UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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



For the quarterly period ended
September 30, 2019



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 November 13, 2019.






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 | 27  
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             | 32  
|Item 4. Controls and Procedures                                                               | 32  
|PART II. OTHER INFORMATION                                                                    |     
|Item 1. Legal Proceedings                                                                     | 33  
|Item 1A. Risk Factors                                                                         | 33  
|Item 6. Exhibits                                                                              | 34  
|SIGNATURE                                                                                     | 35  
|                                                                                              |     





















2


Table of Contents






EQUUS TOTAL RETURN, INC.

CONDENSED BALANCE SHEETS

(Unaudited)



Part I. Financial Information

Item 1. Unaudited Condensed Financial Statements







|                                                                                           |  |                    |         |                  
|------------------------------------------------------------------------------------------ |  | ------------------ | ------- | -----------------
|                                                                                           |  | September 30, 2019 |         | December 31, 2018
|(in thousands, except per share amounts)                                                   |  |                    |         |                  
|Assets                                                                                     |  |                    |         |                  
|Investments in portfolio securities at fair value:                                         |  |                    |         |                  
|Control investments (cost at $7,050 and $10,050, respectively)                             |  | $                  | 10,500  |                  
|Affiliate investments (cost at $350)                                                       |  |                    | 26,500  |                  
|Non-affiliate investments - related party (cost at $6,819 and $6,579, respectively)        |  |                    | 4,927   |                  
|Non-affiliate investments (cost at $977)                                                   |  |                    | 977     |                  
|Total investments in portfolio securities at fair value                                    |  |                    | 42,904  |                  
|Temporary cash investments                                                                 |  |                    | 26,991  |                  
|Cash and cash equivalents                                                                  |  |                    | 4,783   |                  
|Restricted cash                                                                            |  |                    | 270     |                  
|Accounts receivable from affiliates                                                        |  |                    | 561     |                  
|Accrued interest and dividend receivable                                                   |  |                    | 489     |                  
|Other assets                                                                               |  |                    | 202     |                  
|Total assets                                                                               |  |                    | 76,200  |                  
|Liabilities and net assets                                                                 |  |                    |         |                  
|Accounts payable                                                                           |  |                    | 126     |                  
|Accounts payable to related parties                                                        |  |                    | 59      |                  
|Borrowing under margin account                                                             |  |                    | 26,991  |                  
|Total liabilities                                                                          |  |                    | 27,176  |                  
|                                                                                           |  |                    |         |                  
|Commitments and contingencies (see Note 2)                                                 |  |                    |         |                  
|                                                                                           |  |                    |         |                  
|Net assets                                                                                 |  | $                  | 49,024  |                  
|                                                                                           |  |                    |         |                  
|Net assets consist of:                                                                     |  |                    |         |                  
|Common stock, par value                                                                    |  | $                  | 13      |                  
|Capital in excess of par value                                                             |  |                    | 55,981  |                  
|Undistributed net investment losses                                                        |  |                    | (31,940 | )                
|Undistributed net capital (losses) gains                                                   |  |                    | (2,738  | )                
|Unrealized appreciation of portfolio securities, net                                       |  |                    | 29,600  |                  
|Unrealized depreciation of portfolio securities, net - related party                       |  |                    | (1,892  | )                
|Total net assets                                                                           |  | $                  | 49,024  |                  
|Shares of common stock issued and outstanding, $.001 par value, 50,000 shares authorized   |  |                    | 13,518  |                  
|Shares of preferred stock issued and outstanding, $.001 par value, 5,000 shares authorized |  |                    | —       |                  
|Net asset value per share                                                                  |  | $                  | 3.63    |                  





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







3


Table of Contents






EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF
OPERATIONS

(Unaudited)





