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, 2022



or



| | ☐ | 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., 48th 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 12, 2022.




Table of Contents






EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)

INDEX



|                                                                                              | 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 | 30  
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             | 36  
|Item 4. Controls and Procedures                                                               | 36  
|PART II. OTHER INFORMATION                                                                    |     
|Item 1. Legal Proceedings                                                                     | 37  
|Item 1A. Risk Factors                                                                         | 37  
|Item 6. Exhibits                                                                              | 38  
|SIGNATURE                                                                                     | 38  
|                                                                                              |     





















2


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EQUUS TOTAL RETURN, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

Part I. Financial Information

Item 1. Unaudited Condensed Financial Statements



|                                                                                                                                                                                             |  | March 31, 2022 |         | December 31,
    2021
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---------------------
|                                                                                                                                                                                             |  |                |         |                      
|(in thousands, except shares and per share amounts)                                                                                                                                          |  |                |         |                      
|Assets                                                                                                                                                                                       |  |                |         |                      
|Investments in portfolio securities at fair value:                                                                                                                                           |  |                |         |                      
|Control investments (cost at $7,961)                                                                                                                                                         |  | $              | 15,000  |                      
|Total investments in portfolio securities at fair value                                                                                                                                      |  |                | 15,000  |                      
|Temporary cash investments                                                                                                                                                                   |  |                | 3,000   |                      
|Cash and cash equivalents                                                                                                                                                                    |  |                | 22,300  |                      
|Restricted cash                                                                                                                                                                              |  |                | 30      |                      
|Accounts receivable from affiliates                                                                                                                                                          |  |                | 350     |                      
|Other assets                                                                                                                                                                                 |  |                | 257     |                      
|Total assets                                                                                                                                                                                 |  |                | 40,937  |                      
|Liabilities and net assets                                                                                                                                                                   |  |                |         |                      
|Accounts payable                                                                                                                                                                             |  |                | 198     |                      
|Accrued compensation                                                                                                                                                                         |  |                | 303     |                      
|Accounts payable to related parties                                                                                                                                                          |  |                | 1       |                      
|Borrowing under margin account                                                                                                                                                               |  |                | 3,000   |                      
|Total liabilities                                                                                                                                                                            |  |                | 3,502   |                      
|                                                                                                                                                                                             |  |                |         |                      
|Commitments and contingencies (see Note 2)                                                                                                                                                   |  |                |         |                      
|                                                                                                                                                                                             |  |                |         |                      
|Net assets                                                                                                                                                                                   |  |                |         |                      
|Common stock, $.001 par value per share; 100,000,000 and 50,000,000 shares authorized and  13,518,000 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively |  |                |         |                      
|                                                                                                                                                                                             |  |                |         |                      
|Preferred stock,  $.001 par value per share;  10,000,000 and 5,000,000 shares authorized, respectively                                                                                       |  |                |         |                      
|Common stock, par value                                                                                                                                                                      |  | $              | 13      |                      
|Capital in excess of par value                                                                                                                                                               |  |                | 74,685  |                      
|Accumulated deficit                                                                                                                                                                          |  |                | (37,263 | )                    
|Total net assets                                                                                                                                                                             |  | $              | 37,435  |                      
|Net asset value per share                                                                                                                                                                    |  | $              | 2.77    |                      



The accompanying notes are an integral part
of these financial statements.

3


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EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                  |  | Three Months Ended March 31,
|----------------------------------------------------------------- |  | ----------------------------
|(in thousands, except per share amounts)                          |  | 2022                        
|                                                                  |  |                             
|Expenses:                                                         |  |                             
|Compensation expense                                              |  |                             
|Professional fees                                                 |  |                             
|Director fees and expenses                                        |  |                             
|Professional liability expenses                                   |  |                             
|General and administrative expenses                               |  |                             
|Mailing, printing and other expenses                              |  |                             
|Taxes                                                             |  |                             
|Interest expense                                                  |  |                             
|Total expenses                                                    |  |                             
|                                                                  |  |                             
|Net investment loss                                               |  |                             
|                                                                  |  |                             
|Net realized loss:                                                |  |                             
|Escrow receivable                                                 |  |                             
|Net realized loss                                                 |  |                             
|                                                                  |  |                             
|Net unrealized appreciation of portfolio securities:              |  |                             
|Control investments                                               |  |                             
|Net change in net unrealized appreciation of portfolio securities |  |                             
|                                                                  |  |                             
|Net increase in net assets resulting from operations              |  | $                           
|                                                                  |  |                             
|Net increase in net assets resulting from operations per share:   |  |                             
|Basic and diluted                                                 |  | $                           
|Weighted average shares outstanding:                              |  |                             
|Basic and diluted                                                 |  |                             



The
accompanying notes are an integral part of these financial statements.

4


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EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)





|                                                     |  |                  |        |           |  |                                |    |                     |  |                 
|---------------------------------------------------- |  | ---------------- | ------ | --------- |  | ------------------------------ | -- | ------------------- |  | ----------------
|                                                     |  | Common Stock     |        |           |  |                               
|(in thousands)                                       |  | Number of Shares |        | Par Value |  | Capital in Excess of Par Value |    | Accumulated Deficit |  | Total Net Assets
|Balances at January 1, 2021                          |  |                  | 13,518 |           |  | $                              | 13 |                     |  | $               
|Net increase in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                     |  |                 
|Balances at March 31, 2021                           |  |                  | 13,518 |           |  | $                              | 13 |                     |  | $               
|                                                     |  |                  |        |           |  |                                |    |                     |  |                 
|                                                     |  |                  |        |           |  |                                |    |                     |  |                 
|Balances at January 1, 2022                          |  |                  | 13,518 |           |  | $                              | 13 |                     |  | $               
|Net increase in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                     |  |                 
|Balances at March 31, 2022                           |  |                  | 13,518 |           |  | $                              | 13 |                     |  | $               







The accompanying notes are an integral part of these
financial statements.



5


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EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)





|                                                                                                                                                     |  |                            
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------
|                                                                                                                                                     |  | Three Months ended March 31
|(in thousands)                                                                                                                                       |  | 2022                       
|Reconciliation of (decrease) increase in net assets resulting from operations to net cash (used in) provided by operating activities:                |  |                            
|Net increase in net assets resulting from operations                                                                                                 |  | $                          
|Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash
    (used in) provided by operating activities: |  |                            
|Net realized loss                                                                                                                                    |  |                            
|Escrow receivable                                                                                                                                    |  |                            
|Net change in unrealized appreciation of portfolio securities                                                                                        |  |                            
|Control investments                                                                                                                                  |  |                            
|(Purchases) sales of temporary cash investments, net                                                                                                 |  |                            
|Changes in operating assets and liabilities:                                                                                                         |  |                            
|Accrued esrow receivable                                                                                                                             |  |                            
|Other assets                                                                                                                                         |  |                            
|Accounts payable and accrued liabilities                                                                                                             |  |                            
|Accounts payable to related parties                                                                                                                  |  |                            
|Net cash (used in) provided by operating activities                                                                                                  |  |                            
|Cash flows from financing activities:                                                                                                                |  |                            
|Borrowings under margin account                                                                                                                      |  |                            
|Repayments under margin account                                                                                                                      |  |                            
|Net cash provided by (used in) financing activities                                                                                                  |  |                            
|Net (decrease) increase in cash and cash equivalents                                                                                                 |  |                            
|Cash and cash equivalents and restricted cash at beginning of period                                                                                 |  |                            
|                                                                                                                                                     |  |                            
|Cash and cash equivalents and restricted cash at end of period                                                                                       |  | $                          
|Supplemental disclosure of cash flow information:                                                                                                    |  |                            
|Interest paid                                                                                                                                        |  | $                          
|Income taxes paid                                                                                                                                    |  | $                          





The accompanying notes are an integral part of these
financial statements.



6


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EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED PER SHARE
DATA AND RATIOS

(Unaudited)





|                                                                                    |  | Three months ended March 31,
|----------------------------------------------------------------------------------- |  | ----------------------------
|                                                                                    |  | 2022                        
|                                                                                    |  |                             
|Expenses                                                                            |  | $                           
|                                                                                    |  |                             
|Net investment loss                                                                 |  |                             
|                                                                                    |  |                             
|Net realized loss                                                                   |  |                             
|Net change in unrealized appreciation of portfolio securities                       |  |                             
|Net increase in net assets                                                          |  |                             
|Net assets at beginning of period                                                   |  |                             
|Net assets at end of period, basic and diluted                                      |  | $                           
|Weighted average number of shares outstanding during period,                        |  |                             
|in thousands                                                                        |  |                             
|Market price per share:                                                             |  |                             
|Beginning of period                                                                 |  | $                           
|End of period                                                                       |  | $                           
|Selected information and ratios:                                                    |  |                             
|Ratio of expenses to average net assets                                             |  |                             
|Ratio of net investment loss to average net assets                                  |  |                             
|Ratio of net increase in net assets resulting from operations to average net assets |  |                             
|Return on net asset value                                                           |  |                             
|Total return on market price (1)                                                    |  |                             
|                                                                                    |  |                             









| | (1) | Total return = [(ending market price per share - beginning price per share) / beginning market price per share].
| | --- | ----------------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part
of these financial statements.

7


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

MARCH 31, 2022

(Unaudited)

(in thousands, except share data)





|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%) |  | $       
|Total Control Investments: Majority-owned (represents 83.3% of total investments at fair value) |  |          |            | 7,961           |       |            |               | 15,000    |      
|Temporary Cash Investments                                                                      |  |          |            |                 |       |            |               |           |       |                        |  |         
|U.S. Treasury Bill                                                                              |  |          | Government |                 |       |            | March 2022    |           |       | UST 0% 4/22            |  |         
|Total Temporary Cash Investments (represents 16.1% of total investments at fair value)          |  |          |            |                 | 3,000 |            |               |           | 3,000 |                       
|Total Investments                                                                               |  |          |            |                 |       |            |               |           |       |                        |  |         











(1)See Note 3 to the financial statements, Valuation of Investments.

