Equus Total Return(EQS) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Financial Statements Equus Total Return, Inc. reported increased assets and net assets for Q1 2019, driven by unrealized appreciation Condensed Balance Sheets Condensed Balance Sheets (in thousands) | Financial Metric (in thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Investments at Fair Value | $39,050 | $35,015 | | Total Assets | $73,734 | $70,941 | | Total Liabilities | $27,182 | $27,446 | | Total Net Assets | $46,552 | $43,495 | | Net Asset Value Per Share | $3.44 | $3.22 | - The company's net assets increased by approximately $3.1 million during the first quarter of 2019, primarily due to an increase in the fair value of its investment portfolio[10] Condensed Statements of Operations Condensed Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Total Investment Income | $16 | $113 | | Total Expenses | $1,006 | $1,104 | | Net Investment Loss | $(990) | $(991) | | Net Change in Unrealized Appreciation | $3,957 | $1,045 | | Net Increase in Net Assets from Operations | $2,977 | $56 | | Earnings Per Share (Basic and Diluted) | $0.22 | $0.00 | - The net increase in net assets was primarily driven by a significant net change in unrealized appreciation of portfolio securities, amounting to $4.0 million in Q1 2019, compared to $1.1 million in Q1 2018[13] Condensed Statements of Changes in Net Assets Condensed Statements of Changes in Net Assets (in thousands) | Description (in thousands) | Amount | | :--- | :--- | | Net Assets at December 31, 2018 | $43,495 | | Share-based incentive compensation | $80 | | Net increase in net assets from operations | $2,977 | | Net Assets at March 31, 2019 | $46,552 | Condensed Statements of Cash Flows Condensed Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(1,103) | $(1,608) | | Net Cash (Used in) Provided by Financing Activities | $(4) | $994 | | Net Decrease in Cash and Cash Equivalents | $(1,107) | $(614) | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $6,588 | $10,361 | Schedules of Investments - The company is classified as a "non-diversified" investment company, with significant concentration in its portfolio. As of March 31, 2019, the investment in PalletOne, Inc. ("Shipping products and services") represented 48.3% of net asset value, and the investment in Equus Energy, LLC ("Energy") represented 22.6% of net asset value[38] Investments by Type (in thousands) | Investment Type (in thousands) | Fair Value (Mar 31, 2019) | % of Net Assets | | :--- | :--- | :--- | | Common stock | $27,362 | 58.8% | | Limited liability company investments | $10,711 | 23.0% | | Secured and subordinated debt | $977 | 2.1% | | Total | $39,050 | 83.9% | Investments by Industry (in thousands) | Industry (in thousands) | Fair Value (Mar 31, 2019) | % of Net Assets | | :--- | :--- | :--- | | Shipping products and services | $22,500 | 48.3% | | Energy | $10,500 | 22.6% | | Financial services | $4,862 | 10.4% | | Business products and services | $977 | 2.1% | | Media | $211 | 0.5% | | Total | $39,050 | 83.9% | Notes to Condensed Financial Statements - The company operates as a Business Development Company (BDC) and qualifies as a Regulated Investment Company (RIC) for tax purposes, allowing it to avoid corporate income taxes on distributed income[54] - The company periodically borrows funds via a margin account to make qualifying investments needed to maintain its RIC status. As of March 31, 2019, it had borrowed $27.0 million for this purpose, collateralized by U.S. Treasury bills[64][65] - A significant portion of the company's investments ($34.2 million) are classified as Level 3 assets, meaning their fair values are determined using unobservable inputs and significant management judgment, leading to inherent valuation uncertainty[88][92] - The company is pursuing a Plan of Reorganization to transition from a BDC to a publicly-traded operating company. Shareholders have authorized the withdrawal of its BDC election, contingent on entering a definitive agreement for a merger or consolidation[117][118][120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Plan of Reorganization, with net asset value increasing due to unrealized gains - The company's primary strategic focus is the 'Plan of Reorganization' to transition from a BDC into a publicly-traded operating company, potentially through a merger or consolidation[154][155] - On January 21, 2019, shareholders approved the company's cessation as a BDC, authorizing the Board to withdraw its BDC election, though this action is contingent upon securing a definitive consolidation agreement[158] Net Investment Loss and Expenses (in millions) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Investment Loss | $1.0 million | $1.0 million | | Investment Income | $0.01 million | $0.1 million | | Total Expense | $1.0 million | $1.1 million | - The net change in unrealized appreciation of $4.0 million in Q1 2019 was primarily due to fair value increases in MVC ($0.6M), PalletOne, Inc. ($2.0M), and Equus Energy, LLC ($1.5M)[175] Item 3. Quantitative and Qualitative Disclosure about Market Risk The company faces market risks from interest rate changes and equity price fluctuations in its private investments - The company's main market risks are changes in interest rates for debt securities and changes in equity security prices[182] - A major portion of the investment portfolio consists of debt and equity in private companies. While modest public market changes do not significantly impact their value, significant market shifts can affect valuations and the timing of realized gains or losses[184] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the Fund's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2019[186] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2019, that materially affected, or are reasonably likely to materially affect, internal controls[186] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is defending a shareholder lawsuit regarding its 2016 Equity Incentive Plan, with an appeal pending - A shareholder lawsuit was filed by Samuel Zalmanoff regarding the Fund's 2016 Equity Incentive Plan, alleging a breach of fiduciary duties of disclosure[188] - The Fund was granted summary judgment on November 13, 2018, but the plaintiff appealed to the Delaware Supreme Court. The company intends to vigorously defend its position[188] Item 1A. Risk Factors No material changes to existing risk factors, but the Plan of Reorganization may introduce new risks - The company states there have been no changes to the risk factors since its 2018 Form 10-K filing[191] - The company acknowledges that its efforts to convert into an operating company under the Plan of Reorganization may subject it to a number of new risks, which will be identified in subsequent filings[190] Item 6. Exhibits This section lists key exhibits filed with the Form 10-Q, including corporate documents and CEO/CFO certifications - The report lists various exhibits, including corporate governance documents, material contracts, and required CEO/CFO certifications under Rule 13a-14(a) and Section 1350[194][195]