|                                                                                  |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|--------------------------------------------------------------------------------- |  | -------------------------------- | ------ | -------------------------------
|(in thousands, except per share amounts)                                          |  | 2019                             |        | 2018                           
|Investment income:                                                                |  |                                  |        |                                
|Interest and dividend income:                                                     |  |                                  |        |                                
|Non-affiliate investments - related party                                         |  | $                                | 81     |                                
|Non-affiliate investments                                                         |  |                                  | —      |                                
|Total interest and dividend income                                                |  |                                  | 81     |                                
|Interest from temporary cash investments                                          |  |                                  | 9      |                                
|Total investment income                                                           |  |                                  | 90     |                                
|                                                                                  |  |                                  |        |                                
|Expenses:                                                                         |  |                                  |        |                                
|Compensation expense                                                              |  |                                  | 464    |                                
|Professional fees                                                                 |  |                                  | 193    |                                
|Director fees and expenses                                                        |  |                                  | 79     |                                
|General and administrative expenses                                               |  |                                  | 139    |                                
|Mailing, printing and other expenses                                              |  |                                  | 34     |                                
|Taxes                                                                             |  |                                  | 5      |                                
|Interest expense                                                                  |  |                                  | 2      |                                
|Total expenses                                                                    |  |                                  | 916    |                                
|                                                                                  |  |                                  |        |                                
|                                                                                  |  |                                  |        |                                
|Net investment loss                                                               |  |                                  | (826   | )                              
|                                                                                  |  |                                  |        |                                
|Net realized (loss) gain:                                                         |  |                                  |        |                                
|Affiliate investments                                                             |  |                                  | —      |                                
|Temporary cash investments                                                        |  |                                  | 10     |                                
|Net realized (loss) gain                                                          |  |                                  | 10     |                                
|                                                                                  |  |                                  |        |                                
|Net unrealized appreciation of portfolio securities:                              |  |                                  |        |                                
|End of period                                                                     |  |                                  | 29,600 |                                
|Beginning of period                                                               |  |                                  | 27,600 |                                
|Net change in net unrealized appreciation of portfolio securities                 |  |                                  | 2,000  |                                
|                                                                                  |  |                                  |        |                                
|Net unrealized depreciation of portfolio securities - related party:              |  |                                  |        |                                
|End of period                                                                     |  |                                  | (1,892 | )                              
|Beginning of period                                                               |  |                                  | (1,719 | )                              
|Net change in net unrealized depreciation of portfolio securities - related party |  |                                  | (173   | )                              
|                                                                                  |  |                                  |        |                                
|Net increase in net assets resulting from operations                              |  | $                                | 1,011  |                                
|                                                                                  |  |                                  |        |                                
|Net increase in net assets resulting from operations per share:                   |  |                                  |        |                                
|Basic and diluted                                                                 |  | $                                | 0.07   |                                
|Weighted average shares outstanding:                                              |  |                                  |        |                                
|Basic and diluted                                                                 |  |                                  | 13,518 |                                







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 |    | Undistributed Net Investment Losses |  | Undistributed Net Capital (Losses) Gains |        | Unrealized Appreciation of Portfolio Securities, net |  | Unrealized Depreciation of Portfolio Securities - Related Party
|Balances at January 1, 2018                                     |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,304 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Share-based incentive compensation                              |  |                  | —      |           |  |                                | —  |                                     |  |                                          | 197    |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Net (decrease) increase in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                                     |  |                                          | —      |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at March 31, 2018                                      |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,501 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Share-based incentive compensation                              |  |                  | —      |           |  |                                | —  |                                     |  |                                          | —      |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Net increase (decrease) in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                                     |  |                                          | 79     |                                                      |  |                                                                
|`                                                               |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at June 30, 2018                                       |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,580 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Share-based incentive compensation                              |  |                  | —      |           |  |                                | —  |                                     |  |                                          | 81     |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Net increase (decrease) in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                                     |  |                                          | —      |                                                      |  |                                                                
|`                                                               |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at September 30, 2018                                  |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,661 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at January 1, 2019                                     |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,741 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Share-based incentive compensation                              |  |                  | —      |           |  |                                | —  |                                     |  |                                          | 80     |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Net increase (decrease) in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                                     |  |                                          | —      |                                                      |  |                                                                
|`                                                               |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at March 31, 2019                                      |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,821 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Share-based incentive compensation                              |  |                  | —      |           |  |                                | —  |                                     |  |                                          | 80     |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Net increase (decrease) in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                                     |  |                                          | —      |                                                      |  |                                                                
|`                                                               |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at June 30, 2019                                       |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,901 |                                                      |  | $                                                              
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Share-based incentive compensation                              |  |                  | —      |           |  |                                | —  |                                     |  |                                          | 80     |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Net increase (decrease) in net assets resulting from operations |  |                  | —      |           |  |                                | —  |                                     |  |                                          | —      |                                                      |  |                                                                
|                                                                |  |                  |        |           |  |                                |    |                                     |  |                                          |        |                                                      |  |                                                                
|Balances at September 30, 2019                                  |  |                  | 13,518 |           |  | $                              | 13 |                                     |  | $                                        | 55,981 |                                                      |  | $                                                              