(2)Majority owned investments are generally defined
under the 1940 Act as companies in which we own more than 50% of the voting securities of the company.

(3)Level 3 Portfolio Investment.



The accompanying notes are an integral part of these
financial statements.

8


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

MARCH 31, 2022

(Unaudited)



All of our portfolio
securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities
Act”) or other relevant regulatory authority. 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 a business development
company (“BDC”), we may invest up to 30% of our assets in non-qualifying portfolio investments, as permitted by the Investment
Company Act of 1940 (the “1940 Act”). Specifically, we may invest up to 30% of our assets in entities that are not considered
“eligible portfolio companies” (as defined in the 1940 Act), including companies located outside of the United States, entities
that are operating pursuant to certain exceptions under the 1940 Act, and publicly-traded entities with a market capitalization exceeding
$250 million. As of March 31, 2022, we had invested 36.6% of our assets in securities of portfolio companies that constituted qualifying
investments under the 1940 Act. As of March 31, 2022, all of our investments are in enterprises that are considered eligible portfolio
companies under the 1940 Act. We provide significant managerial assistance to our sole remaining portfolio company that comprises 100%
of the total value of the investments in portfolio securities as of March 31, 2022.



We are classified as
a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our assets
that may be invested in the securities of a single user. The value of one segment called “Energy” includes our sole remaining
portfolio company and was 40.1% of our net asset value, 36.6% of our total assets and 100% of our investments in portfolio company securities
(at fair value) as of March 31, 2022. Changes in business or industry trends or in the financial condition, results of operations, or
the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock
to a greater extent than would be the case if we were a “diversified” company holding numerous investments.



Our investments in
portfolio securities consist of the following types of securities as of March 31, 2022 (in thousands):



|Type of Securities                    |  | Cost |       | Fair Value |  | Fair Value as Percentage of Net Assets
|------------------------------------- |  | ---- | ----- | ---------- |  | --------------------------------------
|                                      |  |      |       |            |  |                                       
|Limited liability company investments |  | $    | 7,961 |            |  | $                                     
|                                      |  |      |       |            |  |                                       
|Total                                 |  | $    | 7,961 |            |  | $                                     





The following is a
summary by industry of the Fund’s investments in portfolio securities as of March 31, 2022
(in thousands):



|Industry |        | Fair Value |  | Fair Value as Percentage of Net Assets
|-------- | ------ | ---------- |  | --------------------------------------
|         | Energy |            |  | $                                     
|         | Total  |            |  | $                                     





The accompanying notes are an integral part of these
financial statements.



9


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2021

(Unaudited)

(in thousands, except share data)



|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%) |  | $       
|Total Control Investments: Majority-owned (represents 83.9% of total investments at fair value) |  |          |            | 7,961           |       |            |               | 13,000    |      
|Temporary Cash Investments                                                                      |  |          |            |                 |       |            |               |           |       |                        |  |         
|U.S. Treasury Bill                                                                              |  |          | Government |                 |       |            | December 2021 |           |       | UST 0% 1/22            |  |         
|Total Temporary Cash Investments (represents 16.1% of total investments at fair value)          |  |          |            |                 | 2,500 |            |               |           | 2,500 |                       
|Total Investments                                                                               |  |          |            |                 |       |            |               |           |       |                        |  |         







(1)See Note 3 to the financial statements, Valuation
of Investments.

(2)Majority owned investments are generally defined
under the 1940 Act as companies in which we own more than 50% of the voting securities of the company.

(3)Level 3 Portfolio Investment.



The accompanying notes are an integral part of these
financial statements.



10


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

DECEMBER 31, 2021

(Unaudited)

(in thousands, except share data)



All
of our portfolio securities are restricted from public sale without prior registration under the Securities Act or other relevant regulatory
authority. 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
a BDC, we may invest up to 30% of our assets in non-qualifying portfolio investments, as permitted by the1940 Act.
Specifically, we may invest up to 30% of our assets in entities that are not considered “eligible portfolio companies” (as
defined in the 1940 Act), including companies located outside of the United States, entities that are operating pursuant to certain exceptions
under the 1940 Act, and publicly- traded entities with a market capitalization exceeding $250 million. As of December 31, 2020, we had
invested 11.9% of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act. As of December
31, 2020, all of our investments were in enterprises that are considered eligible portfolio companies under the 1940 Act. We provide significant
managerial assistance to our sole remaining portfolio company that comprises 100% of the total value of the investments in portfolio securities
as of December 31, 2020.



We
are classified as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion
of our assets that may be invested in the securities of a single user. The value of one segment called “Energy” includes our
sole remaining portfolio company and was 20.7% of our net asset value, 11.9% of our total assets and 100% of our investments in portfolio
company securities (at fair value) as of December 31, 2020. Changes in business or industry trends or in the financial condition, results
of operations, or the market’s assessment of any single portfolio company will affect the net asset value and the market price of
our common stock to a greater extent than would be the case if we were a “diversified” company holding numerous investments.



Our investmentsin portfolio securities consistof the following
types of securities as of December 31, 2021(in thousands):





|Type of Securities                    |  | Cost |       | Fair Value |  | Fair Value as Percentage of Net Assets
|------------------------------------- |  | ---- | ----- | ---------- |  | --------------------------------------
|                                      |  |      |       |            |  |                                       
|Limited liability company investments |  | $    | 7,961 |            |  | $                                     
|                                      |  |      |       |            |  |                                       
|Total                                 |  | $    | 7,961 |            |  | $                                     





The
followingis a summary by industry of the Fund’s investments in portfolio securities
as of December 31, 2021 (in thousands):



|Industry |        | Fair Value |  | Fair Value as Percentage of Net Assets
|-------- | ------ | ---------- |  | --------------------------------------
|         | Energy |            |  | $                                     
|         | Total  |            |  | $                                     





The accompanying notes are an integral part of these
financial statements.

11


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EQUUS TOTAL RETURN, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2022

(Unaudited)



(1)       Description
of Business and Basis of Presentation



Description of Business—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 NYSE 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 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 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 subordinated 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. If we remain a BDC, we will 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, although our shareholders have previously authorized us to withdraw this election as part of our efforts
to transform Equus into an operating company, and may likely grant such an authorization in the future (see Note 6 “Conversion
to an Operating Company – Authorization to Withdraw BDC Election” below). 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.



Impact of COVID-19—In
2019, SARS-CoV-2, a highly contagious pathogen which causes COVID-19, coronavirus disease, or simply, the ‘coronavirus’, arose
in Wuhan Province, China and spread to most of the world by the end of the first quarter of 2020. Throughout 2020, the spread of Covid-19
had a destabilizing effect on business and society globally, including labor shortages, supply chain disruptions, civil unrest, and unprecedented
public borrowing to stimulate business and consumer economic activity. Although the global economy largely recovered from the slowdowns
and interruptions of the first half of 2020, beginning in late 2020 and continuing throughout 2021, new and more highly contagious strains
of the virus appeared in different parts of the world, all of which were transmitted across the globe within a matter of weeks. The resurgence
in infections and the introduction of these new strains, including the most recent Omicron strain in late 2021, resulted in the temporary
return of some proscriptions on social gatherings that were originally introduced in the early stages of the pandemic. Most, if not all,
of these restrictions have now been substantially curtailed or eliminated. As of March 31, 2022, the number of worldwide deaths attributable
to the coronavirus stood at over 6.0 million.



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The highly contagious
nature of the coronavirus caused numerous private and public organizations to substantially alter the way in which they operate. Many
such organizations have, to the extent possible, required employees to work remotely to reduce opportunities for contagion. In many cases,
these remote working arrangements have become permanent. We are presently unable to predict either the potential near-term or longer-term
impact that the coronavirus may have on our financial and operating results due to numerous uncertainties regarding the duration and severity
of the crisis. The ultimate impact of the coronavirus pandemic is highly uncertain and subject to change, and our business, results of
operations, and financial condition have been and will likely continue to be impacted by future developments concerning the pandemic and
the resulting economic disruption.



We have taken steps
to minimize the exposure of our employees and service providers by requiring all such persons to work from a remote location. We utilize
a cloud-based storage and retrieval system for our records and can communicate electronically or by telephone or video conference with
third parties such as our financial institutions, legal and accounting advisors, and our portfolio companies. Our day-to-day operations
and management has not, therefore, been materially affected by the coronavirus pandemic.



Impact of Geopolitical
Events and the Coronavirus on the Oil and Gas Sector—The substantial volatility in world markets has been prominent in the oil
and gas sector, with crude prices falling to 18-year lows in mid-March 2020 as a result of the coronavirus pandemic, only to increase
to multi-year highs in the first quarter of 2022, largely as a result of high industrial and consumer demand, a reluctance of U.S. producers
and OPEC nations to generate additional supply, and the conflict in Ukraine. Meanwhile, gas prices had increased in the third quarter
of 2021 to $5.50 per MMBTU, a level not seen since 2014, then decreased again to $3.82 per MMBTU by the end of 2021. In the first quarter
of 2022 and thereafter, gas prices have increased sharply, largely as a result of increased demand combined with the effect of the conflict
in Ukraine on short term gas prices globally. The increased prices for oil and gas, including the forward pricing curves for these commodities,
has improved the outlook and prospects for remaining small oil and gas firms such as Equus Energy that hold development rights in low-cost
production reservoirs such as those underlying the Permian Basin and the Eagle Ford Shale regions.



