The accompanying notes are an integral
part of these financial statements.
Substantially all of our portfolio securities
are restricted from public sale without prior registration under the Securities Act of 1933. We negotiate certain aspects of the
method and timing of the disposition of our investment in each portfolio company, including registration rights and related costs.
As defined in the Investment Company
Act of 1940, all of our investments are in eligible portfolio companies. We provide significant managerial assistance to portfolio
companies that comprise 67.1% of the total value of the investments in portfolio securities as of December 31, 2014.
Our investments in portfolio securities
consist of the following types of securities as of December 31, 2014 (in thousands):
Interest payments are being received
and/or accrued on notes with a fair value of $1.5 million, while accrued interest has been impaired on notes receivable included
in secured and subordinated debt with a fair value of $3.2 million.
The following is a summary by industry of our investments
in portfolio securities as of December 31, 2014 (in thousands):
The accompanying notes are an integral
part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 AND 2013
(1) ORGANIZATION AND BUSINESS PURPOSE
Equus Total Return, Inc. (“we,”
“us,” “our,” “Equus” the “Company” and the “Fund”), a Delaware corporation,
was formed by Equus Investments II, L.P. (the “Partnership”) on August 16, 1991. On July 1, 1992, the Partnership was
reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common
stock of the Fund. Our shares trade on the New York Stock Exchange under the symbol EQS. On August 11, 2006, our shareholders approved
the change of the Fund’s investment strategy to a total return investment objective. This new strategy seeks to provide the
highest total return, consisting of capital appreciation and current income. In connection with this strategic investment change,
the shareholders also approved the change of name from Equus II Incorporated to Equus Total Return, Inc.
We attempt to maximize the return to
stockholders in the form of current investment income and long-term capital gains by investing in the debt and equity securities
of companies with a total enterprise value of between $5.0 million and $75.0 million, although we may engage in transactions with
smaller or larger investee companies from time to time. We seek to invest primarily in companies pursuing growth either through
acquisition or organically, leveraged buyouts, management buyouts and recapitalizations of existing businesses or special situations.
Our income-producing investments consist principally of debt securities including subordinate debt, debt convertible into common
or preferred stock, or debt combined with warrants and common and preferred stock. Debt and preferred equity financing may also
be used to create long-term capital appreciation through the exercise and sale of warrants received in connection with the financing.
We seek to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned
companies in transactions negotiated directly with such companies. Given market conditions over the past several years and the
performance of our portfolio, our Management and Board of Directors believe it prudent to continue to review alternatives to refine
and further clarify the current strategies.
We elected to be treated as a BDC under
the 1940 Act. We currently qualify as a regulated investment company RIC for federal income tax purposes and, therefore, are not
required to pay corporate income taxes on any income or gains that we distribute to our stockholders. We have certain wholly owned
taxable subsidiaries (“Taxable Subsidiaries”) each of which holds one or more portfolio investments listed on our Schedules
of Investments. The purpose of these Taxable Subsidiaries is to permit us to hold certain income-producing investments or portfolio
companies organized as limited liability companies, or LLCs, (or other forms of pass-through entities) and still satisfy the RIC
tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income. Absent the Taxable
Subsidiaries, a portion of the gross income of these income-producing investments or of any LLC (or other pass-through entity)
portfolio investment, as the case may be, would flow through directly to us for the 90% test. To the extent that such income did
not consist of investment income, it could jeopardize our ability to qualify as a RIC and, therefore, cause us to incur significant
federal income taxes. The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable
Subsidiaries and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. We do not
consolidate the Taxable Subsidiaries for income tax purposes and they may generate income tax expense because of the Taxable Subsidiaries’
ownership of the portfolio companies. We reflect any such income tax expense on our Statements of Operations.
(2) LIQUIDITY AND FINANCING ARRANGEMENTS
As of December 31, 2015, we had cash
and cash equivalents of $17.0 million. We had $19.4 million of our net assets of $37.3 million invested in portfolio securities.
We also had $15.1 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end
margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $15.0 million was
invested in U.S. Treasury bills and $0.1 million represented a required 1% brokerage margin deposit. These securities were held
by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills
were sold on January 4, 2016 and we subsequently repaid this margin loan. The margin interest was paid on February 3, 2016.
As of December 31, 2014, we had cash
and cash equivalents of $15.7 million. We had $19.7 million of our net assets of $36.2 million invested in portfolio securities.
We also had $15.1 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end
margin loan that we incurred to maintain the diversification requirements applicable to a RIC to maintain our pass-through tax
treatment. Of this amount, $15.0 million was invested in U.S. Treasury bills and $0.1 million represented a required 1% brokerage
margin deposit. These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment
of the margin loan. The U.S. Treasury bills were sold on January 2, 2015 and we subsequently repaid this margin loan. The margin
interest was paid on February 4, 2015.
During 2015 and 2014, we borrowed sufficient
funds to maintain the Fund’s RIC status by utilizing a margin account with a securities brokerage firm. There is no assurance
that such arrangement will be available in the future. If we are unable to borrow funds to make qualifying investments, we may
no longer qualify as a RIC. We would then be subject to corporate income tax on the Fund’s net investment income and realized
capital gains, and distributions to stockholders would be subject to income tax as ordinary dividends. Failure to continue to qualify
as a RIC could be material to us and our stockholders.
(3) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant
accounting policies followed by the Fund in the preparation of its financial statements:
Use of Estimates
—The preparation
of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Although we believe the estimates and assumptions used in preparing these financial
statements and related notes are reasonable in light of known facts and circumstances, actual results could differ from those estimates.
Valuation of Investments—
We
follow ASC Topic 820 for measuring fair value. Prior to our election to become a BDC, we also followed the guidance in ASC Topic
820 in disclosing the fair value reported for all financial instruments that were either impaired or available for sale securities,
using the definitions provided in Accounting Standards Codification Topic 320, “Investments – Debt and Equity Securities”
(“ASC Topic 320”). Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Inputs are broadly defined under ASC Topic 820 as assumptions market participants would
use in pricing an asset or liability. The three levels of the fair value hierarchy under ASC Topic 820 are described below:
Level 1—Unadjusted quoted prices
in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2—Inputs other than quoted
prices within Level 1 that are observable for the asset or liability, either directly or indirectly; and fair value is determined
through the use of models or other valuation methodologies.
Level 3—Inputs are unobservable
for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The
inputs into the determination of fair value are based upon the best information under the circumstances and may require significant
management judgment or estimation.
We consider a two-step process when
appraising investments of privately held companies. The first step involves determining the enterprise value of the portfolio company.
During this step, we consider three different valuation approaches: a market approach, an income approach, and a cost approach.
