10-Q 1 f10q_equus09312021.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period to

Commission File Number 814-00098

EQUUS TOTAL RETURN, INC.

(Exact name of registrant as specified in its charter)

Delaware	76-0345915
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

700 Louisiana St., 48^th Floor Houston, Texas	77002
(Address of principal executive offices)	(Zip Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Registrant’s telephone number, including area code: (713) 529-0900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange

on which registered

Common Stock

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☒

There were 13,518,146 shares of the registrant’s common stock, $.001 par value, outstanding, as of November 15, 2021.

	Page
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements	3
Condensed Balance Sheets	3
Condensed Statements of Operations	4
Condensed Statements of Changes in Net Assets	5
Condensed Statements of Cash Flows	6
Financial Highlights	7
Schedules of Investments	8
Notes to Condensed Financial Statements	12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosure about Market Risk	34
Item 4. Controls and Procedures	34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 6. Exhibits	36
SIGNATURE	37

	September 30, 2021			December 31, 2020

(in thousands, except per share amounts)
Assets
Investments in portfolio securities at fair value:
Control investments (cost at $7,961 and $7,611, respectively)	$	12,000		$	7,000
Total investments in portfolio securities at fair value		12,000			7,000
Temporary cash investments		—			24,000
Cash and cash equivalents		22,891			23,639
Restricted cash		—			240
Accounts receivable from affiliates		350			350
Escrow receivable		1,226			3,413
Other assets		556			181
Total assets		37,023			58,823
Liabilities and net assets
Accounts payable		84			54
Accrued compensation		693			990
Accounts payable to related parties		3			2
Borrowing under margin account		—			24,000
Total liabilities		780			25,046

Commitments and contingencies (see Note 2)

Net assets	$	36,243		$	33,777

Net assets consist of:
Common stock, par value	$	13		$	13
Capital in excess of par value		74,685			56,142
Accumulated deficit		(38,455	)		(22,378	)
Total net assets	$	36,243		$	33,777
Shares of common stock issued and outstanding, $.001 par value, 100,000 and 50,000 shares authorized, respectively		13,518			13,518
Shares of preferred stock issued and outstanding, $.001 par value, 10,000 and 5,000 shares authorized, respectively		—			—
Net asset value per share	$	2.68		$	2.50

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2021			2020			2021			2020
Investment income:
Interest and dividend income:
Non-affiliate investments - related party	$	—		$	—		$	—		$	193
Non-affiliate investments		—			98			—			98
Total interest and dividend income		—			98			—			291
Interest from temporary cash investments		—			—			—			3
Other income - director fees		—			6			—			18
Total investment income		—			104			—			312

Expenses:
Compensation expense		329			418			1,169			1,113
Professional fees		113			195			581			803
Director fees and expenses		76			84			249			260
Professional liability expenses		178			80			344			201
General and administrative expenses		33			33			89			139
Mailing, printing and other expenses		21			8			78			74
Taxes		6			6			20			15
Interest expense		1			3			3			19
Total expenses		757			827			2,533			2,624

Net investment loss		(757	)		(723	)		(2,533	)		(2,312	)

Net realized (loss) gain:
Escrow receivable		526			—			349			—
Temporary cash investments		—			—			—			8
Net realized (loss) gain		526			—			349			8

Net unrealized appreciation (depreciation) of portfolio securities:
Control investments		1,750			(6,575	)		4,650			(8,075	)
Non-affiliate investments - related party		—			3,260			—			1,741
Net change in net unrealized appreciation (depreciation) of portfolio securities		1,750			(3,315	)		4,650			(6,334	)


Net increase (decrease) increase in net assets resulting from operations	$	1,519		$	(4,038	)	$	2,466		$	(8,638	)

Net increase (decrease) in net assets resulting from operations per share:
Basic and diluted	$	0.11		$	(0.30	)	$	0.18		$	(0.64	)
Weighted average shares outstanding:
Basic and diluted		13,518			13,518			13,518			13,518

	Common Stock
(in thousands)	Number of Shares		Par Value		Capital in Excess of Par Value		Accumulated Deficit			Total Net Assets
Balances at January 1, 2020		13,518		13	$	56,062	$	(10,086	)	$	45,989
Share-based incentive compensation		—		—		80		—			80
Net decrease in net assets resulting from operations		—		—		—		(7,175	)		(7,175	)
Balances at March 31, 2020		13,518	$	13	$	56,142	$	(17,261	)	$	38,894
Net increase in net assets resulting from operations		—		—		—		2,575			2,575
Balances at June 30, 2020		13,518	$	13	$	56,142	$	(14,686	)	$	41,469
Share-based incentive compensation		—		—		—		—			—
Net decrease in net assets resulting from operations		—		—		—		(4,038	)		(4,038	)
Balances at September 30, 2020		13,518	$	13	$	56,142	$	(18,724	)	$	37,431


Balances at January 1, 2021		13,518	$	13	$	56,142	$	(22,378	)	$	33,777
Net increase in net assets resulting from operations		—		—		—		298			298
Balances at March 31, 2021		13,518	$	13	$	56,142	$	(22,080	)	$	34,075
Recharacterization of net capital losses		—		—		18,543		(18,543	)		—
Net increase in net assets resulting from operations		—		—		—		649			649
Balances at June 30, 2021		13,518	$	13	$	74,685	$	(39,974	)	$	34,724
Net increase in net assets resulting from operations		—		—		—		1,519			1,519
Balances at September 30, 2021		13,518	$	13	$	74,685	$	(38,455	)	$	36,243

