Equus Total Return(EQS) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Financial Statements Unaudited condensed financial statements for H1 2020 show net assets decreased to $41.5 million from $46.0 million, with a $4.6 million net decrease from operations Condensed Balance Sheets As of June 30, 2020, total assets were $68.8 million and net assets were $41.5 million, a decrease from $46.0 million at year-end 2019 Condensed Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total investments at fair value | $37,755 | $40,648 | | Total assets | $68,767 | $75,086 | | Total liabilities | $27,298 | $29,097 | | Total net assets | $41,469 | $45,989 | | Net asset value per share | $3.07 | $3.40 | Condensed Statements of Operations For H1 2020, the company reported a net investment loss of $1.6 million and a net decrease in net assets from operations of $4.6 million, driven by unrealized depreciation Six Months Ended June 30, (in thousands, except per share data) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total investment income | $208 | $106 | | Total expenses | $1,797 | $1,893 | | Net investment loss | ($1,589) | ($1,787) | | Net realized (loss) gain | $8 | ($2,757) | | Net change in unrealized appreciation/depreciation | ($3,019) | $8,822 | | Net (decrease) increase in net assets from operations | ($4,600) | $4,278 | | Net (decrease) increase per share | ($0.34) | $0.32 | Condensed Statements of Changes in Net Assets Net assets decreased from $46.0 million to $41.5 million in H1 2020, primarily due to a $4.6 million net loss from operations and $3.0 million unrealized depreciation - The company's net assets decreased by $4.52 million in the first six months of 2020, from $45.99 million to $41.47 million[16] - The decrease was driven by a net investment loss of $1.59 million and a net unrealized depreciation of portfolio securities totaling $3.0 million[15][16] Condensed Statements of Cash Flows For H1 2020, net cash provided by operating activities was $0.3 million, a turnaround from $2.0 million used in H1 2019, with cash decreasing by $1.7 million Cash Flow Summary for Six Months Ended June 30, (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $284 | ($2,027) | | Net cash (used in) provided by financing activities | ($1,991) | $9 | | Net decrease in cash and cash equivalents | ($1,707) | ($2,018) | | Cash and cash equivalents at end of period | $2,549 | $5,677 | Schedules of Investments As of June 30, 2020, total investments were $64.8 million, highly concentrated in shipping (66.3%) and energy (13.3%), reflecting a non-diversified status - The Fund is classified as a "non-diversified" investment company, with significant concentration in a few portfolio companies[36] Portfolio Composition by Industry as of June 30, 2020 (as % of Net Assets) | Industry | Fair Value (in thousands) | % of Net Assets | | :--- | :--- | :--- | | Shipping products and services | $27,500 | 66.3% | | Energy | $5,500 | 13.3% | | Financial services | $3,778 | 9.1% | | Business products and services | $977 | 2.4% | | Total | $37,755 | 91.1% | - As of June 30, 2020, 90.1% of the Fund's assets at fair value were in qualifying investments under the 1940 Act[35] Notes to Condensed Financial Statements Notes detail business, accounting policies, and portfolio specifics, highlighting COVID-19 impacts, Level 3 valuations, and substantial doubt about Equus Energy's going concern status - The COVID-19 pandemic has constrained the Fund's ability to source new investments, facilitate dispositions, and consummate a substantial transaction due to travel restrictions and economic dislocation[56][57] - The Fund periodically borrows funds via a margin account to purchase U.S. Treasury bills to maintain its RIC tax status. As of June 30, 2020, it had borrowed $27.0 million for this purpose[63][69] - As of June 30, 2020, investments valued using significant unobservable inputs (Level 3) totaled $34.0 million, representing the majority of the portfolio securities' fair value[93][97] - The Fund has a Plan of Reorganization to terminate its BDC election and restructure as a publicly-traded operating company, but cannot assure when or if this will be completed[122] - The fair value of the investment in Equus Energy, LLC decreased by $2.5 million in H1 2020 due to falling oil prices. Factors raise substantial doubt about Equus Energy's ability to continue as a going concern[119][130] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of COVID-19 and oil price collapse on the Fund's portfolio, leading to a 9.7% NAV per share decrease and ongoing reorganization challenges - The Fund's net asset value decreased from $3.40 per share at year-end 2019 to $3.07 per share as of June 30, 2020, a decrease of 9.7%[183] - The economic disruption from the coronavirus and the oil price collapse have created substantial doubt about portfolio company Equus Energy's ability to continue as a going concern[178] - The Fund's Plan of Reorganization to become an operating company is ongoing but faces constraints due to the pandemic's impact on travel and deal-making[169] Changes in Unrealized Appreciation/Depreciation (Six Months Ended June 30, 2020) | Portfolio Company | Change in Fair Value (in millions) | Reason | | :--- | :--- | :--- | | MVC | ($1.4) | Decrease in share price | | Equus Energy, LLC | ($2.5) | Decrease in oil prices and mineral acreage values | | PalletOne, Inc. | $1.0 | Improved operating performance | Quantitative and Qualitative Disclosure about Market Risk The Fund is exposed to financial market risks, primarily interest rate changes on debt and price changes on equity, with private company investments less directly impacted by short-term volatility - The company is subject to market risks including interest rate changes on debt securities and price changes for marketable equity securities[201] - A major portion of the investment portfolio consists of debt and equity in private companies, whose fair value is less directly impacted by short-term market volatility compared to public equities[203] Controls and Procedures Management concluded that the Fund's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - As of June 30, 2020, the CEO and CFO concluded that the Fund's disclosure controls and procedures were effective[205] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[205] PART II. OTHER INFORMATION Legal Proceedings The Fund is occasionally involved in legal proceedings incidental to operations, which management does not expect to materially affect financial condition or results - The company does not expect any current legal proceedings to have a material effect on its financial condition or results of operations[207] Risk Factors Primary risks include the Fund's Plan of Reorganization and the significant, uncertain economic disruption caused by the COVID-19 pandemic on operations and financial results - The Fund faces risks associated with its Plan of Reorganization to convert into an operating company[208] - The economic dislocation caused by the coronavirus pandemic presents a significant and evolving risk, with an uncertain impact on the Fund's business, results of operations, and financial condition[209] Exhibits This section lists exhibits filed with the report, including governance documents, material contracts, and certifications by the CEO and CFO - The report includes required exhibits, such as governance documents, material contracts, and officer certifications, primarily incorporated by reference from previous filings[212][213] Signature - The report was signed on August 13, 2020, by John A. Hardy, the Chief Executive Officer of Equus Total Return, Inc[217]