The particular facts and circumstances of each portfolio company determine which approach, or combination of approaches, will be
utilized. The second step when appraising equity investments of privately held companies involves allocating value to the various
debt and equity securities of the company. We allocate value to these securities based on their relative priorities. For equity
securities such as warrants, we may also incorporate alternative methodologies including the Black-Scholes Option Pricing Model.
Yield analysis is also employed to determine if a debt security has been impaired.
In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within
the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment
of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the investment.
Investments for which prices are not
observable are generally private investments in the debt and equity securities of operating companies. The primary valuation method
used to estimate the fair value of these Level 3 investments is the discounted cash flow method (although a liquidation analysis,
option theoretical, or other methodology may be used when more appropriate). The discounted cash flow approach to determine fair
value (or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various
relevant factors depending on investment type, including comparing the latest arm’s length or market transactions involving
the subject security to the selected benchmark credit spread, assumed growth rate (in cash flows), and capitalization rates/multiples
(for determining terminal values of underlying portfolio companies). The valuation based on the inputs determined to be the
most reasonable and probable is used as the fair value of
the investment. The determination of fair value using these methodologies may take into consideration a range of factors including,
but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading
values on public exchanges for comparable securities, current and projected operating performance, financing transactions subsequent
to the acquisition of the investment and anticipated financing transactions after the valuation date. Application of these valuation
methodologies involves a significant degree of judgment by management. Fair values of new investments are generally assumed to
be equal to their cost to the Company for up to three months after their initial purchase.
To assess the reasonableness of the
discounted cash flow approach, the fair value of equity securities, including warrants, in portfolio companies may also consider
the market approach—that is, through analyzing and applying to the underlying portfolio companies, market valuation multiples
of publicly-traded firms engaged in businesses similar to those of the portfolio companies. The market approach to determining
the fair value of a portfolio company’s equity security (or securities) will typically involve: (1) applying to the portfolio
company’s trailing twelve months (or current year projected) EBITDA a low to high range of enterprise value to EBITDA multiples
that are derived from an analysis of publicly-traded comparable companies, in order to arrive at a range of enterprise values for
the portfolio company; (2) subtracting from the range of calculated enterprise values the outstanding balances of any debt or equity
securities that would be senior in right of payment to the equity securities we hold; and (3) multiplying the range of equity values
derived therefrom by our ownership share of such equity tranche in order to arrive at a range of fair values for our equity security
(or securities). Application of these valuation methodologies involves a significant degree of judgment by Management.
Equity in a portfolio company that invests
in loans will typically be valued by arriving at a fair value of such vehicle’s loan assets (plus, when appropriate, the
carrying value of certain other assets), and deducting the book value or fair value (as appropriate) of such vehicle’s liabilities
to arrive at a fair value for the equity. When appropriate, in order to recognize value that would be created by growth opportunities
of such portfolio company, equity in a portfolio company may also be valued by taking into consideration the magnitude, timing,
and effective life of its expected future investments in loans.
Due to the inherent uncertainty of determining
the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may
differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially
from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other
restrictions or otherwise are less liquid than publicly traded instruments. If we were required to liquidate a portfolio investment
in a forced or liquidation sale, we might realize significantly less than the value at which such investment had previously been
recorded. With respect to Level 3 investments, where sufficient market quotations are not readily available or for which no or
an insufficient number of indicative prices from pricing services or brokers or dealers have been received, we undertake, on a
quarterly basis, a valuation process as described below:
•
|
|
For each debt investment, a basic credit rating review process is completed. The risk rating on every credit facility is reviewed and either reaffirmed or revised by our Investment Committee.
|
•
|
|
Each portfolio company or investment is valued by an investment professional.
|
•
|
|
Third party valuation firm(s) are engaged to provide valuation services as requested, by reviewing Management’s preliminary valuations. Our Management’s preliminary fair value conclusions on each of the Fund’s assets for which sufficient market quotations are not readily available is reviewed and assessed by a third-party valuation firm at least once in every 12-month period, and more often as determined by the Audit Committee or required by our valuation policy. Such valuation assessment may be in the form of positive assurance, range of values or other valuation method based on the discretion of our Board.
|
•
|
|
The Audit Committee reviews the preliminary valuations of our Management and independent valuation firms and, if appropriate, recommends the approval of the valuations by the Board.
|
•
|
|
Our Board discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of Management, the Audit Committee and, where appropriate, the respective independent valuation firms.
|
The following sections describe the
valuation techniques we use to measure different financial instruments at fair value and include the levels within the fair value
hierarchy in which the financial instruments are categorized.
Market approach
– The market
approach typically employed by Management calculates the enterprise value of a company as a multiple of earnings before interest,
taxes, depreciation and amortization (“EBITDA”) generated by the company for the trailing twelve month period. Adjustments
to the company’s EBITDA, including those for non-recurring items, may be considered. Multiples are estimated based on current
market conditions and past experience in the private company marketplace and are subjective in nature. We will apply liquidity
and other discounts as deemed appropriate to equity valuations where applicable. We may also use, when available, third-party transactions
in a portfolio company’s securities as the basis of valuation (the “private market method”). The private market
method will be used only with respect to completed transactions or firm offers made by sophisticated, independent investors.
Income approach
– The income
approach typically utilized by our Management calculates the enterprise value of a company utilizing a discounted cash flow model
incorporating projected future cash flows of the company. Projected future cash flows consider the historical performance of the
company as well as current and projected market participant performance. Discount rates are estimated based on current market conditions
and past experience in the private company marketplace and are subjective in nature. We will apply liquidity and other discounts
as deemed appropriate to equity valuations where applicable.
Asset approach
– We consider
the asset approach to determine the fair value of significantly deteriorated investments demonstrating circumstances indicative
of a liquidation analysis. This situation may arise when a portfolio company: 1) cannot generate adequate cash flow to meet the
principal and interest payments on its indebtedness; 2) is not successful in refinancing its debt upon maturity; 3) we believe
the credit quality of a loan has deteriorated due to changes in the business and underlying asset or market conditions may result
in the company’s inability to meet future obligations; or 4) the portfolio company’s reorganization or bankruptcy.
Consideration is also given as to whether a liquidation event would be orderly or forced.
We base adjustments upon such factors
as the portfolio company’s earnings, cash flow and net worth, the market prices for similar securities of comparable companies,
an assessment of the company’s current and future financial prospects and various other factors and assumptions. In the case
of unsuccessful or substantially declining operations, we may base a portfolio company’s fair value upon the company’s
estimated liquidation value. Fair valuations are necessarily subjective, and our estimate of fair value may differ materially from
amounts actually received upon the disposition of its portfolio securities. Also, any failure by a portfolio company to achieve
its business plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant
and rapid change in its value.