	Nine Months ended September 30,
(in thousands)	2021			2020
Reconciliation of increase (decrease) in net assets resulting from operations to net cash provided by operating activities:
Net increase (decrease) in net assets resulting from operations	$	2,466		$	(8,638	)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:
Net realized gain:
Escrow receivable		(349	)		—
Temporary cash investments		—			(8	)
Net change in unrealized (appreciation) depreciation of portfolio securities
Control investments		(4,650	)		8,075
Non-affiliate investments - related party		—			(1,741	)
Share-based incentive compensation		—			80
Purchase of portfolio securities		(350	)		(561	)
Dividends exchanged for portfolio securities		—			(156	)
Changes in operating assets and liabilities:
Sales of temporary cash investments, net		24,000			1,999
Accrued interest and dividend receivable		—			561
Accrued escrow receivable		2,538			—
Other assets		(375	)		(121	)
Accounts payable and accrued liabilities		(267	)		140
Accounts payable to related parties		(1	)		7
Net cash provided by (used in) operating activities		23,012			(363	)
Cash flows from financing activities:
Borrowings under margin account		—			80,001
Repayments under margin account		(24,000	)		(81,992	)
Net cash used in financing activities		(24,000	)		(1,991	)
Net decrease in cash and cash equivalents		(988	)		(2,354	)
Cash and cash equivalents and restricted cash at beginning of period		23,879			4,256

Cash and cash equivalents and restricted cash at end of period	$	22,891		$	1,902
Supplemental disclosure of cash flow information:
Interest paid	$	1		$	8
Income taxes paid	$	20		$	15

Name and location of			Date of Initial			Cost of		Fair
Portfolio Company	Industry		Investment		Investment	Investment		Value⁽¹⁾

Control Investments: Majority-owned ⁽²⁾:
Equus Energy, LLC ⁽³⁾ Houston, TX		Energy		December 2011	Member interest (100%)	$	7,961	$	12,000

Total Control Investments: Majority-owned (represents 100% of total investments at fair value)						$	7,961	$	12,000
Total Investments						$	7,961	$	12,000

Type of Securities	Cost		Fair Value		Fair Value as Percentage of Net Assets

Limited liability company investments	$	7,961	$	12,000		33.1	%

Total	$	7,961	$	12,000		33.1	%

			Fair Value Measurements as of September 30, 2021
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Investments:
Control investments	$	12,000	$	—	$	—	$	12,000
Total investments and temporary cash investments	$	12,000	$	—	$	—	$	12,000

			Fair Value Measurements as of December 31, 2020
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Investments:
Control investments	$	7,000	$	—	$	—	$	7,000
Total investments		7,000		—		—		7,000
Temporary cash investments		24,000		24,000		—		—
Total investments and temporary cash investments	$	31,000	$	24,000	$	—	$	7,000

	Fair value measurements using significant unobservable inputs (Level 3)
(in thousands)	Control Investments		Affiliate Investments		Non-affiliate Investments		Total
Fair value as of June 30, 2021	$	10,250	$	—	$	—	$10,250
Change in unrealized appreciation		1,750		—		—	1,750
Fair value as of September 30, 2021	$	12,000	$	—	$	—	$12,000

	As of September 30, 2021			As of December 31, 2020
Accumulated undistributed net investment losses	$	(42,843	)	$	(40,310	)
Unrealized appreciation of portfolio securities, net		4,039			(611	)
Accumulated undistributed net capital gains		349			18,543
Accumulated earnings deficit	$	(38,455	)	$	(22,378	)

	September 30,			December 31,
	2021			2020


Assets
Current assets:
Cash and cash equivalents	$	694		$	621
Accounts receivable		156			77
Total current assets		850			698
Oil and gas properties		8,093			8,061
Less: accumulated depletion, depreciation and amortization		(8,093	)		(8,061	)
Net oil and gas properties		—			—
Total assets	$	850		$	698

Liabilities and member's deficit
Current liabilities:
Accounts payable and other	$	100		$	229
Due to affiliate		350			350
Total current liabilities		450			579
Asset retirement obligations		213			208
Total liabilities		663			787

Total member's equity (deficit)		187			(89	)

Total liabilities and member'sequity (deficit)	$	850		$	698

EQUUS ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three months ended September 30,					Nine months ended September 30,
	2021		2020			2021			2020


Operating revenue	$	237	$	120		$	623		$	337
Operating expenses
Direct operating expenses		155		200			482			492
General and administrative		53		38			178			187
Depletion, depreciation, amortization and accretion		2		84			5			21
Impairment of oil and gas properties		—		—			32			—
Total operating expenses		210		322			697			700
Net loss		27		(202	)		(74	)		(363	)

	•	our future operating results;
	•	our business prospects and the prospects of our existing and prospective portfolio companies;
	•	the return or impact of current and future investments;
	•	our contractual arrangements and other relationships with third parties;
	•	the dependence of our future success on the general economy and its impact on the industries in which we invest;
	•	the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;
	•	our expected financings and investments;
	•	our regulatory structure and tax treatment;
	•	our ability to qualify and operate as a BDC and a RIC, including the impact of changes in laws or regulations governing our operations, or the operations of our portfolio companies;
	•	the adequacy of our cash resources and working capital;
	•	the timing of cash flows, if any, from the operations of our portfolio companies;
	•	the impact of fluctuations in interest rates on our business;
	•	the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
	•	our ability to recover unrealized losses;
	•	market conditions and our ability to access additional capital, if deemed necessary;
	•	developments in the global economy as well as the public health crisis related to the COVID-19 virus and resulting demand and supply for oil and natural gas;
	•	natural or man-made disasters and other external events that may disrupt our operations; and
	•	continued volatility of oil and natural gas prices.

SEC Form 10-Q filed by Equus Total Return, Inc.