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





5


Table of Contents






EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF CASH
FLOWS

(Unaudited)





|                                                                                                                        |  |                                
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------
|                                                                                                                        |  | Nine Months Ended September 30,
|(in thousands)                                                                                                          |  | 2019                           
|Reconciliation of increase in net assets resulting from operations to net cash                                          |  |                                
|used in operating activities:                                                                                           |  |                                
|Net increase in net assets resulting from operations                                                                    |  | $                              
|Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |  |                                
|Net realized loss (gain)                                                                                                |  |                                
|Net change in unrealized appreciation of portfolio securities                                                           |  |                                
|Net change in unrealized depreciation of portfolio securities - related party                                           |  |                                
|Share-based incentive compensation                                                                                      |  |                                
|Dissolution of portfolio securities                                                                                     |  |                                
|Changes in operating assets and liabilities:                                                                            |  |                                
|Purchases of temporary cash investments, net                                                                            |  |                                
|Accounts receivable from affiliates                                                                                     |  |                                
|Accrued interest and dividend receivable                                                                                |  |                                
|Other assets                                                                                                            |  |                                
|Accounts payable and accrued liabilities                                                                                |  |                                
|Accounts payable to related parties                                                                                     |  |                                
|Net cash used in 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 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                                                          |  | $                              
|Non-cash operating and financing activities:                                                                            |  |                                
|Accrued interest or dividends exchanged for portfolio securities - related party                                        |  | $                              
|                                                                                                                        |  |                                
|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)





|                                                                                    |  |                                 |        |     
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ----
|                                                                                    |  | Nine Months Ended September 30,
|                                                                                    |  | 2019                            |        | 2018
|                                                                                    |  |                                 |        |     
|Investment income                                                                   |  | $                               | 0.01   |     
|Expenses                                                                            |  |                                 | 0.21   |     
|                                                                                    |  |                                 |        |     
|Net investment loss                                                                 |  |                                 | (0.20  | )   
|                                                                                    |  |                                 |        |     
|Net realized loss                                                                   |  |                                 | (0.20  | )   
|Net change in unrealized appreciation                                               |  |                                 | 0.76   |     
|Net change in unrealized depreciation - related party                               |  |                                 | 0.03   |     
|Net increase in net assets                                                          |  |                                 | 0.39   |     
|Capital transactions:                                                               |  |                                 |        |     
|Share-based incentive compensation                                                  |  |                                 | 0.02   |     
|Dilutive effect of shares issued                                                    |  |                                 | —      |     
|Increase in net assets resulting from capital transactions                          |  |                                 | 0.02   |     
|Net increase in net assets                                                          |  |                                 | 0.41   |     
|Net assets at beginning of period                                                   |  |                                 | 3.22   |     
|Net assets at end of period, basic and diluted                                      |  | $                               | 3.63   |     
|Weighted average number of shares outstanding during period,                        |  |                                 |        |     
|in thousands                                                                        |  |                                 | 13,518 |     
|Market price per share:                                                             |  |                                 |        |     
|Beginning of period                                                                 |  | $                               | 1.96   |     
|End of period                                                                       |  | $                               | 1.61   |     
|Selected information and ratios:                                                    |  |                                 |        |     
|Ratio of expenses to average net assets                                             |  |                                 | 6.07   | %   
|Ratio of net investment loss to average net assets                                  |  |                                 | (5.65  | %)  
|Ratio of net increase in net assets resulting from operations to average net assets |  |                                 | 11.43  | %   
|Total return on market price (1)                                                    |  |                                 | (17.86 | %)  