Our general intent is to hold our loans
to maturity when appraising our privately held debt investments. As such, we believe that the fair value will not exceed the cost
of the investment. However, in addition to the previously described analysis involving allocation of value to the debt instrument,
we perform a yield analysis to determine if a debt security has been impaired. Certificates of deposit purchased by the Fund generally
will be valued at their face value, plus interest accrued to the date of valuation.
For most of our investments, market
quotations are not available. With respect to investments for which market quotations are not readily available or when such market
quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described
below:
1.
|
|
Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by the Fund;
|
2.
|
|
The independent valuation firms conduct independent valuations and make their own independent assessments;
|
3.
|
|
The Audit Committee of our Board reviews and discusses the preliminary valuation of the Fund and that of the independent valuation firms; and
|
4.
|
|
The Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our Management, the respective independent valuation firm and the Audit Committee.
|
Investments are valued utilizing a yield
analysis, enterprise value (“EV”) analysis, net asset value analysis, liquidation analysis, discounted cash flow analysis,
or a combination of methods, as appropriate. The yield analysis uses loan spreads and other relevant information implied by market
data involving identical or comparable assets or liabilities. Under the EV analysis, the EV of a portfolio company is first determined
and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall”
allocation). To determine the EV, we typically use a market multiples approach that considers relevant and applicable market trading
data of guideline public companies, transaction metrics from precedent M&A transactions and/or a discounted cash flow analysis.
The net asset value analysis is used to derive a value of an underlying investment (such as real estate property) by dividing a
relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar
properties as may be obtained from guideline public companies and/or relevant transactions. The liquidation analysis is intended
to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds
based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow analysis uses valuation techniques
to convert future cash flows or earnings to a range of fair values from which a single estimate may be derived utilizing an appropriate
discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts.
In applying these methodologies, additional
factors that we consider in fair value pricing our investments may include, as we deem relevant: security covenants, call protection
provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to
make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer
companies; the principal market; and enterprise values, among other factors.
Because of the inherent uncertainty
of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $16.2 million and
$15.7 million as of December 31, 2015 and 2014, respectively, our fair value determinations may materially differ from the values
that would have been used had a ready market existed for the securities.
We adjust our net asset value for the
changes in the value of our publicly held securities, if applicable, and material changes in the value of private securities, generally
determined on a quarterly basis or as announced in a press release, and report those amounts to Lipper Analytical Services, Inc.
Our net asset value appears in various publications, including
Barron’s
and
The Wall Street Journal
.
For loan and debt securities, the Fund
has performed a yield analysis assuming a hypothetical current sale of the security. The yield analysis considers changes in interest
rates and changes in leverage levels of the portfolio company as compared to the market interest rates and leverage levels. Assuming
the credit quality of the portfolio company remains stable, the Fund will use the value determined by the yield analysis as the
fair value for that security.
We will record unrealized depreciation
on investments when we determine that the fair value of a security is less than its cost basis, and will record unrealized appreciation
when we determine that the fair value is greater than its cost basis.
We assess the levels of the investments
at each measurement date, and transfers between levels are recognized on the subsequent measurement date closest in time to the
actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and Level
2 during 2015 and 2014.
As of December 31, 2015, investments
measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input
to the valuations:
|
|
Fair Value Measurements as of December 31, 2015
|
(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
|
|
$
|
5,715
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,715
|
|
Affiliate investments
|
|
|
9,600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,600
|
|
Non-affiliate investments - related party
|
|
|
3,159
|
|
|
|
3,159
|
|
|
|
—
|
|
|
|
—
|
|
Non-affiliate investments
|
|
|
915
|
|
|
|
—
|
|
|
|
—
|
|
|
|
915
|
|
Total investments
|
|
|
19,389
|
|
|
|
3,159
|
|
|
|
—
|
|
|
|
16,230
|
|
Temporary cash investments
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
Total investments and temporary cash investments
|
|
$
|
34,389
|
|
|
$
|
18,159
|
|
|
$
|
—
|
|
|
$
|
16,230
|
|
As of December 31, 2014, investments
measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input
to the valuations:
|
|
Fair Value Measurements as of December 31, 2014
|
(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
|
|
$
|
13,173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,173
|
|
Affiliate investments
|
|
|
960
|
|
|
|
—
|
|
|
|
—
|
|
|
|
960
|
|
Non-affiliate investments - related party
|
|
|
3,981
|
|
|
|
3,981
|
|
|
|
—
|
|
|
|
—
|
|
Non-affiliate investments
|
|
|
1,532
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,532
|
|
Total investments
|
|
|
19,646
|
|
|
|
3,981
|
|
|
|
—
|
|
|
|
15,665
|
|
Temporary cash investments
|
|
|
14,996
|
|
|
|
14,996
|
|
|
|
—
|
|
|
|
—
|
|
Total investments and temporary cash investments
|
|
$
|
34,642
|
|
|
$
|
18,977
|
|
|
$
|
—
|
|
|
$
|
15,665
|
|
There were no transfers between Level
1 and Level 2 during 2015 and 2014.
The following table provides a reconciliation
of fair value changes during 2015 for all investments for which we determine fair value using significant unobservable (Level 3)
inputs:
|
|
Fair
value measurements using significant unobservable inputs (Level 3)
|
(in thousands)
|
|
Control
Investments
|
|
Affiliate
Investments
|
|
Non-affiliate
Investments
|
|
Total
|
Fair value as of December 31, 2014
|
|
$
|
13,173
|
|
|
$
|
960
|
|
|
$
|
1,532
|
|
|
$
|
15,665
|
|
Realized losses
|
|
|
(2,850
|
)
|
|
|
—
|
|
|
|
372
|
|
|
|
(2,478
|
)
|
Change in unrealized appreciation (depreciation)
|
|
|
(1,450
|
)
|
|
|
8,640
|
|
|
|
(435
|
)
|
|
|
6,755
|
|
Purchases of portfolio securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from sales/dispositions
|
|
|
(3,158
|
)
|
|
|
—
|
|
|
|
(554
|
)
|
|
|
(3,712
|
)
|
Fair value as of December 31, 2015
|
|
$
|
5,715
|
|
|
$
|
9,600
|
|
|
$
|
915
|
|
|
$
|
16,230
|
|
The following table provides a reconciliation
of fair value changes during 2014 for all investments for which we determine fair value using significant unobservable (Level 3)
inputs:
|
|
Fair
value measurements using significant unobservable inputs (Level 3)
|
(in
thousands)
|
|
Control
Investments
|
|
Affiliate
Investments
|
|
Non-affiliate
Investments
|
|
Total
|
Fair value
as of December 31, 2013
|
|
$
|
11,105
|
|
|
$
|
250
|
|
|
$
|
1,980
|
|
|
$
|
13,335
|
|
Realized
losses
|
|
|
—
|
|
|
|
—
|
|
|
|
(63
|
)
|
|
|
(63
|
)
|
Change
in unrealized depreciation
|
|
|
1,799
|
|
|
|
710
|
|
|
|
(349
|
)
|
|
|
2,160
|
|
Purchases
of portfolio securities
|
|
|
269
|
|
|
|
—
|
|
|
|
171
|
|
|
|
440
|
|
Proceeds
from sales/dispositions
|
|
|
—
|
|
|
|
—
|
|
|
|
(207
|
)
|
|
|
(207
|
)
|
Fair value as of December
31, 2014
|
|
$
|
13,173
|
|
|
$
|
960
|
|
|
$
|
1,532
|
|
|
$
|
15,665
|
|
Foreign Exchange—
We record
temporary changes in foreign exchange rates of portfolio securities denominated in foreign currencies as changes in fair value.