Basis of Presentation—In
accordance with Article 6 of Regulation S-X under the Securities Act and the Securities Exchange Act of 1934, as amended (“Exchange
Act”), we do not consolidate portfolio company investments, including those in which we have a controlling interest. Our interim
unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”), for interim financial information and in accordance with the requirements of reporting on Form 10-Q and Article
10 of Regulation S-X, under the Exchange Act. Accordingly, they are unaudited and exclude some disclosures required for annual financial
statements. We believe that we have made all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation
of these interim financial statements.



The results of operations
for the three months ended March 31, 2022 are not necessarily indicative of results that ultimately may be achieved for the remainder
of the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the financial statements
and notes thereto included in the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the
SEC.



(2)       Liquidity
and Financing Arrangements



Liquidity—There
are several factors that may materially affect our liquidity during the reasonably foreseeable future. We are evaluating the impact of
current market conditions on our portfolio company valuations and their ability to provide current income. We have followed valuation
techniques in a consistent manner; however, we are cognizant of current market conditions that might affect future valuations of portfolio
securities.



Cash and Cash Equivalents—As
of March 31, 2022, we had cash and cash equivalents of $22.3 million. We had $15.0 million of our net assets of $37.4 million invested
in portfolio securities.



As of December 31, 2021, we had cash and
cash equivalents of $23.4 million. We had $12.0 million of our net assets of $36.4 million invested in portfolio securities.



We exclude “Restricted
Cash and Temporary Cash Investments” used for purposes of complying with RIC requirements from cash equivalents.



13


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Restricted Cash
and Temporary Cash Investments—As of March 31, 2022, we had $3.0 million of restricted cash and temporary cash investments,
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, $3.0 million was invested in U.S. Treasury bills and $0.03 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 matured on April 7, 2022 and we subsequently repaid this margin loan, plus interest.



As of December 31,
2021, we had $2.5 million of restricted cash and of temporary cash investments, 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, $2.5 million was invested in U.S.
Treasury bills and $0.03 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 matured on January 5, 2022 and
we subsequently repaid this margin loan, plus interest.



Dividends—So
long as we remain a BDC, we will pay out net investment income and/or realized net capital gains, if any, on an annual basis as required
under the 1940 Act.



Investment Commitments—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.



As of March 31, 2022, we had a follow-on commitment
of $150,000 to invest in additional equity of Equus Energy, LLC.



RIC Borrowings,
Restricted Cash and Temporary Cash Investments—We may periodically borrow sufficient funds to maintain the Fund’s RIC
status by utilizing a margin account with a securities brokerage firm. We cannot assure you that any 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. If we remain a BDC and do not become an operating company as described in Note 6 –
Conversion to an Operating Company below, our failure to continue to qualify as a RIC could be materially adverse to us and our
stockholders.



As of March 31, 2022,
we borrowed $3.0 million to maintain our RIC status by utilizing a margin account with a securities brokerage firm. We collateralized
such borrowings with restricted cash and temporary cash investments in U.S. Treasury bills of $3.03 million.



As of December 31,
2021, we borrowed $2.5 million to maintain our RIC status by utilizing a margin account with a securities brokerage firm. We collateralized
such borrowings with restricted cash and temporary cash investments in U.S. Treasury bills of $2.53 million.



Asset Coverage
Ratio—Under the 1940 Act, BDCs are required to have an asset coverage ratio of 200%, meaning that the maximum debt that may
be incurred by a BDC is the BDC’s net asset value. Pursuant to amendments made to the 1940 Act in March 2018, BDCs may now, with
stockholder or board of directors approval, reduce this ratio to 150%, meaning that the maximum debt that may be incurred by a BDC is
two times the BDC’s net asset value. In November 2019, we obtained approval of our shareholders to reduce our asset coverage ratio
to 150%. This authorization permits Equus to borrow up to twice the value of the Fund’s net assets. Other than the margin loan obtained
by the Fund from time to time to acquire U.S. Treasury bills to maintain our RIC status as described above, we have not yet undertaken
any other additional borrowings.



Certain Risks and
Uncertainties—Market and economic volatility which has become endemic in the past few years, together with the economic dislocation
caused by the onset of the coronavirus, has constrained the availability of debt financing for small and medium-sized companies such as
Equus and its portfolio companies. Such debt financing generally has shorter maturities, higher interest rates and fees, and more restrictive
terms than debt facilities available in the past. In addition, during these years and continuing into the third quarter of 2021, the price
of our common stock remained well below our net asset value, thereby making it undesirable to issue additional shares of our common stock
below net asset value.



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Because of these challenges,
our near-term strategies shifted from originating debt and equity investments to preserving liquidity necessary to meet our operational
needs. Key initiatives that we have previously undertaken to provide necessary liquidity include monetizations, the suspension of dividends
and the internalization of management. We are also evaluating potential opportunities that could enable us to effect a change to our business
and become an operating company as described in Note 6 – Conversion to an Operating Company. We believe we have sufficient
liquidity to meet our operating requirements for 12 months from the date of this filing.



| | (3) | Significant Accounting Policies
| | --- | -------------------------------



The following is a
summary of significant accounting policies followed by the Fund in the preparation of our 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—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;
| | -- | ---------------------------------------------------------------------------------



| | 2. | With respect to investments with a fair value exceeding $2.5 million that have been held for more than one year, we engage independent valuation firms to assist our investment professionals. These independent valuation firms conduct independent valuations and make their own independent assessments;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Our Management produces a report that summarizes each of our portfolio investments and recommends a fair value of each such investment as of the date of the report;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The Audit Committee of our Board reviews and discusses the preliminary valuation of our portfolio investments as recommended by Management in their report and any reports or recommendations of the independent valuation firms, and then approves and recommends the fair values of our investments so determined to our Board for final approval; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | The Board discusses valuations and determines the fair value of each portfolio investment in good faith based on the input of our Management, the respective independent valuation firm, as applicable, and the Audit Committee.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the first
twelve months after an investment is made, we rely on the original investment amount to determine the fair value unless significant developments
have occurred during this twelve-month period which would indicate a material effect on the portfolio company (such as results of operations
or changes in general market conditions).

Investments
are valued utilizing various methodologies and approaches, including 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.

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In estimating
the fair value of our interest in Equus Energy, we have given more emphasis to a market approach that examines developed and undeveloped
reserves and mineral acreage values, as well as a market approach that examines comparable industry transactions involving oil and gas
assets in proximity to the leasehold interests held by Equus Energy. Our management received advice and assistance from a third-party
valuation firm to support our determination of the fair value of this investment.

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. 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 assuming a hypothetical current sale of the security to determine if a debt security has been
impaired. 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 if less than the cost of the investment.



We 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.



Fair Value Measurement—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
as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy 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.



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.



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Investments for which
prices are not observable are generally private investments in the debt and equity securities of operating companies. A 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. In the case of our investment in Equus Energy, we also examine acreage values in comparable transactions
and assess the impact upon the working interests held by Equus Energy. 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.



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.



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, our valuation
process as described above.



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 among Level 1, 2 and
3 for the three months ended March 31, 2022 and the year ended December 31, 2021.



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As of March 31, 2022,
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 March 31, 2022                                                                                                  
|------------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for Identical Assets
                                                                                (Level 1)
|Assets                                           |  |       |        |                                                                                                                                               
|Investments:                                     |  |       |        |                                                                                                                                               
|Control investments                              |  | $     | 15,000 |                                                                                                                                               
|Total investments                                |  |       | 15,000 |                                                                                                                                               
|Temporary cash investments                       |  |       | 3,000  |                                                                                                                                               
|Total investments and temporary cash investments |  | $     | 18,000 |                                                                                                                                               





As of December 31,
2021, 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, 2021                                                                                               
|------------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for Identical Assets
                                                                                (Level 1)
|Assets                                           |  |       |        |                                                                                                                                               
|Investments:                                     |  |       |        |                                                                                                                                               
|Control investments                              |  | $     | 13,000 |                                                                                                                                               
|Total investments                                |  |       | 13,000 |                                                                                                                                               
|Temporary cash investments                       |  |       | 2,500  |                                                                                                                                               
|Total investments and temporary cash investments |  | $     | 15,500 |                                                                                                                                               



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Table of Contents




The following table provides a reconciliation
of fair value changes during the three months ended March 31, 2022 for all investments for which we determine fair value using unobservable
(Level 3) factors:

|                                  |  |                     |  | Fair value measurements using significant unobservable inputs (Level 3)
|--------------------------------- |  | ------------------- |  | -----------------------------------------------------------------------
|(in thousands)                    |  | Control Investments |  | Affiliate Investments                                                  
|Fair value as of January 1, 2022  |  |                     |  |                                                                        
|Change in unrealized appreciation |  |                     |  |                                                                        
|Fair value as of March 31, 2022   |  |                     |  |                                                                        



The following table provides a reconciliation
of fair value changes during the three months ended March 31, 2021 for all investments for which we determine fair value using unobservable
(Level 3) factors:



|                                  |  |                     |  | Fair value measurements using significant unobservable inputs (Level 3)
|--------------------------------- |  | ------------------- |  | -----------------------------------------------------------------------
|(in thousands)                    |  | Control Investments |  | Affiliate Investments                                                  
|Fair value as of January 1, 2021  |  |                     |  |                                                                        
|Change in unrealized appreciation |  |                     |  |                                                                        
|Fair value as of March 31, 2021   |  |                     |  |                                                                        



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.



