10-Q 1 f10q_equus03312021.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 March 31, 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 May 13, 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
Supplemental Information—Selected Per Share Data and Ratios	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	28
Item 3. Quantitative and Qualitative Disclosure about Market Risk	34
Item 4. Controls and Procedures	34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	35
Item 6. Exhibits	36
SIGNATURE	37

	March 31, 2021			December 31, 2020

(in thousands, except per share amounts)
Assets
Investments in portfolio securities at fair value:
Control investments (cost at $7,611)		8,500			7,000
Total investments in portfolio securities at fair value		8,500			7,000
Temporary cash investments		—			24,000
Cash and cash equivalents		25,509			23,639
Restricted cash		—			240
Accounts receivable from affiliates		350			350
Escrow receivable		700			3,413
Other assets		99			181
Total assets		35,158			58,823
Liabilities and net assets
Accounts payable		361			54
Accrued compensation		720			990
Accounts payable to related parties		2			2
Borrowing under margin account		—			24,000
Total liabilities		1,083			25,046

Commitments and contingencies (see Note 2)

Net assets	$	34,075		$	33,777

Net assets consist of:
Common stock, par value	$	13		$	13
Capital in excess of par value		74,685			56,142
Accumulated earnings deficit		(40,623	)		(22,378	)
Total net assets	$	34,075		$	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	$	2.52		$	2.50

	Three Months Ended March 31,
(in thousands, except per share amounts)	2021			2020
Investment income:
Interest and dividend income:
Non-affiliate investments - related party	$	—		$	95
Total interest and dividend income		—			95
Interest from temporary cash investments		—			3
Other income - director fees		—			6
Total investment income		—			104

Expenses:
Compensation expense		506			404
Professional fees		295			380
Director fees and expenses		76			79
Professional liability expenses		84			63
General and administrative expenses		29			68
Mailing, printing and other expenses		31			29
Taxes		3			—
Interest expense		1			7
Total expenses		1,025			1,030

Net investment loss		(1,025	)		(926	)

Net realized (loss) gain:
Escrow receivable		(177	)		—
Temporary cash investments		—			9
Net realized (loss) gain		(177	)		9

Net unrealized appreciation (depreciation) of portfolio securities:
Control investments		1,500			(3,500	)
Non-affiliate investments - related party		—			(2,757	)
Net change in net unrealized appreciation (depreciation) of portfolio securities		1,500			(6,257	)


Net increase (decrease) increase in net assets resulting from operations	$	298		$	(7,174	)

Net increase (decrease) in net assets resulting from operations per share:
Basic and diluted	$	0.02		$	(0.53	)
Weighted average shares outstanding:
Basic and diluted		13,518			13,518

	Common Stock
(in thousands)	Number of Shares		Par Value		Capital in Excess of Par Value		Accumulated Earnings 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) increase in net assets resulting from operations
Undistributed net investment losses		—		—		—		(926	)		(926	)
Undistributed net capital gains		—		—		—		9			9
Unrealized depreciation of portfolio securities, net		—		—		—		(3,500	)		(3,500	)
Unrealized appreciation of portfolio securities-related party		—		—		—		(2,757	)		(2,757	)

Balances at March 31, 2020		13,518	$	13	$	56,142	$	(17,261	)	$	38,894


Balances at January 1, 2021		13,518	$	13	$	56,142	$	(22,378	)	$	33,777

Net increase (decrease) in net assets resulting from operations
Undistributed net investment losses		—		—		—		(1,025	)		(1,025	)
Undistributed net capital losses		—		—		—		(177	)		(177	)
Unrealized appreciation of portfolio securities-related party		—		—		—		1,500			1,500