These changes are therefore reflected as unrealized gains or losses until realized.
Investment Transactions
—Investment
transactions are recorded on the accrual method. Realized gains and losses on investments sold are computed on a specific identification
basis.
We classify our investments in accordance
with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies
in which the Fund owns more than 25% of the voting securities or maintains greater than 50% of the board representation. Under
the 1940 Act, “Affiliate Investments” are defined as those non-control investments in companies in which we own between
5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliate Investments” are defined as investments that
are neither Control Investments nor Affiliate Investments.
As of December 31, 2015 and 2014, we
had no outstanding commitments to our portfolio company investments; however, under certain circumstances, we may be called on
to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make follow-on investments,
the portfolio company in need of the investment may be negatively impacted. Also, our equity interest in the estimated fair value
of the portfolio company could be reduced. Follow-on investments may include capital infusions which are expenditures made directly
to the portfolio company to ensure that operations are completed, thereby allowing the portfolio company to generate cash flows
to service the debt.
Interest Income Recognition
—We
record interest income, adjusted for amortization of premium and accretion of discount, on an accrual basis to the extent that
we expect to collect such amounts. We accrete or amortize discounts and premiums on securities purchased over the life of the respective
security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion
of discount and/or amortization of premium on debt securities. We stop accruing interest on investments when we determine that
interest is no longer collectible. We may also impair the accrued interest when we determine that all or a portion of the current
accrual is uncollectible. If we receive any cash after determining that interest is no longer collectible, we treat such cash as
payment on the principal balance until the entire principal balance has been repaid, before we recognize any additional interest
income. We will write off uncollectible interest upon the occurrence of a definitive event such as a sale, bankruptcy, or reorganization
of the relevant portfolio interest.
Payment in Kind Interest (PIK)
—We
have loans in our portfolio that may pay PIK interest. We add PIK interest, if any, computed at the contractual rate specified
in each loan agreement, to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC,
we must pay out to stockholders this non-cash source of income in the form of dividends even if we have not yet collected any cash
in respect of such investments. We will continue to pay out net investment income and/or realized capital gains, if any, on an
annual basis as required under the Investment Company Act of 1940.
Cash Flows
—For purposes
of the Statements of Cash Flows, we consider all highly liquid temporary cash investments purchased with an original maturity of
three months or less to be cash equivalents. We include our investing activities within cash flows from operations. We exclude
“Restricted Cash and Temporary Cash Investments” used for purposes of complying with RIC requirements from cash equivalents.
Taxes
—We intend to comply
with the requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and, as such, will not
be subject to federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed to stockholders.
Therefore, no provision for federal income taxes is recorded in the financial statements. We borrow money from time to time to
maintain our tax status under the Internal Revenue Code as a RIC. See Note 1 for discussion of Taxable Subsidiaries and see Note
2 for further discussion of the Fund’s RIC borrowings.
All corporations incorporated in the
State of Delaware are required to file an Annual Report and to pay a franchise tax. As a result, we paid Delaware Franchise tax
in the amount of $0.02 million, $0.02 million and $0.01 million for the years ended December 31, 2015, December 31, 2014 and December
31, 2013, respectively.
Texas margin tax applies to legal entities
conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a
tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result,
we did not owe state income tax for each of the years ended December 31, 2015, 2014 and 2013.
Significant Unobservable Inputs
—
Our investment portfolio is not composed of homogeneous debt and equity securities that can be valued with a small number of inputs.
Instead, the majority of our investment portfolio is composed of complex debt and equity securities with distinct contract terms
and conditions. As such, our valuation of each investment in our portfolio is unique and complex, often factoring in numerous different
inputs, including historical and forecasted financial and operational performance of the portfolio company, project cash flows,
market multiples comparable market transactions, the priority of our securities compared with those of other investors, credit
risk, interest rates, independent valuations and reviews and other inputs.
The following table summarizes the significant
non-observable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique
as of December 31, 2015:
|
|
|
|
|
|
|
|
Range
|
(in thousands)
|
|
Fair
Value
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Minimum
|
|
Maximum
|
Secured and subordinated debt
|
|
$
|
915
|
|
|
Yield-to-maturity
|
|
Discount for lack of marketability
|
|
|
0
|
%
|
|
|
0
|
%
|
Common stock
|
|
|
9,600
|
|
|
Income/Market approach
|
|
EBITDA Multiple/Discount for lack of marketability/Control premium
|
|
|
10
|
%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset approach
|
|
Recovery rate
|
|
|
0
|
%
|
|
|
100
|
%
|
Limited liability company investments
|
|
|
5,715
|
|
|
Discounted cash flow; Guideline transaction
method
|
|
Reserve adjustment factors
|
|
|
75
|
%
|
|
|
100
|
%
|
|
|
$
|
16,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
- Certain amounts have been reclassified
in the 2014 financial statements to conform with the current year presentation.
(4) RELATED PARTY TRANSACTIONS AND AGREEMENTS
Except as noted below, as compensation
for services to the Fund, each Independent Director receives an annual fee of $20,000 paid quarterly in arrears, a fee of $2,000
for each meeting of the Board of Directors attended in person, a fee of $1,000 for participation in each telephonic meeting of
the Board and a fee of $1,000 for each committee meeting attended, and reimbursement of all out-of-pocket expenses relating to
attendance at such meetings. A quarterly fee of $15,000 is paid to the Chairman of the Audit Committee and a quarterly fee of $3,750
is paid to the Chairman of the Independent Directors. We may also pay other one-time or recurring fees to members of our Board
of Directors in special circumstances. None of our interested directors receive annual fees for their service on the Board of Directors.
In November, 2011, Equus Energy, LLC,
a wholly-owned subsidiary of the Fund, entered into a consulting agreement with Global Energy Associates, LLC (“Global Energy”)
to provide consulting services for energy related investments. Henry W. Hankinson, Director of the Fund, is a managing partner
and co-founder of Global Energy. For each of the years ended December 31, 2015, 2014 and 2013, payments to Global Energy totaled
$75,000.