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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
March 31, 2022: (fair value expressed in thousands; acreage range expressed in dollars and not rounded):



|                                      |  |                      |                           |                              |           |                          |           | Range            
|------------------------------------- |  | -------------------- | ------------------------- | ---------------------------- | --------- | ------------------------ | --------- | -----------------
|(in thousands)                        |  | Fair Value           |                           | Valuation Techniques         |           | Unobservable Inputs      |           | Minimum          
|Limited liability company investments |  | $         15,000     |                           | Guideline Transaction Method |           | Acreage Value (per acre) |           | $           1,500
|                                      |  |                      | Proved Reserve Multiple   |                              | 3.8x      |                          | 8.8x      |                  
|                                      |  |                      | Daily Production Multiple |                              | 18,324.5x |                          | 44,928.8x |                  
|                                      |  | Discounted Cash Flow |                           | Discount Rate                |           | 11.0%                    |           | 11.0%            



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, 2021: (fair value expressed in thousands; acreage range expressed in dollars and not rounded):





|                                      |  |                      |                           |                              |           |                          |           | Range            
|------------------------------------- |  | -------------------- | ------------------------- | ---------------------------- | --------- | ------------------------ | --------- | -----------------
|(in thousands)                        |  | Fair Value           |                           | Valuation Techniques         |           | Unobservable Inputs      |           | Minimum          
|Limited liability company investments |  | $         12,000     |                           | Guideline Transaction Method |           | Acreage Value (per acre) |           | $           1,500
|                                      |  |                      | Proved Reserve Multiple   |                              | 3.6x      |                          | 7.3x      |                  
|                                      |  |                      | Daily Production Multiple |                              | 15,425.3x |                          | 37,215.1x |                  
|                                      |  | Discounted Cash Flow |                           | Discount Rate                |           | 11.0%                    |           | 11.0%            







Because of the inherent uncertainty of the valuation
of portfolio securities which do not have readily ascertainable market values, amounting to $15.0 million and $12.0 million as of March
31, 2022 and December 31, 2021, respectively, our fair value determinations may materially differ from the values that would have been
used had a ready market existed for these 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.



Escrowed Receivables,
at Estimated Fair Value—In December 2020, we sold our interest in PalletOne, Inc (“PalletOne”). A portion of the
proceeds from the sale was placed in a cash escrow account to secure the representations and warranties made to the purchaser. The escrow
receivable was valued at $3.4 million as of December 31, 2020.



During 2021, we received
$3.8 million in cash from PalletOne. We recognized a capital gain of $0.4 million due to the change in our estimated fair value of this
receivable.



Investment Transactions—Investment
transactions are recorded on the accrual method. Realized gains and losses on investments sold are computed on a specific identification
basis.



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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. See also Note 4 for discussion of related party investment transactions.



Interest and Dividend
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. Dividend income is recorded as dividends are declared by the portfolio company
or at the point an obligation exists for the portfolio company to make a distribution.



Net Realized Gains
or Losses and Net Change in Unrealized Appreciation or Depreciation—Realized gains or losses are measured by the difference
between the net proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or
financial instrument, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off
during the period net of recoveries and realized gains or losses from in-kind redemptions. Net change in unrealized appreciation or depreciation
reflects the net change in the fair value of the portfolio company investments and financial instruments and the reclassification of any
prior period unrealized appreciation or depreciation on exited investments and financial instruments to realized gains or losses.



Payment in Kind
Interest (PIK)—From time to time, 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. To the extent we remain BDC and a RIC, we will continue to pay out net investment income and/or
realized capital gains, if any, on an annual basis as required under the 1940 Act.



Earnings Per Share—Basic
and diluted per share calculations are computed utilizing the weighted-average number of shares of common stock outstanding for the period.
In accordance with ASC 260, Earnings Per Share, the unvested shares of restricted stock awarded pursuant to our equity compensation plans
are participating securities and, therefore, are included in the basic earnings per share calculation. As a result, for all periods presented,
there is no difference between diluted earnings per share and basic earnings per share amounts.



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Distributable Earnings—The
components that make up distributable earnings (accumulated undistributed deficit) on the Condensed Balance Sheet as of March
31, 2022 andDecember 31, 2021 are as follows:



|​                                 |  | As of
                                                                                March 31, 2022 |         | As of
                                                                                December 31, 2021
|---------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------------------
|Accumulated undistributed net investment losses      |  | $                                                                                                    | (44,731 | )                                                                                                      
|Unrealized appreciation of portfolio securities, net |  |                                                                                                      | 7,039   |                                                                                                        
|Accumulated undistributed net capital gains          |  |                                                                                                      | 429     |                                                                                                        
|Accumulated deficit                                  |  | $                                                                                                    | (37,264 | )                                                                                                      





Taxes—So
long as we remain a BDC, we intend to comply with the requirements of the Internal Revenue Code necessary to qualify as a RIC 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. As of December 31, 2021, we accrued a $0.04 million in corporate level income and excise tax in lieu of making a distribution
of the net capital gain for the sale of PalletOne, Inc. 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.



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 have no provision for margin tax expense for the three months ended March 31, 2022, and we expect no in state income
tax for the year ended December 31, 2022.



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 exclude “Restricted Cash and Temporary Cash Investments” used for purposes
of complying with RIC requirements from cash equivalents.



The following table
provides a reconciliation of cash and cash equivalents and restricted cash as reported within the consolidated balance sheet that sums
to the total of the same amounts shown in the consolidated statement of cash flows at March 31, 2022 and December 31, 2021:





|                                                               |  | As of
                                                                                March 31, 2022 |        | As of
                                                                                December 31, 2021
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- | ------ | -------------------------------------------------------------------------------------------------------
|Cash and cash equivalents at end of period                     |  | $                                                                                                    | 22,300 |                                                                                                        
|Restricted cash at end of period                               |  |                                                                                                      | 30     |                                                                                                        
|Cash and cash equivalents and restricted cash at end of period |  | $                                                                                                    | 22,330 |                                                                                                        









Recent Accounting Standards—We
consider the applicability and impact of all accounting standard updates (“ASU”) issued by the Financial Accounting Standards
Board (“FASB”). ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal
impact on our financial statements.



Accounting Standards Recently
Adopted— In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs,
to disclose the financial statements of certain of their portfolio companies or acquired funds (the “Final Rules”). The Final
Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities
Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial
information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of
“significant subsidiary.” The Final Rules amend the definition of “significant subsidiary” in a manner that is
intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an
investment company. The Final Rules became effective on January 1, 2021, but voluntary compliance was permitted in advance of the effective
date. The Company elected to comply with the Final Rules effective June 30, 2020 which reduced the requirement for the Company to provide
separate audited financial statements and summarized financial information for its controlled portfolio companies going forward.

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| | (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 $40,000 paid quarterly in arrears, a fee of $2,000 for each meeting of
the Board of Directors or committee thereof attended in person, a fee of $1,000 for participation in each telephonic meeting of the Board
or committee thereof, and reimbursement of all out-of-pocket expenses relating to attendance at such meetings. The chair of each of our
standing committees (audit, compensation, and nominating and governance) also receives an annual fee of $50,000, payable quarterly in
arrears. 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 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 $300
per hour for such services.



(5)       Portfolio
Securities

During the three months
ended March 31, 2021, we realized a loss of $0.2 million from the adjustment of the escrow receivable from the sale of PalletOne, Inc.



During
the three months ended March 31, 2022, with respect to our holding in Equus Energy, LLC, we recorded an increase in the fair value of
this investment by $2.0 million, resulting in a net change in unrealized appreciation of $7.0 million. Such change in fair value was principally
due to increases in mineral acreage prices and a substantial increase in short-and long-term prices for crude oil and natural gas.

During the three
months ended March 31, 2021, we recorded a net change in unrealized appreciation of $1.5 million, to a net unrealized appreciation of
$0.9 million. Such change in unrealized appreciation, principally due to increases in mineral acreage prices and a substantial increase
in the short-and long-term prices for crude oil.

(6)       Conversion
to an Operating Company

Authorization to
Withdraw BDC Election—On August 17, 2021, holders of a majority of the outstanding common stock of the Fund approved our cessation
as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective
as of a date designated by the Board and our Chief Executive Officer. Although this authorization has since expired, we expect to receive
a further authorization from our shareholders as a consequence of our expressed intent to transform Equus into an operating company or
a permanent capital vehicle. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal
unless and until Equus has entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized
to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting
shares to enter into any such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities
that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time
period or at all, and, although we expect that our shareholders will extend our current authorization, we do not expect to cause the Fund
to withdraw its election to be classified as BDC prior to June 30, 2022. Moreover, we cannot assure you that the terms of any such transformative
transaction would be acceptable to us.



Increase in Authorized
Shares—On January 20, 2021, holders of a majority of the outstanding common stock of the Fund approved the restatement of our
Certificate of Incorporation to increase the number of our authorized shares of common stock from 50,000,000 to 100,000,000, and the number
of our authorized shares of preferred stock from 5,000,000 to 10,000,000. The increase is intended to help facilitate the transformation
of Equus into an operating company and provide sufficient authorized shares to evaluate larger business concerns as possible acquisition
or merger candidates.