| | (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

SEPTEMBER 30, 2019

(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 (3):                                                             |                                |                 |                                        |        |           |        |            |   |         
|Equus Energy, LLC
                                                              Houston, TX           | Energy                         | December 2011   | Member interest (100%)                 |        |           | $      | 7,050      | $ | 10,500  
|                                                                                                      |                                |                 |                                        |        |           |        |            |   |         
|Total Control Investments: Majority-owned (represents 16.2% of total investments at fair value)       |                                |                 | $                                      | 7,050  | $         | 10,500
|Affiliate Investments (4):                                                                            |                                |                 |                                        |        |           |        |            |   |         
|PalletOne, Inc.
                                                                 Bartow, FL           | Shipping products and services | October 2001    | 350,000 shares of common stock (18.7%) |        |           | $      | 350        | $ | 26,500  
|Total Affiliate Investments (represents 34.1% of total investments at fair value)                     |                                |                 | $                                      | 350    | $         | 26,500
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                        |        |           |       
|MVC Capital, Inc.
                                    Purchase, NY                                    | Financial services             | May 2014        | 553,557 shares of common stock (1.7%)  |        |           | $      | 6,819      | $ | 4,927   
|Total Non-Affiliate Investments - Related Party (represents 7.1% of total investments at fair value)  |                                |                 | $                                      | 6,819  |           | 4,927 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                        |        |           |       
|5TH Element Tracking, LLC
                                                                 Boston, MA | Business products and services | January 2015    | 14% promissory note due 5/18 (2)       | $      | 977       | $      | 977        | $ | 977     
|Total Non-Affiliate Investments (represents 1.4% of total investments at fair value)                  |                                |                 | $                                      | 977    | $         | 977   
|Total Investment in Portfolio Securities                                                              |                                |                 |                                        |        |           | $      | 15,196     | $ | 42,904  
|Temporary Cash Investments                                                                            |                                |                 |                                        |        |           |        |            |   |         
|U.S. Treasury Bill                                                                                    | Government                     | September 2019  | UST 0% 10/19                           | $      | 26,991    | $      | 26,991     | $ | 26,991  
|Total Temporary Cash Investments (represents 38.6% of total investments at fair value)                |                                |                 | $                                      | 26,991 | $         | 26,991
|Total Investments                                                                                     |                                |                 |                                        |        |           | $      | 42,187     | $ | 69,895  









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

| | (2) | Non-income-producing. See notes 5 and 9 to the financial statements.
| | --- | --------------------------------------------------------------------

| | (3) | 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Affiliate investments are generally defined under the 1940 Act as companies in which we own at least 5% but not more
                                                                                                     than 25% voting securities of the company.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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







8


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

SEPTEMBER 30, 2019

(Unaudited)



Except
for our holding of shares of MVC Capital, Inc. (“MVC”), 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”) regulated pursuant to the Investment Company Act of 1940 (“1940 Act”), we may
invest up to 30% of our assets in non-qualifying portfolio investments, as permitted by 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 September 30, 2019, we held
88.5% of our assets at fair value in securities of portfolio companies that constituted qualifying investments under the 1940 Act.
As of September 30, 2019, except for our shares of MVC, all of our investments are in enterprises that are considered eligible
portfolio companies under the 1940 Act. We provide significant managerial assistance to portfolio companies that comprise 86.2%
of the total value of the investments in portfolio securities as of September 30, 2019.



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 issuer. The value of one segment called “Shipping products
and services” includes one portfolio company and was 54.1% of our net asset value, 31.8% of our total assets and 61.8% of
our investments in portfolio company securities (at fair value) as of September 30, 2019. The value of one segment called “Energy”
includes one portfolio company and was 21.4% of our net asset value, 13.8% of our total assets and 24.5% of our investments in
portfolio company securities (at fair value) as of September 30, 2019. 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 September 30, 2019 (in thousands):





|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as Percentage of Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | --------------------------------------
|                                      |  |      |        |            |  |                                       
|Common stock                          |  | $    | 7,169  |            |  | $                                     
|Limited liability company investments |  |      | 7,050  |            |  |                                       
|Secured and subordinated debt         |  |      | 977    |            |  |                                       
|                                      |  |      |        |            |  |                                       
|Total                                 |  | $    | 15,196 |            |  | $                                     









The following is a summary by industry of the Fund’s
investments in portfolio securities as of September 30, 2019 (in thousands):





|Industry                       |  | Fair Value |        | Fair Value as Percentage of Net Assets
|------------------------------ |  | ---------- | ------ | --------------------------------------
|Shipping products and services |  |            | 26,500 |                                       
|Energy                         |  |            | 10,500 |                                       
|Financial services             |  |            | 4,927  |                                       
|Business products and services |  |            | 977    |                                       
|Total                          |  | $          | 42,904 |                                       







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





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EQUUS
TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2018