Balances at March 31, 2021		13,518	$	13	$	56,142	$	(22,080	)	$	34,075

	Three Months ended March 31
(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	$	298		$	(7,174	)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:
Net realized loss (gain)
Escrow receivable		177			—
Temporary cash investments		—			(9	)
Net change in unrealized (appreciation) depreciation of portfolio securities
Control investments		(1,500	)		3,500
Non-affiliate investments - related party		—			2,757
Share-based incentive compensation		—			80
Dividends exchanged for portfolio securities		—			(95	)
Changes in operating assets and liabilities:
Proceeds from temporary cash investments, net		24,000			2,999
Accrued interest and dividend receivable		—			—
Accrued escrow receivable		2,536			—
Other assets		82			62
Accounts payable and accrued liabilities		37			197
Accounts payable to related parties		—			25
Net cash provided by operating activities		25,630			2,342
Cash flows from financing activities:
Borrowings under margin account		—			26,001
Repayments under margin account		(24,000	)		(28,991	)
Net cash used in financing activities		(24,000	)		(2,990	)
Net increase (decrease) in cash and cash equivalents		1,630			(648	)
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	$	25,509		$	3,608
Supplemental disclosure of cash flow information:
Interest paid	$	1		$	8
Income taxes paid	$	3		$	—

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

Control Investments: Majority-owned ⁽²⁾:
Equus Energy, LLC ⁽³⁾ Houston, TX		Energy		December 2011	Member interest (100%)		$	7,611	$	8,500

Total Control Investments: Majority-owned (represents 100% of total investments at fair value)							$	7,611	$	8,500
Total Investments							$	7,611	$	8,500

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

Limited liability company investments	$	7,611	$	8,500		24.9	%

Total	$	7,611	$	8,500		24.9	%

				Fair Value Measurements as of March 31, 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	$	8,500		$	—		$	—		$	8,500
Total investments		8,500			—			—			8,500
Temporary cash investments		—			—			—			—
Total investments and temporary cash investments	$	8,500		$	—		$	—		$	8,500

				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 January 1, 2021		$	7,000	$	—	$	—	$7,000
Change in unrealized appreciation			1,500		—		—	1,500
Purchases of portfolio securities			—		—		—	-
Fair value as of March 31, 2021		$	8,500	$	—	$	—	$8,500

					Range
(in thousands)	Fair Value		Valuation Techniques	Unobservable Inputs	Minimum			Maximum
			Asset approach	Acreage Value	$	3,000		$	8,000
Limited liability company investments	$	8,500	Guideline Transaction method; Market approach	Recovery rate Reserve adjustment factors		75	%		100	%

	As of March 31, 2021			As of December 31, 2020
Accumulated undistributed net investment losses	$	(41,335	)	$	(40,310	)
Unrealized appreciation of portfolio securities, net		889			(611	)
Accumulated undistributed net capital gains		(177	)		18,543
Accumulated earnings deficit	$	(40,623	)	$	(22,378	)

	March 31,			December 31,
	2021			2020


Assets
Current assets:
Cash and cash equivalents	$	465		$	621
Accounts receivable		117			77
Total current assets		582			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	$	582		$	698

Liabilities and member's deficit
Current liabilities:
Accounts payable and other	$	203		$	229
Due to affiliate		350			350
Total current liabilities		553			579
Asset retirement obligations		209			208
Total liabilities		762			787

Total member's deficit		(180	)		(89	)

Total liabilities and member's deficit	$	582		$	698

	•	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;
	•	the level of domestic capital spending by the oil and natural gas industry, which has been significantly impacted by the continuation of a swift and material decline in global crude oil demand and crude oil prices for an uncertain period of time that correspondingly have led to a significant reduction in domestic capital spending;
	•	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;
	•	uncertainty regarding the future actions of oil producers and the risk that they take actions that will prolong or exacerbate the current over-supply of crude oil;
	•	uncertainty regarding the timing, pace and extent of an economic recovery in the United States and elsewhere, which in turn will likely affect demand for crude oil and therefore the demand for the services we provide and the commercial opportunities available to us;
	•	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.