Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (NYSE: EQS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2021
Business Overview: A non-diversified Business Development Company (BDC) and Regulated Investment Company (RIC) focused on debt and equity securities of private companies. The Fund is currently evaluating a transformation into an operating company and has shareholder authorization to withdraw its BDC election by August 31, 2021, contingent on a definitive transformative transaction.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | As of June 30, 2021 |
|---|---|---|---|
| Net Assets | $34,724 | $41,469 (End of Period) | $34,724 |
| Net Asset Value (NAV) per Share | $2.57 | $3.07 (End of Period) | $2.57 |
| Investment Income | $0 | $208 | N/A |
| Total Expenses | $1,776 | $1,797 | N/A |
| Net Investment Loss | $(1,776) | $(1,589) | N/A |
| Net Realized Loss | $(177) | $8 | N/A |
| Net Unrealized Appreciation | $2,900 | $(3,019) | N/A |
| Net Increase in Net Assets from Operations | $947 | $(4,600) | N/A |
| Cash and Cash Equivalents | N/A | N/A | $24,169 |
| Total Investments (Fair Value) | N/A | N/A | $10,250 |
| Debt (Borrowing under margin account) | N/A | N/A | $0 |
| Expense Ratio to Average Net Assets | 5.19% | 4.11% | N/A |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments in portfolio securities increased from $7.0 million (Dec 31, 2020) to $10.25 million (June 30, 2021). This $2.9 million increase in fair value was driven by a revaluation of the sole portfolio company, Equus Energy, LLC, due to rising crude oil and natural gas prices and increased mineral acreage values.
- Liquidity Position: The Fund repaid a $24.0 million margin loan used to maintain RIC status that existed at year-end 2020. Consequently, temporary cash investments (U.S. Treasury bills) dropped from $24.0 million to $0, while unrestricted cash and cash equivalents remained stable at approximately $24.2 million.
- Operating Results: The Fund reported a net increase in net assets of $0.95 million for the six months ended June 30, 2021, a significant improvement from a net decrease of $4.6 million in the same period in 2020. This turnaround was primarily due to the $2.9 million unrealized appreciation in the portfolio, offsetting a consistent net investment loss of approximately $1.8 million in both periods.
- Investment Income: Investment income dropped to $0 for the six months ended June 30, 2021, compared to $208,000 in the prior year, following the sale of interest/dividend-bearing investments.
Guidance, Outlook, Risks, and Unusual Items
- Strategic Transformation: Shareholders approved the withdrawal of the BDC election effective no later than August 31, 2021, to facilitate a transformation into an operating company. Management is evaluating opportunities but has not entered a definitive agreement. The Fund also increased authorized common stock to 100 million shares to facilitate potential mergers.
- Portfolio Concentration Risk: The Fund is non-diversified. 100% of its portfolio securities (29.5% of net assets) are invested in a single entity, Equus Energy, LLC. The Fund's performance is highly correlated with the energy sector and the specific financial condition of this subsidiary.
- Going Concern Uncertainty: The filing notes substantial doubt regarding Equus Energy, LLC's ability to continue as a going concern without securing additional financing, shutting in wells, or selling assets. However, the Fund itself maintains sufficient liquidity for 12 months.
- Unusual Items: A realized loss of $177,000 was recognized due to a reduction in the estimated fair value of an escrow receivable from the prior sale of PalletOne, Inc.
- Market Risks: The Fund is exposed to volatility in oil and gas prices, which directly impacts the valuation of its primary asset. COVID-19 restrictions continue to constrain travel and deal-making capabilities.
Investor Verification Checklist
- Transformation Timeline: Verify if the Fund has entered a definitive agreement for a transformative transaction before the August 31, 2021 deadline for BDC election withdrawal.
- Equus Energy Liquidity: Monitor Equus Energy, LLC's ability to secure financing or generate cash flow to avoid a potential write-down of the Fund's primary asset.
- NAV Discount: Note that the stock trades at a significant discount to NAV (approx. 31.8% as of June 30, 2021); assess if this discount narrows or widens based on transformation progress.
- Expense Ratio: Review the 5.19% expense ratio, which is elevated compared to the prior year, and determine if internalization of management will yield future cost efficiencies.
- Dividend Policy: Confirm the suspension of dividends and the Fund's ability to generate distributable earnings in the future given the current net investment loss.