In
respect of services provided to the Fund by members of the Board not in connection with their roles and duties as directors, the
Fund pays a rate of $250 per hour for services rendered.
During 2015 and 2014, we paid Kenneth I. Denos, P.C., a professional
corporation owned by Kenneth I. Denos, a director of the Fund, $0.3 million and $0.3 million, respectively, for services provided
to the Fund during the year.
(5) FEDERAL INCOME
TAX MATTERS
As a Regulated Investment Company, our
tax liability is dependent upon whether an election is made to distribute taxable investment income and capital gains above any
statutory requirement. As we incurred losses in 2013, 2014 and 2015, no distributions were required or made.
The Internal Revenue Service approved
our request, effective October 31, 1998, to change our year-end for determining capital gains for purposes of Section 4982
of the Internal Revenue Code from December 31 to October 31.
There are no material book to tax differences
for net investment income/losses, realized gains or unrealized appreciation/depreciation. As of December 31, 2015, we had approximately
$31.3 million in capital losses of which $14.4 million will begin expiring after 2017, and the remaining $16.9 million can be carried
forward definitely.
Return of Capital Statement of Position
has no material book to tax differences for the three years ended December 31, 2015 and therefore has no material book to tax differences
impacting accumulated earnings.
We believe that any aggregate exposure
for uncertain tax positions should not have a material impact on our financial statements as of December 31, 2015 or December 31,
2014. An uncertain tax position is measured as the largest amount of tax return benefits that does not have a greater than 50%
likelihood of being realized upon ultimate settlement. We have not recorded an adjustment to our financial statements related to
any uncertain tax positions. We will continue to evaluate our tax positions and recognize any future impact of uncertain tax positions
as a charge to income in the applicable period in accordance with promulgated standards.
The Fund’s accounting policy related
to income tax penalties and interest assessments is to accrue for these costs and record a charge to expenses during the period
that the Fund takes an uncertain tax position through resolution with the taxing authorities or expiration of the applicable statute
of limitations.
All of the Fund’s federal and
state tax returns for 2011 through 2015 remain open to examination. We believe that there are no tax positions taken or expected
to be taken that would significantly increase or decrease unrecognized tax benefits within 12 months of the reporting date.
(6) COMMITMENTS AND CONTINGENCIES
We had an operating lease for office
space that expired in September 2014. Our current office space lease as of December 31, 2015 is month-to-month. Rent expense under
the operating lease agreement, inclusive of common area maintenance costs, was $61,000 and $85,000 for the years ended December
31, 2014 and 2013, respectively.
As of December 31, 2015, we had no outstanding
commitments to our portfolio company investments.
Legal Proceedings
Champion Window Arbitration Settlement
—In
January 2006, we sold our 31.5% ownership interest in Champion Window, Inc. (“Champion”), a portfolio company of the
Fund, to Atrium Companies Inc. (“Atrium”) pursuant to a Stock Purchase Agreement (“SPA”) dated December
22, 2005. The SPA contained certain limited rights of indemnification for Atrium in connection with its purchase of such ownership
interest.
More than five years after the closing
of the sale of our Champion interest, Atrium filed suit in Texas state court, which was subsequently consolidated into an Arbitration
Action, against two former officers of Champion, Equus, and another former Champion shareholder. The suit alleged breaches of fiduciary
duty against Champion’s former officers for hiring undocumented workers that were discovered as a result of an investigation
by the U.S. Immigration and Customs Enforcement agency (“ICE”) into Atrium’s hiring practices. The suit also
sought indemnification under the SPA from these officers, Equus, and another former Champion shareholder, for a payment of $2.0
million made to ICE in settlement of the investigation and associated legal costs, as well as for claimed lost profits as a result
of the investigation.
On February 4, 2015, without admitting
to any liability on the part of Equus, we entered into a settlement agreement with Atrium and its associated companies. Pursuant
to the settlement agreement and in view of the estimated costs of protracted litigation and the associated disruption to the operations
of the Fund, we agreed to pay $500,000, in complete settlement of the lawsuit, as being in the best interests of the Fund and its
shareholders. This amount was accrued as of December 31, 2014 in the accompanying financial statements. The settlement payment
was made on February 6, 2015. Atrium filed a motion to dismiss the lawsuit with prejudice on February 4, 2015.
Indemnification Settlement
—Effective
June 13, 2013, the Fund entered into a settlement agreement with Sam Douglass, a former director and executive officer of the Fund,
in respect of a claim for indemnification pursuant to the General Corporation Law of Delaware and an indemnification agreement
entered into by the Fund with Mr. Douglass on May 3, 2001. The settlement agreement provides for the reimbursement to Mr. Douglass
of actual expenses incurred, excluding any fines or penalties, in connection with an enforcement action initiated by the Securities
and Exchange Commission against Mr. Douglass in 2009. The settlement payment of $125,000 was made on June 24, 2013 and included
in the Statement of Operations in 2013.
From time to time, the Fund is also
a party to certain proceedings incidental to the normal course of our business including the enforcement of our rights under contracts
with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we
do not expect that these proceedings will have a material effect upon the Fund’s financial condition or results of operations.
2015 Portfolio Activity
During the year ended December 31, 2015,
we received a 1-year subordinated note from 5
th
Element Tracking in the original principal amount of $0.9 million, bearing
interest at the rate of 14% per annum in connection with the sale of our interest in Spectrum. We also received 23,694 shares of
MVC in the form of dividend payments.
The following table includes significant
investment activity during the year ended December 31, 2015 (in thousands):
|
|
Investment Activity
|
|
|
|
|
New Investments
|
|
Existing Investments
|
|
|
Portfolio Company
|
|
Cash
|
|
Non-Cash
|
|
Follow-On
|
|
PIK
|
|
Total
|
MVC Capital, Inc.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222
|
|
|
$
|
222
|
|
5
TH
Element Tracking, LLC
|
|
|
—
|
|
|
|
915
|
|
|
|
—
|
|
|
|
—
|
|
|
|
915
|
|
|
|
$
|
—
|
|
|
$
|
915
|
|
|
$
|
—
|
|
|
$
|
222
|
|
|
$
|
1,136
|
|
During 2015,we realized capital
losses of $2.5 million, including the following significant transactions:
Portfolio Company
|
|
Industry
|
|
Type
|
|
Transaction Type
|
|
Realized Gain (Loss)
|
Spectrum Management, LLC
|
|
Business products and services
|
|
|
Control
|
|
|
Disposition
|
|
$
|
(2,850
|
)
|
Orco Property Group S. A.