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| | (7) | 2016 Equity Incentive Plan
| | --- | --------------------------



Share-Based Incentive
Compensation—On June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”).
On January 10, 2017, the SEC issued an order approving the Incentive Plan and certain awards intended to be made thereunder. The Incentive
Plan is intended to promote the interests of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates
to acquire or increase their equity interest in the Fund and to provide a means whereby they may develop a proprietary interest in the
development and financial success of the Fund, to encourage them to remain with and devote their best efforts to the business of the Fund,
thereby advancing the interests of the Fund and its stockholders. The Incentive Plan is also intended to enhance the ability of the Fund
and its affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the Fund. The
Incentive Plan permits the award of restricted stock as well as common stock purchase options. The maximum number of shares of common
stock that are subject to awards granted under the Incentive Plan is 2,434,728 shares. The term of the Incentive Plan will expire on June
13, 2026. On March 17, 2017, we granted awards of restricted stock under the Incentive Plan to certain of our directors and executive
officers in the aggregate amount of 844,500 shares. The awards are each subject to a vesting requirement over a 3-year period unless the
recipient thereof is terminated or removed from their position as a director or executive officer without “cause”, or as a
result of constructive termination, as such terms are defined in the respective award agreements entered into by each of the recipients
and the Fund. As of March 31, 2020, all awards granted under the Incentive Plan were fully vested. We account for share-based compensation
using the fair value method, as prescribed by ASC 718. Accordingly, for restricted stock awards, we measure the grant date fair value
based upon the market price of our common stock on the date of the grant and amortize the fair value of the awards as share-based compensation
expense over the requisite service period, which is generally the vesting term.





| | (8) | Equus Energy, LLC
| | --- | -----------------



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 presently consisting of 136 producing and non- producing oil and gas wells.
On September 30, 2020, the Fund provided an additional $0.6 million in capital to Equus Energy for the purpose of additional working capital.
On June 30, 2021, the Fund provided an additional $0.3 million in capital to Equus Energy for the purpose of additional working capital.
The working interests include associated development rights of approximately 21,320 acres situated on 9 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 operators, including Burk Royalty, which has operating responsibility for all of Equus Energy’s 22 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 seeking to effect a recompletion program of existing Conger Field wells to the Wolfcamp formation, a zone containing oil as
well as gas and natural gas liquids. A substantial 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.



The gradual recovery
of the world economy, largely buoyed by fiscal and monetary stimulus, resulted in a strong recovery in energy prices through to the end
of 2021. The buildup and subsequent invasion of Ukraine by Russian forces in February 2022 added additional impetus to short-term commodity
prices, with oil increasing 33.1% in the first quarter of 2022 and natural gas increasing 42.9% during the same period. In the wake of
the invasion, the U.S. Energy Information Administration, which had previously forecast a $75.00 WTI price for 2022 as recently as January
2022, raised its WTI estimate on March 16, 2022 to $113.00 for the remainder of the year and Brent prices to $116.00. The EIA also revised
its estimate of natural gas for the remainder of 2022 from $3.79 per MMBTU to $5.68.



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The Impact of COVID-19
and Other Events—Recent years have witnessed unprecedented systemic events, such as Covid-19, government-induced consumer demand,
and, most recently, armed conflict, that had a material effect on oil prices globally, which has continued through the first quarter of
2022 where crude and natural gas prices are at substantial multi-year highs.



Notwithstanding present
pricing conditions and forecasts for the remainder of 2022, operators of the leasehold interests held by Equus Energy have not yet undertaken
significant capital expenditures, which could have a material adverse effect upon the operations and long-term financial condition of
Equus Energy. To conserve existing cash resources or create additional cash resources during the next year, Equus Energy intends to either:
(i) attempt to secure equity or debt financing from one or more institutional sources, which sources may include the Fund, a commercial
lender, or other investors, (ii) request that its operators shut-in additional wells, (iii) sell certain of its oil and gas holdings,
or (iv) undertake a combination of the foregoing. However, we cannot assure you that Equus Energy will be able to implement these plans
successfully, or that such plans will generate sufficient liquidity to continue as a going concern. The factors discussed above, therefore,
raise substantial doubt about Equus Energy’s ability to continue as a going concern.



Going-Concern—The
accompanying unaudited condensed consolidated financial statements of Equus Energy have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. As
such, the unaudited condensed consolidated financial statements do not include adjustments relating to the recoverability and classification
of assets and their carrying amount, or the amount and classification of liabilities that may result should the Equus Energy be unable
to continue as a going concern.



Revenue and Income—During
the three months ended March 31, 2022, Equus Energy’s revenue, operating revenue less direct operating expenses, and net loss were
$0.3 million, $0.2 million, and ($5) thousand, respectively, as compared to revenue, operating revenue less direct operating expenses,
and net loss which were $0.2 million, ($0.02) million, and ($0.09) million, respectively, for the three months ended March 31, 2021.



Capital Expenditures—During
the three months ended March 31, 2022and March 31, 2021, Equus Energy’s investment,
respectively, in capital expenditures for small repairs and improvements was not significant.



We do not consolidate
Equus Energy or its wholly-owned subsidiaries and accordingly only the value of our investment in Equus Energy is included on our balance
sheets. Our investment in Equus Energy is valued in accordance with our normal valuation procedures and is based in part on a reserve
report prepared for Equus Energy by Lee Keeling & Associates, Inc., an independent petroleum engineering firm, the transactions and
values of comparable companies in this sector, and the estimated value of leasehold mineral interests associated with the acreage held
by Equus Energy. A valuation of Equus Energy was performed by a third-party valuation firm, who recommended a value range of Equus Energy
consistent with the fair value determined by our Management (See Schedule of Investments).



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Below is summarized
unaudited condensed consolidated financial information for Equus Energy as of March 31, 2022 and December 31, 2021 and for the three months
ended March 31, 2022 and 2021, respectively (in thousands):



EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Balance Sheets





|                                                           |   | March 31 |        | December 31
|---------------------------------------------------------- | - | -------- | ------ | -----------
|                                                           |   | 2022     |        | 2021       
|                                                           |   |          |        |            
|                                                           |   |          |        |            
|Assets                                                     |   |          |        |            
|Current assets:                                            |   |          |        |            
|Cash and cash equivalents                                  |   | $        | 510    |            
|Accounts receivable                                        |   |          | 388    |            
|Total current assets                                       |   |          | 898    |            
|Oil and gas properties                                     |   |          | 8,097  |            
|Less: accumulated depletion, depreciation and amortization |   |          | (8,093 | )          
|Net oil and gas properties                                 |   |          | 4      |            
|Total assets                                               | $ | 902      |        |            
|                                                           |   |          |        |            
|Liabilities and member's deficit                           |   |          |        |            
|Current liabilities:                                       |   |          |        |            
|Accounts payable and other                                 |   | $        | 150    |            
|Due to affiliate                                           |   |          | 350    |            
|Total current liabilities                                  |   |          | 500    |            
|Asset retirement obligations                               |   |          | 215    |            
|Total liabilities                                          |   | 715      |        |            
|                                                           |   |          |        |            
|Total member's equity                                      |   |          | 187    |            
|                                                           |   |          |        |            
|Total liabilities and member's equity                      | $ | 902      |        |            





Revenue and direct
operating expenses for the various oil and gas assets included in the unaudited condensed consolidated statements of operations below
represent the net collective working and revenue interests acquired by Equus Energy.











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EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements of
Operations



|                                                    |  | Three months ended March 31,
|--------------------------------------------------- |  | ----------------------------
|                                                    |  | 2022                        
|                                                    |  |                             
|                                                    |  |                             
|Operating revenue                                   |  | $                           
|Operating expenses                                  |  |                             
|Direct operating expenses                           |  |                             
|General and administrative                          |  |                             
|Depletion, depreciation, amortization and accretion |  |                             
|Impairment of oil and gas properties                |  |                             
|Total operating expenses                            |  |                             
|Net loss                                            |  |                             



EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements of
Cash Flows



|                                                    |  | Three months ended March 31,
|--------------------------------------------------- |  | ----------------------------
|                                                    |  | 2022                        
|                                                    |  |                             
|Cash flows from operating activities:               |  |                             
|                                                    |  |                             
|Net loss                                            |  | $                           
|Adjustments to reconcile net loss to                |  |                             
|net cash used in operating activities:              |  |                             
|Depletion, depreciation and amortization            |  |                             
|Accretion expense                                   |  |                             
|Impairment                                          |  |                             
|Changes in operating assets and liabilites:         |  |                             
|Accounts receivable                                 |  |                             
|Accounts payable and other                          |  |                             
|Net cash used in operating activities               |  |                             
|                                                    |  |                             
|Cash flows from investing activities:               |  |                             
|Investment in oil & gas properties                  |  |                             
|Net cash (used in) provided by investing activities |  |                             
|                                                    |  |                             
|Net decrease in cash                                |  |                             
|Cash and cash equivalents at beginning of period    |  |                             
|Cash and cash equivalents at end of period          |  | $                           



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Critical Accounting Policies for Equus Energy

Oil & Gas Properties—Equus
Energy and its wholly-owned subsidiary EQS Energy Holdings, Inc. (collectively, “the Company”) follow the Full Cost Method
of Accounting for oil and gas properties. Under the full cost method, all costs associated with property acquisition, exploration, and
development activities are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, delay rentals,
costs of drilling, completing and equipping successful and unsuccessful oil and gas wells and related costs. Gains or losses are normally
not recognized on the sale or other disposition of oil and gas properties. Gains or losses are normally reflected as an adjustment to
the full cost pool. Any excess of the net book value of proved oil and gas properties over the ceiling is charged to expense and reflected
as additional impairment in the accompanying statements of operations.



The capitalized costs
of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated cost of dismantlement and
abandonment, net of salvage value, are amortized on a unit-of-production method over the estimated productive life of the proved oil and
gas reserves. Unevaluated oil and gas properties are excluded from this calculation. Depletion, depreciation, amortization and accretion
expense for the Company’s oil and gas properties totaled $1 thousand for the three months ended March 31, 2022 and 2021, respectively.



