Business Context and Reporting Period
Company: EQUUS TOTAL RETURN, INC. (NYSE: EQS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2016
Business Overview: A Business Development Company (BDC) and Regulated Investment Company (RIC) seeking total return through debt and equity investments in private and smaller public companies. The Fund is currently evaluating a reorganization plan involving a potential merger or consolidation with MVC Capital, Inc.
Key Financial Metrics
| Metric (in thousands) | Sept 30, 2016 | Dec 31, 2015 |
|---|---|---|
| Total Assets | $71,736 | $52,530 |
| Total Liabilities | $30,230 | $15,222 |
| Net Assets | $41,506 | $37,308 |
| Net Asset Value (NAV) per Share | $3.27 | $2.94 |
| Cash and Cash Equivalents | $12,617 | $17,036 |
| Borrowings (Margin Account) | $29,998 | $15,000 |
Results of Operations (Nine Months Ended Sept 30)
| Metric (in thousands) | 2016 | 2015 |
|---|---|---|
| Total Investment Income | $556 | $224 |
| Total Expenses | $2,311 | $2,262 |
| Net Investment Loss | $(1,755) | $(2,038) |
| Net Realized Loss | $(9) | $(2,483) |
| Net Change in Unrealized Appreciation | $5,548 | $6,655 |
| Net Increase in Net Assets from Operations | $4,198 | $1,451 |
| Per Share Increase (Basic/Diluted) | $0.33 | $0.11 |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments in portfolio securities increased from $19.4 million to $27.7 million. This was driven primarily by a $5.8 million increase in the fair value of the affiliate investment in PalletOne, Inc., and a $0.4 million increase in the MVC Capital, Inc. holding.
- Liquidity and Leverage: Borrowings under the margin account doubled from $15.0 million to $30.0 million. This increase was a strategic move to purchase U.S. Treasury bills to maintain RIC diversification requirements. The loan was repaid on October 3, 2016.
- Investment Income: Investment income more than doubled year-over-year ($556k vs $224k), attributed to new income-producing investments, specifically a loan to Biogenic Reagents, LLC, and dividends from MVC.
- Realized Gains/Losses: The Fund recorded a minimal net realized loss of $9,000 in 2016, a significant improvement over the $2.5 million net realized loss in 2015 (which included a $2.85 million loss on the sale of Spectrum Management).
- Market Price Discount: As of September 30, 2016, the common stock traded at a 43.2% discount to NAV, widening slightly from a 39.2% discount at year-end 2015.
Outlook, Risks, and Unusual Items
- Reorganization Plan: The Fund is pursuing a reorganization with MVC Capital, Inc. Options include a merger with MVC, a subsidiary, or a portfolio company, potentially restructuring Equus as a publicly-traded operating company focused on energy or financial services.
- Portfolio Risks:
- Concentration: The Fund is "non-diversified." PalletOne, Inc. represents 37.1% of Net Assets and 55.7% of portfolio securities.
- Energy Sector: Equus Energy, LLC (a control investment) continues to face headwinds from lower crude oil and natural gas prices, resulting in a $0.3 million decrease in fair value.
- Default Risk: On July 4, 2016, the Fund issued a notice of default to Biogenic Reagents, LLC regarding a $2.0 million note. Management believes principal and accrued interest will be recovered based on liquidation value.
- Liquidity Strategy: Management has shifted strategy from originating new debt/equity to preserving liquidity. Initiatives include monetizing assets, suspending dividends, and internalizing management.
- Unusual Items: The Fund utilized a $30 million margin loan at quarter-end solely to purchase T-Bills to satisfy RIC tax diversification rules. This loan was repaid immediately after the quarter-end.
Investor Verification Checklist
- Reorganization Status: Verify the current status of the proposed merger or consolidation with MVC Capital, Inc. and the likelihood of restructuring as an operating company.
- Biogenic Reagents Default: Monitor the resolution of the default notice issued to Biogenic Reagents, LLC, and the actual recovery rate of the $2.0 million principal.
- PalletOne Concentration: Assess the financial health of PalletOne, Inc., given it comprises over one-third of the Fund's Net Assets.
- NAV vs. Market Price: Evaluate the widening discount to NAV (43.2%) and management's plans to address this valuation gap.
- Dividend Policy: Confirm the suspension of the managed distribution policy and the timeline for potential future dividends.