(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 (3):                                                             |                                |                 |                                        |        |           |        |            |   |         
|Equus Energy, LLC
                                 Houston, TX                                        | Energy                         | December 2011   | Member interest (100%)                 |        |           | $      | 7,050      | $ | 9,000   
|Equus Media Development Company, LLC
                                 Houston, TX                     | Media                          | January 2007    | Member interest (100%)                 |        |           |        | 3,000      |   | 210     
|Total Control Investments: Majority-owned (represents 14.9% of total investments at fair value)       |                                |                 | $                                      | 10,050 | $         | 9,210 
|Affiliate Investments (4):                                                                            |                                |                 |                                        |        |           |        |            |   |         
|PalletOne, Inc.
                                                                 Bartow, FL           | Shipping products and services | October 2001    | 350,000 shares of common stock (18.7%) |        |           | $      | 350        | $ | 20,500  
|Total Affiliate Investments (represents 33.1% of total investments at fair value)                     |                                |                 | $                                      | 350    | $         | 20,500
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                        |        |           |       
|MVC Capital, Inc.
                                    Purchase, NY                                    | Financial services             | May 2014        | 527,138 shares of common stock (1.7%)  |        |           | $      | 6,579      | $ | 4,328   
|Total Non-Affiliate Investments - Related Party (represents 7.0% of total investments at fair value)  |                                |                 | $                                      | 6,579  | $         | 4,328 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                        |        |           |       
|5TH Element Tracking, LLC
                                                                 Boston, MA | Business products and services | January 2015    | 14% promissory note due 5/18 (2)       | $      | 977       | $      | 977        | $ | 977     
|Total Non-Affiliate Investments (represents 1.5% of total investments at fair value)                  |                                |                 | $                                      | 977    | $         | 977   
|Total Investment in Portfolio Securities                                                              |                                |                 |                                        |        |           | $      | 17,956     | $ | 35,015  
|Temporary Cash Investments                                                                            |                                |                 |                                        |        |           |        |            |   |         
|U.S. Treasury Bill                                                                                    | Government                     | December 2018   | UST 0% 1/19                            |        | 26,981    | $      | 26,981     | $ | 26,981  
|Total Temporary Cash Investments (represents 43.5% of total investments at fair value)                |                                |                 | $                                      | 26,981 | $         | 26,981
|Total Investments                                                                                     |                                |                 |                                        |        |           | $      | 44,937     | $ | 61,996  







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

| | (2) | Non-income-producing. See notes 5 and 9 to the financial statements.
| | --- | --------------------------------------------------------------------

| | (3) | 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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Affiliate investments are generally defined under the 1940 Act as companies in which we own at least 5% but not more
                                                                                                     than 25% voting securities of the company.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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







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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

DECEMBER 31, 2018

(in thousands, except share data)



Except
for our holding of shares of MVC, substantially 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 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 December 31, 2018,
we had invested 87.5% of our assets in securities of portfolio companies that constituted qualifying investments under the 1940
Act. As of December 31, 2018, except for our shares of MVC, all of our investments are in enterprises that are considered eligible
portfolio companies under the 1940 Act. We provide significant managerial assistance to portfolio companies that comprise 84.6%
of the total value of the investments in portfolio securities as of December 31, 2018.



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 issuer. The value of one segment called “Shipping products
and services” includes one portfolio company and was 47.1% of our net asset value, 28.9% of our total assets and 58.5% of
our investments in portfolio company securities (at fair value) as of December 31, 2018. The value of one segment called “Energy”
includes one portfolio company and was 20.7% of our net asset value, 12.7% of our total assets and 25.7% of our investments in
portfolio company securities (at fair value) as of December 31, 2018. 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 December 31, 2018 (in thousands):



|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as Percentage of
                                                                                Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | ----------------------------------------------------------------------------------------------------------------------
|Common stock                          |  | $    | 6,929  |            |  | $                                                                                                                     
|Limited liability company investments |  |      | 10,050 |            |  |                                                                                                                       
|Secured and subordinated debt         |  |      | 977    |            |  |                                                                                                                       
|Total                                 |  | $    | 17,956 |            |  | $                                                                                                                     





The following is a summary by industry of the Fund’s
investments in portfolio securities as of December 31, 2018 (in thousands):







|Industry                       |  | Fair Value |        | Fair Value as Percentage of
                                                                                Net Assets
|------------------------------ |  | ---------- | ------ | ----------------------------------------------------------------------------------------------------------------------
|Shipping products and services |  |            | 20,500 |                                                                                                                       
|Energy                         |  |            | 9,000  |                                                                                                                       
|Financial services             |  |            | 4,328  |                                                                                                                       
|Business products and services |  |            | 977    |                                                                                                                       
|Media                          |  |            | 210    |                                                                                                                       
|Total                          |  | $          | 35,015 |                                                                                                                       







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





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EQUUS TOTAL RETURN, INC.