Capitalized oil and gas property costs are limited
to an amount (the ceiling limitation) equal to the sum of the following:



| | (a) | As of March 31, 2022, the present value of estimated future net revenue from the projected production of proved oil and gas reserves, calculated at the simple arithmetic average, first-day-of-the-month prices during the twelve-month period before the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) and a discount factor of 10%;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The cost of investments in unproved and unevaluated properties excluded from the costs being amortized; and
| | --- | -----------------------------------------------------------------------------------------------------------



| | (c) | The lower of cost or estimated fair value of unproved properties included in the costs being amortized.
| | --- | -------------------------------------------------------------------------------------------------------



When it is determined
that oil and gas property costs exceed the ceiling limitation, an impairment charge is recorded to reduce its carrying value to the ceiling
limitation. The Company recognized an impairment loss on its oil and gas properties during the three months ended March 31, 2022 and 2021
of $0 and $32 thousand, respectively.



The costs of certain
unevaluated leasehold acreage and certain wells being drilled are not amortized. The Company excludes all costs until proved reserves
are found or until it is determined that the costs are impaired. Costs not amortized are periodically assessed for possible impairment
or reduction in value. If a reduction in value has occurred, costs being amortized are increased accordingly.



Revenue Recognition—The
Company recognizes revenue in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with
Customers.



The Company’s
revenue is generated primarily from the sale of oil, gas and natural gas liquids (“NGL”) produced from working interests and
to a lesser extent from royalty interests in oil and gas properties owned by the Company. As a working interest owner, the Company is
responsible for the incurred production expenses proportionate to the interest stipulated in the operating agreement. As a non-operator,
the Company does not manage the daily well operations, which are borne by the well operator. Sales of oil, gas and NGLs are recognized
at the time control of the product is transferred to the customer.



Various arrangements
amongst the eleven different oil and gas properties all differ in some respects, although they do share the commonality that, as a non-operating
working interest holder, the Company does not engage in the selling process, but instead relies on the operator, as their selling agent,
for negotiating and determining pricing, volume, and delivery terms. Such pricing terms are often a function of a specified discount from
the daily/monthly NYMEX or Henry Hub average. The discount is usually based on differentials such as distance of the field/wells from
the distribution node or the buyer’s storage facility, as well as the quality of the product itself (i.e., in the case of oil, its
gravity).



Revenue is measured
based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The
Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control
of those goods to the customer. The contract consideration is typically allocated to specific performance obligations in the contract
according to the terms of the contract. Each unit of oil or gas is considered a separate performance obligation under the contract. Wells
are spot measured once a month to determine production and the composition of each of the products (i.e. oil, gas, NGLs) from the well.
Each month the consideration obtained by the operator is allocated to the related performance obligations.



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Performance Obligations



A performance obligation
is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s
transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation
is satisfied. Revenue is recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that
reflects the consideration the Company expects to be entitled to in exchange for services rendered.



Depending on the contract
and commodity, there are various means by which upstream entities can transfer control (i.e., at the wellhead, inlet, tailgate of the
processing plant, or a location where the product is delivered to a third party). The Company has control of the commodity before it is
extracted, therefore consideration must be given to whether the transfer of control of the commodity is to the operator or to the end
customer at the point of sale.



Unless special arrangements
are entered into, the Company’s performance obligations are generally considered performed when control of the extracted commodity
transfers when it is delivered to the end customer at the agreed-upon market or index price. At the end of each month, when the performance
obligation is satisfied, the variable consideration can be reasonably estimated. Variances between the Company’s estimated revenue
and actual payments are recorded in the month the payment is received.



Principal vs. Agent



While the guidance
on principal versus agent considerations is similar to legacy GAAP, the key difference is that ASC 606 focuses on control of the specified
goods and services as the overarching principle for entities to consider when determining whether they are acting as a principal or an
agent. This could result in entities reaching different conclusions than they did under legacy GAAP.



An
entity acting as a principal records revenue on a gross basis if it controls a promised good or service before transferring that good
or service to the customer. An entity is an agent if it does not control the promised good or service before transfer to the customer.
If the entity is an agent, it records as revenue the net amount it retains for its agency services. However, due to the uncertainty of
the variable pricing component and the separation of expenses billed to the Company from the consideration processed and paid by the operator,
the revenue is recorded at net.



Under the Company’s normal operating activity
arrangements, the operator is responsible for negotiating, fulfilling and collecting the agreed-upon amount from the sale with the end
customer and is, therefore, determined to be acting as agent on behalf of the Company. The principal versus agent consideration will continue
to be assessed for new contracts, both within and outside the company’s normal operating activities.



Income
Taxes—A limited liability company is not subject to the payment of federal income taxes as components of its income and expenses
flow through directly to the members. However, the Company is subject to certain state income taxes. 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. Taxable Subsidiaries
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. The Company had no federal income tax expense for the three months ending March 31, 2022
and 2021, respectively.



Asset Retirement Obligations—The fair
value of asset retirement obligations are recorded in the period in which they are incurred if a reasonable estimate of fair value can
be made, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The fair value of the
asset retirement obligation is measured using expected future cash outflows discounted at the Company’s credit- adjusted risk-free
interest rate. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk
premium was included in the Company’s asset retirement obligation fair value estimate since a reasonable estimate could not be made.
The liability is accreted to its then present value each period, and the capitalized cost is depleted or amortized over the estimated
recoverable reserves using the units-of-production method.



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| | (9) | Subsequent Events
| | --- | -----------------



Management performed
an evaluation of the Fund’s activity through the date the financial statements were issued, noting the following subsequent event:



On April 7, 2022, our
holding in $3.0 million in U.S. Treasury Bills matured and we repaid our margin loan.



Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations



Equus Total Return,
Inc. (“we,” “us,” “our,” “Equus,” and the “Fund”), a Delaware corporation,
was formed on August 16, 1991. Our shares trade on the New York Stock Exchange under the symbol ‘EQS’. Our investment strategy
seeks to provide the highest total return, consisting of capital appreciation and current income.



The information contained
in this section should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Quarterly Report
and in conjunction with the financial statements and notes thereto in the Fund’s Form 10-K for the year ended December 31, 2021,
as filed with the SEC. In addition, some of the statements in this report constitute forward-looking statements. The matters discussed
in this Quarterly Report, as well as in future oral and written statements by management of Equus, that are forward-looking statements
are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ
materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future
events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “could,”
“intends,” “target,” “projects,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of these terms or other similar words. Important assumptions include
our ability to originate new investments, achieve certain margins and levels of profitability, and the availability of additional capital.
In light of these and other uncertainties, the inclusion of a forward-looking statement in this Quarterly Report should not be regarded
as a representation by us that our plans or objectives will be achieved. The forward- looking statements contained in this Quarterly Report
include statements as to:



| | • | 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.                                                                                                                                  

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There
are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such
forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements
contained in this Quarterly Report, please see the discussion in Part II, “Item 1A. Risk Factors”, and in Part I, “Item
1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“10-K”). In particular,
you should carefully consider the risks we have described in the 10-K and elsewhere in this Quarterly Report concerning our efforts to
transform Equus into an operating company, as well as the coronavirus pandemic and the economic impact of the coronavirus on the Fund
and our sole remaining portfolio company, as well as on oil and gas markets generally. You should not place undue reliance on these forward-looking
statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements
are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date
this Quarterly Report is filed with the SEC.

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. To the extent that we remain a BDC,
we will seek to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned
companies (and smaller public 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 is 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 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 a wholly-owned Taxable Subsidiary
which holds one of our portfolio investments listed on our Schedules of Investments. The purpose of this Taxable Subsidiary 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 Subsidiary, 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 Subsidiary
is taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages.
We do not consolidate the Taxable Subsidiary for income tax purposes and they may generate income tax expense because of the Taxable Subsidiary’s
ownership of the portfolio investment. We reflect any such income tax expense on our Statements of Operations.



Conversion to an Operating Company



Authorization to Withdraw BDC Election. On
August 17, 2021, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the 1940 Act
and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective as of a date designated
by the Board and our Chief Executive Officer. Although this authorization has since expired, we expect to receive a further authorization
from our shareholders as a consequence of our expressed intent to transform Equus into an operating company or a permanent capital vehicle.
Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal unless and until Equus has
entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized to withdraw our election
as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter into any
such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities that could enable
us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period or at all,
and, although we expect our shareholders will renew their authorization to withdraw our BDC election, we cannot assure you that the terms
of any such transformative transaction would be acceptable to us.



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Increase in Authorized Shares. On January 20,
2021, holders of a majority of the outstanding common stock of the Fund approved the restatement of our Certificate of Incorporation to
increase the number of our authorized shares of common stock from 50,000,000 to 100,000,000, and the number of our authorized shares of
preferred stock from 5,000,000 to 10,000,000. The increase is intended to help facilitate the transformation of Equus into an operating
company and provide sufficient authorized shares to evaluate larger business concerns as possible acquisition or merger candidates.



Reduction in Asset Coverage Ratio

On November
14, 2019, our shareholders approved a reduction in our asset coverage ratio from 200% to 150%. Prior to the reduction, we were restricted
in the amount that we could borrow to the value of our net assets. The reduction in our asset coverage from 200% to 150% means that we
may now borrow up to twice the value of our net assets. Except for a margin loan that we have previously procured each quarter to acquire
U.S. Treasury bills as part of the maintenance of our RIC status, we have not incurred any additional borrowings as a consequence of this
authorization.



