prices and potential capital expenditure delays.
- Liquidity and Borrowing: The company maintains a margin loan of $27.0 million (repaid July 2, 2020) to purchase U.S. Treasury bills to maintain RIC tax status. Management believes current cash and operating cash flow are sufficient for the next 12 months.
- Concentration Risk: The portfolio is non-diversified. PalletOne, Inc. (Shipping products and services) represents 66.3% of net assets, and Equus Energy represents 13.3%.
Investor Verification Checklist
- Going Concern Status: Verify the financial stability and liquidity plans of Equus Energy, LLC, given the explicit "substantial doubt" raised in the filing regarding its ability to continue operations.
- Reorganization Progress: Monitor for updates on the Plan of Reorganization, specifically the timeline for obtaining new shareholder authorization to withdraw the BDC election and any potential merger targets.
- Portfolio Concentration: Assess the risk exposure to PalletOne, Inc., which comprises over two-thirds of the company's net assets.
- NAV vs. Market Price: Investigate the widening discount to NAV (61.9%) and management's strategy to address this valuation gap.
- Valuation Methodologies: Review the independent valuation reports for Level 3 assets (private investments), particularly Equus Energy and PalletOne, to understand the assumptions used given the volatile market conditions.