|
|
Real Estate
|
|
|
Non-affiliate
|
|
|
Disposition
|
|
|
372
|
|
Various others
|
|
|
|
|
|
|
|
Disposition
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,483
|
)
|
During 2015, we recorded a net decrease
in unrealized depreciation of $5.9 million, to arrive at a net unrealized appreciation of our portfolio securities of $2.4 million,
resulting principally from the following:
|
(i)
|
Decrease in the fair value of our holdings in Equus Energy, LLC of $4.3 million, principally due to a combination of production without a corresponding increases in proved reserves and declining short- and long-term prices for crude oil and natural gas;
|
|
(ii)
|
Decrease in the fair value of our shareholding in MVC of $0.8 million due to a decrease in the MVC share price during the period, which was partially offset by $0.2 million in dividends received in the form of additional MVC shares and $0.2 million in purchase price adjustment;
|
|
(iii)
|
Increase in fair value of our shareholding in PalletOne, Inc. of $8.6 million due to an overall improvement in the industry sector for packaging companies, as well as continued revenue and earnings growth for the company;
|
|
(iv)
|
Transfer of unrealized depreciation to realized gain on our holding of OPG Notes of $0.4 million in connection with the sale of our interest in the OPG Notes; and
|
|
(v)
|
Transfer of unrealized depreciation to realized loss on our holdings in Spectrum of $2.9 million in connection with the sale of our interest in Spectrum.
|
2014 Portfolio Activity
During the year ended December 31, 2014,
we made a capital infusion of $0.3 million relating to Spectrum. We also received a semi-annual interest payment of $0.04 million
in cash and $0.2 million in the form of PIK’d interest in respect of our €1.2 million [$1.5 million] in OPG notes. On
May 14, 2014, we sold to MVC 2,112,000 newly-issued shares of the Fund’s common stock in exchange for 395,839 shares of MVC
(see “
Significant Events−Plan of Reorganization”
above). During the year ended December 31, 2014, we also
received 9,129 shares of MVC in the form of dividend payments.
The following table includes significant
investment activity during the year ended December 31, 2014 (in thousands):
|
|
Investment Activity
|
|
|
|
|
New Investments
|
|
Existing Investments
|
|
|
Portfolio Company
|
|
Cash
|
|
Non-Cash
|
|
Follow-On
|
|
PIK
|
|
Total
|
MVC Capital, Inc.
|
|
$
|
524
|
|
|
$
|
5,075
|
|
|
$
|
—
|
|
|
$
|
107
|
|
|
$
|
5,706
|
|
Orco Property Group
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171
|
|
|
|
171
|
|
Spectrum Management, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
269
|
|
|
|
—
|
|
|
|
269
|
|
|
|
$
|
524
|
|
|
$
|
5,075
|
|
|
$
|
269
|
|
|
$
|
278
|
|
|
$
|
6,146
|
|
During 2014, we realized capital gains
of $0.7 million, including the following significant transactions:
Portfolio Company
|
|
Industry
|
|
Type
|
|
Transaction Type
|
|
Realized Gain (Loss)
|
Orco Property Group
|
|
Real estate
|
|
|
Non-affiliate
|
|
|
Disposition
|
|
$
|
(63
|
)
|
MVC Capital, Inc.
|
|
Financial services
|
|
|
Non-affiliate
|
|
|
Share exchange
|
|
|
724
|
|
Various others
|
|
|
|
|
|
|
|
Disposition
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
660
|
|
During 2014, we recorded a net change
in unrealized depreciation of $0.3 million, to arrive at net unrealized depreciation of $3.6 million as of December 31, 2014. Such
change in depreciation resulted primarily from the following changes:
(i)
|
|
Increase in fair value of our holding in Equus Energy of
$1.8 million due to an increase in comparable transactions for mineral leases, increased oil and gas production, as well as additional
proved developed producing and proved developed producing behind-pipe reserves from new drilling and recompletion activities;
|
(ii)
|
|
Decrease in fair value of Equus Media Development Company,
LLC of $0.1 million due to a net operating loss for the period equal to the amount of the decrease;
|
(iii)
|
|
Decrease in fair value of MVC of $1.7 million due to the
decline in the stock price of MVC, which was partially offset by $0.1 million in dividends received in the form of additional MVC
shares;
|
(iv)
|
|
Decrease in fair value of our holding of OPG Notes of $0.1
million due to adverse changes in the USD-EUR exchange rate; and
|
(v)
|
|
Increase in fair value of our shareholding in PalletOne, Inc. of $0.7 million due to an improvement in the industry sector for packaging companies and continued revenue and earnings growth.
|
2013 Portfolio Activity
During the year ended December 31, 2013,
we had investment activity of $0.8 million in two portfolio companies. We made a capital infusion of $0.3 million relating to Spectrum
Management. We made a short-term working capital loan of $0.5 million to Security Monitor Holdings, LLC (“SMH”). SMH
is a company which specializes in managing and improving operations of distressed companies.
The following table includes significant
investment activity during the year ended December 31, 2013 (in thousands):
|
|
Investment Activity
|
|
|
|
|
New Investments
|
|
Existing Investments
|
|
|
Portfolio Company
|
|
Cash
|
|
Non-Cash
|
|
Follow-On
|
|
PIK
|
|
Total
|
Security Monitor Holdings, LLC
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
Spectrum Management, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
310
|
|
|
|
—
|
|
|
|
310
|
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
310
|
|
|
$
|
—
|
|
|
$
|
810
|
|
During 2013, we realized net capital
losses of $9.8 million, including the following significant transactions:
Portfolio Company
|
|
Industry
|
|
Type
|
|
Transaction Type
|
|
Realized Gain (Loss)
|
The Bradshaw Group
|
|
Business products and services
|
|
Non-affiliate
|
|
|
Disposition
|
|
$
|
(1,795
|
)
|
Infinia Corporation
|
|
Alternative energy
|
|
Non-affiliate
|
|
|
Disposition
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2013, we recorded a net change
in unrealized depreciation of $13.3 million, to arrive at net unrealized depreciation of $3.9 million as of December 31, 2013.
Such change in depreciation resulted primarily from the following changes:
(i)
|
|
Transfer of unrealized depreciation to realized loss of our
holdings in Bradshaw of $1.8 million in connection with Bradshaw’s sale of all of its assets;
|
(ii)
|
|
Transfer of unrealized depreciation to realized loss of our
holdings in Infinia of $8.0 million as a result of the liquidation of Infinia due to bankruptcy proceedings initiated by the company;
|
(iii)
|
|
Increase in the fair value of Equus Energy of $1.1 million
due improved operational results and an increase in proved developed producing reserves;
|
(iv)
|
|
Increase in the fair value of our holdings in Spectrum of
$2.5 million due to continued stability in operations resulting in the utilization of a market approach in determining fair value,
in lieu of an asset approach applying a liquidation analysis used in prior quarters; and
|
(v)
|
|
Increase in the fair value of our holdings in PalletOne of $0.1 million due to improved operations.
|
(8) EQUUS ENERGY, LLC
Equus Energy was formed in November
2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector, with particular emphasis on
income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus Energy. On December
27, 2012, we invested an additional $6.8 million in Equus Energy for the purpose of additional working capital and to fund the
purchase of $6.6 million in working interests in 132 producing and non-producing oil and gas wells. The working interests include
associated development rights of approximately 21,620 acres situated on 13 separate properties in Texas and Oklahoma. The working
interests range from a
de minimus
amount to 50% of the leasehold that includes these wells.