2016 Equity Incentive Plan



On June 13, 2016, our
shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”). On January 10, 2017, the SEC issued
an order approving the Incentive Plan and certain awards intended to be made thereunder. The Incentive Plan is intended to promote the
interests of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates to acquire or increase their equity
interest in the Fund and to provide a means whereby they may develop a proprietary interest in the development and financial success of
the Fund, to encourage them to remain with and devote their best efforts to the business of the Fund, thereby advancing the interests
of the Fund and its stockholders. The Incentive Plan is also intended to enhance the ability of the Fund and its affiliates to attract
and retain the services of individuals who are essential for the growth and profitability of the Fund. The Incentive Plan permits the
award of restricted stock as well as common stock purchase options. The maximum number of shares of common stock that are subject to awards
granted under the Incentive Plan is 2,434,728 shares. The term of the Incentive Plan will expire on June 13, 2026. On March 17, 2017,
we granted awards of restricted stock under the Plan to certain of our directors and executive officers in the aggregate amount of 844,500
shares. The awards were each subject to a vesting requirement over a 3-year period unless
the recipient thereof was terminated or removed from their position as a director or executive
officer without “cause”, or as a result of constructive termination, as such terms are defined in the respective award agreements
entered into by each of the recipients and the Fund. As of March 31, 2020, all awards granted under the Incentive Plan were fully vested.
We account for share-based compensation using the fair value method, as prescribed by ASC 718. Accordingly, for restricted stock awards,
we measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize the fair value
of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term. We recorded
compensation expense of $0.08 million for the three months ended March 31, 2020 in connection with these awards.



Critical Accounting Policies



See the Fund’s
Critical Accounting Policies from the disclosure set forth in the Fund’s Annual Report on Form 10-K for the year ended December
31, 2021.



Current Market Conditions



Impact of the Coronavirus
Generally. The introduction of the coronavirus has had a substantial detrimental impact on markets and economic forecasts for governments
and businesses worldwide, and has also affected our operations and that of our sole remaining portfolio company, although the extent of
the impact cannot be determined at the present time. Beginning in the first quarter of 2020, all U.S. states and many foreign countries
implemented significant travel, movement, and assembly restrictions, as well as restrictions on the movement of goods. By the first quarter
of 2022, most of these restrictions had been lifted, although the coronavirus and its derivative strains are still causing significant
disruption in global markets. As of March 31, 2022, the number of worldwide deaths attributable to the coronavirus stood at over 6.0 million.



Impact of the Coronavirus
on Our Operations. The highly contagious nature of the coronavirus and its various strains has caused numerous private and public
organizations to substantially alter the way in which they operate. In some cases, these workplace and operational alterations have become
permanent. Many such organizations have, to the extent possible, required employees to work remotely to reduce opportunities for contagion.
We have also taken steps to minimize the exposure of our employees and service providers by allowing all such persons to work from a remote
location. We utilize a cloud-based storage and retrieval system for our records and can communicate electronically or by telephone with
third parties such as our financial institutions, legal and accounting advisors, and our portfolio companies. Our day-to-day operations
and management has not, therefore, been materially affected by the coronavirus pandemic.



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Impact of Geopolitical
Events and the Coronavirus on the Oil and Gas Sector. The substantial volatility in world markets has been prominent in the oil and
gas sector, with crude prices falling to 18-year lows in mid-March 2020 as a result of the coronavirus pandemic, only to increase to multi-year
highs in the first quarter of 2022, largely as a result of high industrial and consumer demand, a reluctance of U.S. producers and OPEC
nations to generate additional supply, and the conflict in Ukraine. Meanwhile, gas prices had increased in the third quarter of 2021 to
$5.50 per MMBTU, a level not seen since 2014, then decreased again to $3.82 per MMBTU by the end of 2021. In the first quarter of 2022
and thereafter, gas prices have increased sharply, largely as a result of increased demand combined with the effect of the conflict in
Ukraine on short term gas prices globally. The increased prices for oil and gas, including the forward pricing curves for these commodities,
has improved the outlook and prospects for remaining small oil and gas firms such as Equus Energy that hold development rights in low-cost
production reservoirs such as those underlying the Permian Basin and the Eagle Ford Shale regions. Notwithstanding present pricing conditions
and forecasts for the remainder of 2022, operators of the leasehold interests held by Equus Energy have not yet undertaken significant
capital expenditures, which could have a material adverse effect upon the operations and long-term financial condition of Equus Energy.
To conserve existing cash resources or create additional cash resources during the next year, Equus Energy intends to either: (i) attempt
to secure equity or debt financing from one or more institutional sources, which sources may include the Fund, a commercial lender, or
other investors, (ii) request that its operators shut-in additional wells, (iii) sell certain of its oil and gas holdings, or (iv) undertake
a combination of the foregoing. However, we cannot assure you that Equus Energy will be able to implement these plans successfully, or
that such plans will generate sufficient liquidity to fund the operating expenses of Equus Energy over the next twelve-months.



The U.S. Economy.
U.S. GDP unexpectedly declined at an annualized rate of 1.4% in the quarter ended March 31, 2022, substantially below the 1.5% annualized
growth predicted by the Conference Board for the period. The principal reasons for the decrease were declines in fixed investment, defense
spending and record trade imbalances. Nevertheless, most economists are not predicting a recession in the short term. The first quarter’s
decrease in GDP followed a 5.7% increase for all of 2021, the highest annual increase since 1984. The GDP gains in 2021 were largely due
to increased consumer spending in the first half of the year which was partially financed from federal stimulus programs, as well as higher
inventory purchases which drove gains during the last half of the year. However, decreased consumer spending in late 2021 resulting from
the expiration of stimulus payments and the onset of systemic inflation, which continued into the first quarter of 2022, has led to significantly
lower growth forecasts for the remainder of 2022. The Conference Board is projecting an overall increase of 3.0% for the entire year,
down from its 3.5% projection made in late 2021. The Congressional Budget Office is predicting 3.7% GDP growth for 2022, although that
figure is also expected to be revised downward (Sources: The Conference Board, CNBC; Congressional Budget Office).



Employment and
Housing. As of March 31, 2022, the U.S. unemployment rate stood at 3.6%, well below the 6.0% rate of March 31, 2021 and substantially
below the high of 14.5% in April 2020 when economic uncertainty associated with Covid-19 was at its peak. Economists are projecting a
stable 3.6% to 3.8% range for the remainder of 2022. Most of the recent employment gains in 2021 and the first quarter of 2022 were due
to gains in nonfarm payrolls, the leisure and hospitality industry, professional and business services, retail trade, transportation,
and warehousing (Sources: Bureau of Labor Statistics; Trading Economics).



Consumer Prices.
Consumer prices, which had largely been held in check during the pandemic, began to rise steadily in the second quarter of 2021 and, by
the end of the first quarter of 2022, had reached an annualized rate of 8.5%, the highest since 1981. Largely as a result of Fed monetary
responses and a slowing of economic growth, a number of commentators are forecasting a decrease in the rate of inflation throughout the
rest of the year, with price increases expected to be approximately 5.0% to 6.0% by the end of 2022 (Sources: Kiplingers; Trading Economics).



Interest Rates.
Principally as a response to rising prices, the Federal Reserve increased the short term federal funds rate by one-half percentage point
on May 4, 2022 and is further expected to increase short term rates one half percentage point in each of its next two meetings. The result
has been substantially increased borrowing costs, particularly for homebuyers and small businesses. Moreover, credit providers have also
begun to require higher collateralization rates, with shorter maturities and higher fees than in the recent past. (Source: The Wall
Street Journal).





Mergers and Acquisitions.
Global merger and acquisition activity in 2021 exceeded $5.0 trillion, an all-time record and $1.4 trillion greater than 2020, an increase
of 38.9%. U.S.-based corporate acquirors, sitting on over $2.0 trillion in cash from higher earnings and funds raised from bond and equity
offerings, were the principal drivers of the acquisition boom, accounting for over 50.0% of worldwide activity, while private equity firms
comprised 27.0% of this total. Technology and healthcare were the sectors that experienced the most significant dealmaking activity during
the year. Data for the first quarter of 2022 has not yet been released, but many analysts are expecting a slight cooling of acquisition
activity in 2022 resulting from higher interest rates and heightened geopolitical tensions. (Sources: Reuters; WoltersKluwer).

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Private Equity.
Private equity firms experienced a record year in 2021, concluding 8,548 transactions worth $2.1 trillion, which was more than double
the industry’s total for 2020 ($1.0 trillion). Buyouts comprised the largest component of PE activity, amounting to $1.5 trillion
of the total. Technology, media, and telecommunications were the industries most represented in private equity transactions in 2021, recording
$784.2 billion during the year, almost double the $404.0 billion for 2020. The number of transactions sharply increased as well, with
3,268 deals consummated in 2021 versus 1,845 in 2020. At the end of 2021, private equity firms were in possession of $2.3 trillion in
cash reserves, suggesting that robust dealmaking activity is likely to continue well into 2022, notwithstanding inflationary pressures
and other economic uncertainties. Data for the first quarter of 2022 is not yet available. However, the invasion of Ukraine by Russian
armed forces in February 2022, combined with systematic increases in short-term rates by the Federal Reserve that are expected to continue
into the intermediate term is expected to temper private equity activity in the first quarter of 2022 and perhaps beyond. Transactions
by special purpose acquisition companies (SPACs) had experienced considerable investor interest and dealmaking activity in 2020 and the
beginning of 2021, with 298 SPAC IPOs in the first quarter of 2021. SPAC IPOs slowed dramatically during the second and third quarters
of 2021 as a result of poor post-acquisition (de-SPAC) performance and increased regulatory scrutiny. Although the fourth quarter of 2021
saw a rebound with 166 SPAC IPOs, 60% of the cash in previously existing SPACs had been returned to investors, and more than 500 SPACs
had yet to find a suitable acquisition target. (Sources: The Wall Street Journal; SPACInsider)



During the three months
ended March 31, 2022, our net asset value increased from $2.69 per share to $2.77 per share, an increase of 2.97%. As of March 31, 2022,
our common stock is trading at a 7.2% discount to our net asset value as compared to 13.0% as of December 31, 2021.



