Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (NYSE: EQS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2018
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 pursuing a "Plan of Reorganization" to consolidate with another operating company and withdraw its BDC election, though no definitive agreement has been reached as of the filing date.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | Dec 31, 2017 (Balance Sheet) |
|---|---|---|---|
| Net Asset Value (NAV) per Share | $3.45 | $3.45 | $3.18 |
| Total Net Assets | $46.6 million | $46.6 million | $43.0 million |
| Investment Income | $85,000 | $315,000 | N/A |
| Total Expenses | $807,000 | $2.96 million | N/A |
| Net Investment Loss | ($722,000) | ($2.65 million) | N/A |
| Net Increase in Net Assets from Operations | $2.36 million | $3.21 million | N/A |
| Cash and Cash Equivalents | $8.2 million | $8.2 million | $10.8 million |
| Borrowings (Margin Account) | $17.0 million | $17.0 million | $18.0 million |
| Portfolio Investments (Fair Value) | $37.2 million | $37.2 million | $31.1 million |
Material Changes vs. Prior Period
- Operational Performance: The Net Investment Loss for the nine months ended September 30, 2018, was $2.65 million, an improvement compared to the $3.25 million loss in the same period in 2017. This improvement was primarily driven by the absence of a $2.5 million merger termination fee incurred in 2017 and reduced compensation and director fees.
- Unrealized Gains: Net unrealized appreciation increased by $6.31 million for the nine months ended September 30, 2018, compared to $0.74 million in the prior year period. This was largely due to a $3.8 million increase in the fair value of the PalletOne, Inc. investment and a $2.5 million increase in Equus Energy, LLC.
- Portfolio Composition: Total portfolio investments grew from $31.1 million at year-end 2017 to $37.2 million at September 30, 2018. The portfolio remains concentrated, with PalletOne, Inc. (Shipping) representing 44.0% of net assets and Equus Energy, LLC (Energy) representing 22.5%.
- Market Price vs. NAV: As of September 30, 2018, the common stock traded at a 42.3% discount to NAV, widening from a 24.6% discount at December 31, 2017.
Outlook, Risks, and Contingencies
- Plan of Reorganization: The company continues to seek a consolidation with an operating company to exit its BDC status. Previous authorizations to withdraw the BDC election have expired, and the company anticipates seeking new authorization in late 2018 or 2019. No definitive agreement is currently in place.
- Liquidity and Financing: The company maintains a margin loan of approximately $17.0 million to satisfy RIC diversification requirements. This loan was collateralized by U.S. Treasury bills which matured in October 2018, and the loan was subsequently repaid. Management believes current cash and operating cash flow are sufficient for the next 12 months.
- Legal Proceedings: A shareholder lawsuit regarding the 2016 Equity Incentive Plan was dismissed with prejudice by the Delaware Court of Chancery in November 2018. The company is also pursuing collection on a defaulted promissory note from 5th Element Tracking, LLC, though no impairment has been recorded as of the filing date.
- Risk Factors: Significant risks include the uncertainty of the reorganization plan, the concentration of assets in a few portfolio companies (non-diversified status), and the potential loss of RIC tax status if borrowing arrangements for diversification are unavailable.
Investor Verification Checklist
- Reorganization Status: Verify if a definitive agreement for the Plan of Reorganization has been signed since the filing date, as this is critical to the company's long-term strategy.
- Margin Loan Repayment: Confirm the successful repayment of the $17.0 million margin loan and the status of the company's RIC qualification post-repayment.
- Portfolio Valuation: Review the specific valuation methodologies used for the Level 3 assets (approx. $32.2 million), particularly the $3.8 million unrealized gain in PalletOne, Inc.
- Defaulted Note: Monitor the status of the legal action against the guarantor of the 5th Element Tracking, LLC note to assess potential impairment risks.
- Expense Ratios: Note the expense ratio of 6.62% for the nine-month period and assess the sustainability of the cost structure relative to the asset base.