The wells are operated by a number of
experienced operators, including Chevron USA, Inc., which has operating responsibility for all of Equus Energy’s 40 producing
well interests located in the Conger Field, a productive oil and gas field on the edge of the Permian Basin that has experienced
successful gas and hydrocarbon extraction in multiple formations. Equus Energy, which holds a 50% working interest in each of these
Conger Field wells, is working with Chevron in a recompletion program of existing Conger Field wells to the Wolfcamp formation,
a zone containing oil as well as gas and natural gas liquids. Part of Equus Energy’s acreage rights described above also
includes a 50% working interest in possible new drilling to the base of the Canyon formation (appx. 8,500 feet) on 2,400 acres
in the Conger Field. Also included in the interests acquired by Equus Energy are working interests of 7.5% and 2.5% in the Burnell
and North Pettus Units, respectively, which collectively comprise approximately 13,000 acres located in the area known as the “Eagle
Ford Shale” play.
Below
is selected financial information from the audited financial statements for Equus Energy as of December 31, 2015 and 2014 and for
the years ended December 31, 2015, 2014 and 2013 (in thousands):
EQUUS ENERGY, LLC and
SUBSIDIARY
Condensed Consolidated Balance Sheets
|
|
December 31,
|
|
|
2015
|
|
2014
|
|
|
|
|
(Revised)
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
517
|
|
|
$
|
613
|
|
Accounts receivable
|
|
|
122
|
|
|
|
310
|
|
Other current assets
|
|
|
32
|
|
|
|
35
|
|
Total current assets
|
|
|
671
|
|
|
|
958
|
|
Oil and gas properties
|
|
|
8,269
|
|
|
|
8,200
|
|
Less: accumulated depletion, depreciation and amortization
|
|
|
(6,516
|
)
|
|
|
(1,768
|
)
|
Net oil and gas properties
|
|
|
1,753
|
|
|
|
6,432
|
|
Total assets
|
|
$
|
2,424
|
|
|
$
|
7,390
|
|
Liabilities and member's equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other
|
|
$
|
206
|
|
|
$
|
110
|
|
Due to affiliate
|
|
|
611
|
|
|
|
611
|
|
Total current liabilities
|
|
|
817
|
|
|
|
721
|
|
Asset retirement obligations
|
|
|
178
|
|
|
|
183
|
|
Total liabilities
|
|
|
995
|
|
|
|
904
|
|
Total member's equity
|
|
|
1,429
|
|
|
|
6,486
|
|
Total liabilities and member's equity
|
|
$
|
2,424
|
|
|
$
|
7,390
|
|
EQUUS ENERGY, LLC and SUBSIDIARY
Condensed Consolidated
Statements of Operations
|
|
Year Ended December
31,
|
|
|
2015
|
|
2014
|
|
2013
|
|
|
|
|
(Revised)
|
|
(Revised)
|
Operating revenue
|
|
$
|
1,091
|
|
|
$
|
2,469
|
|
|
$
|
2,556
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses
|
|
|
1,103
|
|
|
|
1,148
|
|
|
|
1,241
|
|
Impairment
|
|
|
3,978
|
|
|
|
—
|
|
|
|
—
|
|
Depletion, depreciation, amortization and accretion
|
|
|
771
|
|
|
|
790
|
|
|
|
989
|
|
General and administrative
|
|
|
356
|
|
|
|
632
|
|
|
|
535
|
|
Total operating expenses
|
|
|
6,208
|
|
|
|
2,569
|
|
|
|
2,765
|
|
Operating loss before income tax expense
|
|
|
(5,117
|
)
|
|
|
(100
|
)
|
|
|
(209
|
)
|
Income tax benefit (expense)
|
|
|
61
|
|
|
|
(63
|
)
|
|
|
2
|
|
Net loss
|
|
$
|
(5,056
|
)
|
|
$
|
(163
|
)
|
|
$
|
(207
|
)
|
EQUUS ENERGY, LLC and SUBSIDIARY
Condensed Consolidated
Statements of Cash Flows
|
|
Year ended December 31,
|
|
|
2015
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
(Revised)
|
|
|
|
(Revised)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,056
|
)
|
|
$
|
(163
|
)
|
|
$
|
(207
|
)
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
|
|
|
|
|
|
|
net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of oil and gas properties
|
|
|
3,978
|
|
|
|
—
|
|
|
|
—
|
|
Depletion, depreciation and amortization
|
|
|
766
|
|
|
|
784
|
|
|
|
983
|
|
Accretion expense
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
188
|
|
|
|
(22
|
)
|
|
|
154
|
|
Prepaid expenses and other current assets
|
|
|
4
|
|
|
|
(35
|
)
|
|
|
|
|
Affiliate payable/receivable
|
|
|
—
|
|
|
|
247
|
|
|
|
365
|
|
Accounts payable and other
|
|
|
95
|
|
|
|
(190
|
)
|
|
|
(188
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(20
|
)
|
|
|
627
|
|
|
|
1,112
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in oil & gas properties
|
|
|
(76
|
)
|
|
|
(500
|
)
|
|
|
(801
|
)
|
Net cash used in investing activities
|
|
|
(76
|
)
|
|
|
(500
|
)
|
|
|
(801
|
)
|
Net (decrease) increase in cash
|
|
|
(96
|
)
|
|
|
127
|
|
|
|
311
|
|
Cash and cash equivalents at beginning of period
|
|
|
613
|
|
|
|
486
|
|
|
|
175
|
|
Cash and cash equivalents at end of period
|
|
$
|
517
|
|
|
$
|
613
|
|
|
$
|
486
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revision of asset retirement obligation
|
|
$
|
(11
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes refunded (paid)
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
(21
|
)
|
Based on calculated reserves at December
31, 2015, the unamortized costs of the Equus Energy’s oil and natural gas properties exceeded the ceiling test limit by $4.0
Million, which was recorded as an impairment of oil and gas properties.