NOTES TO CONDENSED FINANCIAL
STATEMENTS SEPTEMBER 30, 2019

(Unaudited)



| | (1) | Description of Business and Basis of Presentation
| | --- | -------------------------------------------------



Description
of Business—Equus Total Return, Inc. (“we,” “us,” “our,” “Equus” and
the “Fund”), a Delaware corporation, was formed by Equus Investments II, L.P. (the “Partnership”) on August
16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred
to the Fund in exchange for shares of common stock of the Fund. Our shares trade on the New York Stock Exchange under the symbol
‘EQS’. On August 11, 2006, our shareholders approved the change of the Fund’s investment strategy to a total
return investment objective. This 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.



So long
as we remain an investment company and not an operating company as contemplated in our Plan of Reorganization described in Note
6 below, we will attempt to maximize the return to our 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 may include debt securities including subordinate
debt, debt convertible into common or preferred stock, or debt combined with warrants and common and preferred stock. Debt and
preferred equity financing may also be used to create long-term capital appreciation through the exercise and sale of warrants
received in connection with the financing. We seek to achieve capital appreciation by making investments in equity and equity-oriented
securities issued by privately-owned companies (or 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 prudent to continue to review alternatives to refine and further clarify the current strategies.



We elected
to be treated as a BDC under the 1940 Act. We currently qualify as a regulated investment company (“RIC”) for federal
income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to
our stockholders. We have certain wholly owned taxable subsidiaries (“Taxable Subsidiaries”) each of which holds one
or more portfolio investments listed on our Schedules of Investments. The purpose of these Taxable Subsidiaries is to permit us
to hold certain income-producing investments or portfolio companies organized as limited liability companies, or LLCs, (or other
forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax
purposes must consist of investment income. Absent the Taxable Subsidiaries, a portion of the gross income of these income-producing
investments or of any LLC (or other pass-through entity) portfolio investment, as the case may be, would flow through directly
to us for the 90% test. To the extent that such income did not consist of investment income, it could jeopardize our ability to
qualify as a RIC and, therefore, cause us to incur significant federal income taxes. The income of the LLCs (or other pass-through
entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and does not flow through to us, thereby helping us
preserve our RIC status and resultant tax advantages. We do not consolidate the Taxable Subsidiaries for income tax purposes and
they may generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect
any such income tax expense on our Statements of Operations.



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 and nine months ended September 30, 2019 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, 2018, as filed with the Securities and Exchange Commission
(“SEC”).





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| | (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. We believe that our operating cash flow and cash on hand will be sufficient to meet operating requirements
and, to the extent we remain a BDC, to finance routine follow-on investments, if any from the date of this filing, through the
next twelve months.



Cash
and Cash Equivalents—As of September 30, 2019, we had cash and cash equivalents of $4.8 million. We had $42.9 million
of our net assets of $49.0 million invested in portfolio securities.



As of December
31, 2018, we had cash and cash equivalents of $7.4 million. We had $35.0 million of our net assets of $43.5 million invested in
portfolio securities



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



Restricted
Cash and Temporary Cash Investments—Asof September 30, 2019, we had $27.3
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 to maintain our pass-through tax treatment. Of this amount,
$27.0 million was invested in U.S. Treasury bills and $0.3 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 October 5, 2019 and we subsequently repaid this margin loan, plus interest.



As of December
31, 2018, we had $27.3 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, $27.0 million was
invested in U.S. Treasury bills and $0.3 million represented a required 1% brokerage margin deposit. These securities were held
by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills
were sold on January 2, 2019 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 September 30, 2019, we had no outstanding commitments
to our portfolio company investments.



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 – Plan of Reorganization below, our failure to continue to qualify as a RIC could be materially
adverse to us and our stockholders.



As of September
30, 2019, we borrowed $27.0 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 $27.3 million.



As of December
31, 2018, we borrowed $27.0 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 $27.3 million.





13


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Certain
Risks and Uncertainties—Market and economic volatility which has become endemic in the past few years 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 2019, 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. 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 – Plan of Reorganization below. We believe we have sufficient
liquidity to meet our operating requirements for the remainder of 2019 and 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 summarized 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 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.







14


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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.



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.





15


Table of Contents








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 nine months ended September 30, 2019 and the year ended December 31, 2018.