Over the past several
years, we have executed certain initiatives to enhance liquidity, achieve a lower operational cost structure, provide more assistance
to portfolio companies and realize certain of our portfolio investments. Specifically, we changed the composition of our Board of Directors
and Management, terminated certain of our follow-on investments, internalized the management of the Fund, suspended our managed distribution
policy, modified our investment strategy to pursue shorter term liquidation opportunities, pursued non-cash investment opportunities,
and sold certain of our legacy and underperforming investment holdings. We believe these actions continue to be necessary to protect capital
and liquidity in order to preserve and enhance shareholder value. Because our Management is internalized, certain of our expenses should
not increase commensurate with an increase in the size of the Fund and, therefore, to the extent we remain a BDC, we expect to achieve
efficiencies in our cost structure if we are able to grow the Fund.



Liquidity and Capital Resources



We generate cash primarily
from maturities, sales of securities and borrowings, as well as capital gains realized upon the sale of portfolio investments. We use
cash primarily to make additional investments, either in new companies or as follow-on investments in the existing portfolio companies
and to pay the dividends to our stockholders.



Because of the nature
and size of the portfolio investments, we may periodically borrow funds to make qualifying investments to maintain our tax status as a
RIC. We often borrow such funds 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 areunable to borrow funds to make qualifying investments,
Equusmay no longer qualify as a RIC. The Fund would then be subject to corporate income tax
on its net investment income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary
dividends.



The Fund has the ability
to borrow funds and issue forms of senior securities representing indebtedness or stock, such as preferred stock, subject to certain restrictions.
Net taxable investment income and net taxable realized gains from the sales of portfolio investments are intended to be distributed at
least annually, to the extent such amounts are not reserved for payment of expenses and contingencies or to make follow-on or new investments.



We reserve the right
to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses.
Such retained amounts, if any, will be taxable to the Fund as long-term capital gains and stockholders will be able to claim their proportionate
share of the federal income taxes paid on such gains as a credit against their own federal income tax liabilities. Stockholders will also
be entitled to increase the adjusted tax basis of their Fund shares by the difference between their undistributed capital gains and their
tax credit.



We are evaluating
the impact of current market conditions on our portfolio company valuations and their ability to provide current income. We believe we
have followed valuation techniques in a reasonably consistent manner; however, we are cognizant of current market conditions that might
affect future valuations of portfolio securities. In view of our present status as a BDC and our anticipated transformation into an operating
company, we believe that our operating cash flow and cash on hand will be sufficient to meet operating requirements and to finance routine
capital expenditures through the next twelve months.



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Results of Operations



Investment Income and Expense



Net investment loss
was $0.9 million for the three months ended March 31, 2022 and $1.0 million March 31, 2021, respectively.



Compensation expense
was $0.3 million for the three months ended March 31, 2022 and $0.5 million for the three months ended March 31, 2021, as a result of
bonuses earned in connection with dispositions of certain of the Fund’s portfolio investments in 2021.



Professional liability
expenses increased to $0.4 million for the three months ended March 31, 2022 from $0.3 million for the three months ended March 31, 2021,
primarily due to overall increases in liability premiums.



General and administrative
expenses were comparable for the three months ended March 31, 2022 and 2021, and were $0.12 million and $0.08 million respectively.



Realized Gains and Losses on Sales of
Portfolio Securities



During the three months
ended March 31, 2021, we realized a loss of $0.2 million from the adjustment of the escrow receivable from the sale of PalletOne, Inc.



Changes in Unrealized Appreciation/Depreciation of Portfolio Securities



During
the three months ended March 31, 2022, with respect to our holding in Equus Energy, LLC, we recorded an increase in the fair value of
$2.0 million, resulting in a net change in unrealized appreciation of $7.0 million. Such change in fair value was principally due to increases
in mineral acreage prices and a substantial increase in short-and long-term prices for crude oil and natural gas.

During the three
months ended March 31, 2021, we recorded a net change in unrealized appreciation of $1.5 million, to a net unrealized appreciation of
$0.9 million. Such change in unrealized appreciation, principally due to increases in mineral acreage prices and a substantial increase
in the short-and long-term prices for crude oil.





Dividends



We will 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.



Subsequent Events



Management performed
an evaluation of the Fund’s activity through the date the financial statements were issued, noting the following subsequent event:



On April 7, 2022, our
holding in $3.0 million in U.S. Treasury Bills matured and we repaid our margin loan..

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Item 3. Quantitative and Qualitative Disclosure about Market Risk



We are subject to
financial market risks, including changes in interest rates with respect to investments in debt securities and outstanding debt payable,
as well as changes in marketable equity security prices. In the future, we may invest in companies outside the United States, including
in Europe and Asia, which would give rise to exposure to foreign currency value fluctuations. We do not use derivative financial instruments
to mitigate any of these risks. The return on investments is generally not affected by foreign currency fluctuations.



Our investments in
portfolio securities consist of some fixed-rate debt securities. Since the debt securities are generally priced at a fixed rate, changes
in interest rates do not directly affect interest income. In addition, changes in market interest rates are not typically a significant
factor in the determination of fair value of these debt securities, since the securities are generally held to maturity. We determine
their fair values based on the terms of the relevant debt security and the financial condition of the issuer.



A major portion of
our investment portfolio consists of debt and equity investments in private companies. Modest changes in public market equity prices generally
do not significantly impact the estimated fair value of these investments. However, significant changes in market equity prices can have
a longer-term effect on valuations of private companies, which could affect the carrying value and the amount and timing of gains or losses
realized on these investments. A small portion of the investment portfolio could also consist of common stock in publicly traded companies.
These investments are directly exposed to equity price risk, in that a hypothetical ten percent change in these equity prices would result
in a similar percentage change in the fair value of these securities.



Item 4. Controls and Procedures



We maintain disclosure
controls and other procedures that are designed to ensure that information required to be disclosed by the Fund in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



Our management, with
the participation of our Fund’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design
and operations of the Fund’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of March 31, 2022. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Fund’s disclosure controls and procedures were effective at a reasonable assurance level. There has been no change in our
internal control over financial reporting during the quarter ended March 31, 2022, that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.



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Part II. Other Information



Item 1. Legal Proceedings

From time to time,
the Fund is 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.



Item 1A. Risk Factors



In connection with
our efforts to convert Equus into an operating company in furtherance of our plan to convert the Fund into an operating company, we may
be subject to a number of risks associated with this process, the transactions that would embody a consolidation of Equus with another
company, as well as specific risks associated with the commercial enterprise with which Equus may seek to combine itself. We intend to
identify, as will be reasonably possible, such risks and include the same in our subsequent filings and reports with the SEC.



Although the U.S.
and global economy has begun to show strong signs of recovery, the economic dislocation precipitated by the coronavirus pandemic is still
rapidly evolving. As of the date of filing of this Quarterly Report on Form 10-Q (“10-Q”), we are unable to predict either
the potential near-term or longer-term impact that the coronavirus may have on our financial and operating results due to numerous uncertainties
regarding the duration and severity of the crisis. To the greatest extent possible, we intend to operate our business in the ordinary
course. Nevertheless, the ultimate impact of the coronavirus pandemic is highly uncertain and subject to change, and our business, results
of operations, and financial condition have been and will likely continue to be impacted by future developments concerning the pandemic
and the resulting economic disruption. We may also seek debt or equity financing to increase our liquidity and availability to make future
investments or pursue a transformative transaction.



Readers should carefully
consider these risks and all other information contained in our annual report on Form 10-K (“10-K”) for the year ended December
31, 2021, including the Fund’s financial statements and the related notes thereto. The risks and uncertainties described in our
10-K and throughout this 10-Q are not the only ones facing the Fund.



Additional risks and
uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

















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Item 6. Exhibits

3.       Articles
of Incorporation or Bylaws

| | (a) | Restated Certificate of Incorporation of the Fund. [Incorporated by reference to Exhibit 3(a) to Registrant’s Current Report on Form 8-K filed on January 21, 2021]
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Certificate of Merger, dated June 30, 1993, between the Fund and Equus Investments Incorporated [Incorporated by reference to Exhibit 3(b) to Registrant’s Annual Report on form 10-K for the year ended December 31, 2007]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Amended and Restated Bylaws of the Fund [Incorporated by reference to Exhibit 3(c) to Registrant’s Current Report on Form 8-K filed on June 30, 2014]
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

10.       Material
Contracts

| | (a) | Safekeeping Agreement between the Fund and Amegy Bank, dated August 16, 2008. [Incorporated by reference to Exhibit 10(c) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011]
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Form of Indemnification Agreement between the Fund and its directors and certain officers. [Incorporated by reference to Exhibit 10(d) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011]
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Code of Ethics of the Fund (Rule 17j-1). [Incorporated by reference to Exhibit 10(f) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | 2016 Equity Incentive Plan, adopted June 13, 2016. [Incorporated by reference to Exhibit 1 to Registrant’s Definitive Proxy Statement filed on May 5, 2016]
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

31.       Rule 13a-14(a)/15d-14(a)
Certifications

| | 1. | Certification by Chief Executive Officer*
| | -- | -----------------------------------------

| | 2. | Certification by Chief Financial Officer*
| | -- | -----------------------------------------

32.       Rule 1350
Certifications

| | 1. | Certification by Chief Executive Officer*
| | -- | -----------------------------------------

| | 2. | Certification by Chief Financial Officer*
| | -- | -----------------------------------------



* Filed herewith

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SIGNATURE



Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned, thereunto duly
authorized.







Dated: May 12, 2022





|EQUUS TOTAL RETURN, INC.
|------------------------
|                        
|/s/ John A. Hardy       
|John A. Hardy           
|Chief Executive Officer 



















39