Prior Year Restatement
Equus Energy LLC has issued audited consolidated financial statements as of December 31, 2015 and 2014 and
for the years ended December 31, 2015, 2014 and 2013. Equus Energy LLC has restated its 2014 and 2013 consolidated financial statements
to reflect certain adjustments for due diligence costs related to an abandoned acquisition and provision for deferred taxes. The
effect on our previously issued 2014 condensed consolidated financial statements is as follows (in thousands):
|
|
2014
Previously Reported
(Unaudited)
|
|
Adjustment
|
|
2014
Restated Amount
(Audited)
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current investment
|
|
|
193
|
|
|
|
(193
|
)
|
|
|
—
|
|
Total Assets
|
|
|
7,583
|
|
|
|
(193
|
)
|
|
|
7,390
|
|
Accounts payable and other current
liabilities
|
|
|
71
|
|
|
|
39
|
|
|
|
110
|
|
Total Current Liabilities
|
|
|
682
|
|
|
|
39
|
|
|
|
721
|
|
Total Liabilities
|
|
|
865
|
|
|
|
39
|
|
|
|
904
|
|
Member’s capital
|
|
|
6,719
|
|
|
|
(233
|
)
|
|
|
6,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
439
|
|
|
|
193
|
|
|
|
632
|
|
Operating Expenses
|
|
|
2,376
|
|
|
|
193
|
|
|
|
2,569
|
|
Income (loss) before income taxes
|
|
|
93
|
|
|
|
(193
|
)
|
|
|
(100
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(63
|
)
|
|
|
(63
|
)
|
Net income (loss)
|
|
|
93
|
|
|
|
(256
|
)
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
93
|
|
|
|
(256
|
)
|
|
|
(163
|
)
|
Change in accounts payable and other
|
|
|
(253
|
)
|
|
|
63
|
|
|
|
(190
|
)
|
Net cash provided by operating activities
|
|
|
820
|
|
|
|
(193
|
)
|
|
|
627
|
|
Investment in oil and gas properties
|
|
|
(193
|
)
|
|
|
193
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(693
|
)
|
|
|
193
|
|
|
|
(500
|
)
|
The effect on our previously issued 2013 condensed consolidated
financial statements is as follows (in thousands):
|
|
2013
Previously Reported
(Unaudited)
|
|
Adjustment
|
|
2013
Restated Amount
(Audited)
|
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(21
|
)
|
|
|
23
|
|
|
|
2
|
|
Net loss
|
|
|
(230
|
)
|
|
|
23
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(230
|
)
|
|
|
23
|
|
|
|
(207
|
)
|
Change in accounts payable and other
|
|
|
(165
|
)
|
|
|
(23
|
)
|
|
|
(188
|
)
|
(9) Recent Accounting Pronouncements
In February 2015, the FASB issued
ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new guidance modifies the consolidation
analysis for limited partnerships and similar type entities as well as variable interests in a variable interest entity, particularly
those that have fee arrangements and related party relationships. Additionally, it provides a scope exception to the consolidation
guidance for certain entities. The amendments in ASU No. 2015-02 are effective for annual reporting periods beginning after
December 15, 2015, including interim periods within that reporting period. Our adoption of ASU No. 2015-02 is not anticipated
to have a material effect on our financial statements.
In May 2015, the FASB issued ASU No.
2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent). The new guidance removes the requirement that investments for which NAV is determined based on practical
expedient reliance be reported utilizing the fair value hierarchy. ASU No. 2015-07 shall be applied retrospectively for periods
beginning on or after December 15, 2015, and interim periods within those fiscal years. Our adoption of ASU No. 2015-07 is not
anticipated to have a material effect on our financial statements.
In January 2016, the FASB issued ASU
No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Among other things, this ASU requires
that pubic business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
ASU No. 2016-01 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. Our adoption of ASU No. 2016-01 is not anticipated to have a material effect on our financial statements.
(10) SUBSEQUENT EVENTS
Our Management performed an evaluation
of the Fund’s activity through the date the financial statements were issued, noting the following subsequent events:
On January 4, 2016, we sold U. S. Treasury
Bills for $15.0 million and repaid our year-end margin loan.
On January 29, 2016, we invested $2.0
million in Biogenic Reagents, LLC (“Biogenic”) in the form of a senior secured promissory note maturing April 28, 2016
and bearing cash and PIK interest at the combined rate of 16% per annum. Biogenic is a developer and producer of high value carbon
products from renewable biomass, headquartered in Minneapolis. The company has developed and commercialized a low-cost platform
technology to make carbon products such as activated carbon for use in purification of air, water, food and pharmaceuticals and
agricultural carbon to improve crop production.
(11) SELECTED QUARTERLY DATA
(in thousands, except per share amounts)
|
|
Year Ended December 31, 2015
|
|
|
Quarter Ended
|
|
Quarter Ended
|
|
Quarter Ended
|
|
Quarter Ended
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2015
|
|
2015
|
|
2015
|
|
2015
|
|
TOTAL
|
Total investment income
|
|
$
|
44
|
|
|
$
|
89
|
|
|
$
|
91
|
|
|
$
|
222
|
|
|
$
|
446
|
|
Net investment loss
|
|
|
(1,074
|
)
|
|
|
(594
|
)
|
|
|
(370
|
)
|
|
|
(313
|
)
|
|
|
(2,351
|
)
|
Increase (decrease) in net assets resulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from operations
|
|
|
(839
|
)
|
|
|
2,623
|
|
|
|
(333
|
)
|
|
|
(344
|
)
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share
(1)
|
|
|
(0.07
|
)
|
|
|
0.21
|
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
|
|
0.09
|
|
(in thousands, except per share amounts)
|
|
Year Ended December 31, 2014
|
|
|
Quarter Ended
|
|
Quarter Ended
|
|
Quarter Ended
|
|
Quarter Ended
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2014
|
|
2014
|
|
2014
|
|
2014
|
|
TOTAL
|
Total investment income
|
|
$
|
256
|
|
|
$
|
64
|
|
|
$
|
109
|
|
|
$
|
536
|
|
|
$
|
965
|
|
Net investment loss
|
|
|
(468
|
)
|
|
|
(714
|
)
|
|
|
(433
|
)
|
|
|
(803
|
)
|
|
|
(2,418
|
)
|
Increase (decrease) in net assets resulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from operations
|
|
|
(537
|
)
|
|
|
1,011
|
|
|
|
(432
|
)
|
|
|
(1,409
|
)
|
|
|
(1,367
|
)
|
Basic and diluted earnings (loss) per share
(1)
|
|
|
(0.05
|
)
|
|
|
0.09
|
|
|
|
(0.04
|
)
|
|
|
(0.11
|
)
|
|
|
(0.11
|
)
|
(
1)
The sum of quarterly per
share amount may not equal per share amounts reported for year-to-date periods due to changes in the number of weighted average
shares outstanding and the effects of rounding.