As of September30, 2019, 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  September 30, 2019                                                                                         
|------------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for Identical Assets
                                                                                (Level 1)
|Assets                                           |  |       |        |                                                                                                                                               
|Investments:                                     |  |       |        |                                                                                                                                               
|Control investments                              |  | $     | 10,500 |                                                                                                                                               
|Affiliate investments                            |  |       | 26,500 |                                                                                                                                               
|Non-affiliate investments - related party        |  |       | 4,927  |                                                                                                                                               
|Non-affiliate investments                        |  |       | 977    |                                                                                                                                               
|Total investments                                |  |       | 42,904 |                                                                                                                                               
|Temporary cash investments                       |  |       | 26,991 |                                                                                                                                               
|Total investments and temporary cash investments |  | $     | 69,895 |                                                                                                                                               
|                                                 |  |       |        |                                                                                                                                               







As of December 31, 2018, 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, 2018                                                                                               
|------------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for Identical Assets
                                                                                (Level 1)
|Assets                                           |  |       |        |                                                                                                                                               
|Investments:                                     |  |       |        |                                                                                                                                               
|Control investments                              |  | $     | 9,210  |                                                                                                                                               
|Affiliate investments                            |  |       | 20,500 |                                                                                                                                               
|Non-affiliate investments - related party        |  |       | 4,328  |                                                                                                                                               
|Non-affiliate investments                        |  |       | 977    |                                                                                                                                               
|Total investments                                |  |       | 35,015 |                                                                                                                                               
|Temporary cash investments                       |  |       | 26,981 |                                                                                                                                               
|Total investments and temporary cash investments |  | $     | 61,996 |                                                                                                                                               









16


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The following table provides a reconciliation
of fair value changes during the nine months ended September 30, 2019 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)                      |                                                                        
|Fair value as of January 1, 2019    |                                                                        
|Realized losses                     |                                                                        
|Change in unrealized appreciation   |                                                                        
|Proceeds from sales/dispositions    |                                                                        
|Fair value as of September 30, 2019 |                                                                        







The following table provides
a reconciliation of fair value changes during the nine months ended September 30, 2018 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)                      |                                                                        
|Fair value as of January 1, 2018    |                                                                        
|Change in unrealized appreciation   |                                                                        
|Fair value as of September 30, 2018 |                                                                        







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.







17


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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 September 30, 2019:





|                                      |  |            |        |                      |  |                                                                                                                                            |  | Range                                                                                           
|------------------------------------- |  | ---------- | ------ | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------
|(in thousands)                        |  | Fair Value |        | Valuation Techniques |  | Unobservable Inputs                                                                                                                        |  | Minimum                                                                                         
|Secured and subordinated debt         |  | $          | 977    |                      |  | Yield analysis                                                                                                                             |  | Discount for lack of marketability                                                              
|Common stock                          |  |            | 26,500 |                      |  | Income/Market approach                                                                                                                     |  | EBITDA Multiple/Discount for lack of marketability/Control premium                              
|Limited liability company investments |  |            | 10,500 |                      |  | Asset approach
                                                        Discounted cash flow; Guideline transaction method; Market approach |  | Recovery rate
                                                        Reserve adjustment factors
|                                      |  | $          | 37,977 |                      |  |                                                                                                                                            |  |                                                                                                 









Because
of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting
to $38.0 million and $30.7 million as of September 30, 2019 and December 31, 2018, respectively, our fair value determinations
may materially differ from the values that would have been used had a ready market existed for these securities. As of September
30, 2019 and December 31, 2018, one of our portfolio investments, consisting of 553,557 and 527,138 common shares of MVC, respectively,
was publicly listed on the NYSE.



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.



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



We classify
our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are
defined as investments in companies in which the Fund owns more than 25% of the voting securities or maintains greater than 50%
of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as those non-control investments
in companies in which we own between 5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliate Investments”
are defined as investments that are neither Control Investments nor Affiliate Investments. See also Note 4 for discussion of related
party investment transactions.



As of September
30, 2019, we had no outstanding commitments to our portfolio company investments; however, under certain circumstances, we may
be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make follow-on
investments, the portfolio company in need of the investment may be negatively impacted. Also, our equity interest in the estimated
fair value of the portfolio company could be reduced. Follow-on investments may include capital infusions which are expenditures
made directly to the portfolio company to ensure that operations are completed, thereby allowing the portfolio company to generate
cash flows to service their debt.



Interest
Income Recognition—We record interest income, adjusted for amortization of premium and accretion of discount, on an accrual
basis to the extent that we expect to collect such amounts. We accrete or amortize discounts and premiums on securities purchased
over the life of the respective security using the effective yield method. The amortized cost of investments represents the original
cost adjusted for the accretion of discount and/or amortization of premium on debt securities. We stop accruing interest on investments
when we determine that interest is no longer collectible. We may also impair the accrued interest when we determine that all or
a portion of the current accrual is uncollectible. If we receive any cash after determining that interest is no longer collectible,
we treat such cash as payment on the principal balance until the entire principal balance has been repaid, before we recognize
any additional interest income. We will write off uncollectible interest upon the occurrence of a definitive event such as a sale,
bankruptcy, or reorganization of the relevant portfolio interest.



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





18


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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)—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.



Share-Based
Compensation—We account for our share-based compensation using the fair value method, as prescribed by ASC 718, Compensation—Stock
Compensation. 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 and account for forfeitures as they occur.



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.



Cash
Flows—For purposes of the Statements of Cash Flows, we consider all highly liquid temporary cash investments purchased
with an original maturity of three months or less to be cash equivalents. We include our investing activities within cash flows
from operations.



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. Therefore, no provision for federal income taxes is recorded in the financial statements. We borrow
money from time to time to maintain our tax status under the Internal Revenue Code as a RIC. See Note 1 for discussion of Taxable
Subsidiaries and see Note 2 for further discussion of the Fund’s RIC borrowings.



All corporations
organized in the State of Delaware are required to file an Annual Report and to pay a franchise tax. As a result, we paid Delaware
Franchise tax in the amount of $0.02 million for the year ended December 31, 2018.



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 nine months ended September 30, 2019, respectively,
and we paid $3 thousand in state income tax for the year ended December 31, 2018.



Accounting Standards
Recently Adopted— In February 2016, the FASB issued ASU 2016-02, Leases,which requires lessees to recognize on
the balance sheet a right of use asset, representing its right to use the underlying asset for the lease term, and a lease liability
for all leases with terms greater than 12 months and the use of practical expedient for leases less than 12 months. The guidance
also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising
from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional
practical expedients that entities may elect to apply. The new guidance was adopted effective January 1, 2019. The adoption of
ASU 2016-02 did not have an impact on our financial statements as we currently have no operating leases as our principal offices
are under a month-to-month lease arrangement for annual periods beginning after December 15, 2018, and interim periods therein.





19


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In August 2018, the SEC
adopted rules (the "SEC Release") that require disclosure of changes in net assets within a registrant's Form 10Q filing
on a quarter-to-date and year-to-date basis for both the current year and prior year comparative periods. The Company adopted the
new requirement to present changes in net assets in interim financial statements within Form 10Q filings beginning January 1, 2019.
The compliance date for the SEC Release was for all filings, as applicable, on or after November 5, 2018. The adoption of this
rule did not have a material impact on the Company’s condensed consolidated financial statements.



Accounting Standards Not Yet Adopted—
In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326)—Measurement of Credit
Losses on Financial Instruments, which amends the financial instruments impairment guidance so that an entity is required
to measure expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable
forecasts. As such, an entity will use forward-looking information to estimate credit losses. ASU 2016-13 also amends the guidance
in FASB ASC 325 - 40, Investments Other, Beneficial Interests in Securitized Financial Assets, related
to the subsequent measurement of accretable yield recognized as interest income over the life of a beneficial interest in securitized
financial assets under the effective yield method. We believe that the impact of the adoption of this standard will not have a
material impact on our financial statements as we do not have any financial instruments that are subject to this standard.



In August 2018, the FASB
issued ASU 2018-13, Fair Value Measurement (Topic 820), which is intended to improve fair value disclosure requirements
by removing disclosures that are not cost-beneficial, clarifying disclosures’ specific requirements, and adding relevant
disclosure requirements. The amendments take effect for all organizations for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted. We believe that the impact of the adoption of this standard
will not have a material impact on our financial statements. .





| | (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.



We may
also pay other one-time or recurring fees to members of our Board of Directors in special circumstances. 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 services. For services provided to the Fund, we paid Kenneth I. Denos,
P.C., a professional corporation owned by Kenneth I. Denos, a director of the Fund, $0.07
million during each of the threemonths ended September 30, 2019 and 2018, respectively,
and$0.3 million during each on the nine months ended September 30, 2019 and 2018,
respectively.





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| | (5) | Portfolio Securities
| | --- | --------------------



During
the nine months ended September 30, 2019, we received dividends in the form of additional shares of $0.2 million relating to our
shareholding in MVC.



Also during
the nine months ended September 30, 2019, we dissolved Equus Media Development Company, LLC (“EMDC”), a wholly-owned
subsidiary of the Fund and transferred EMDC’s assets, consisting of approximately $211,000 in cash and various creative entertainment
properties, to the Fund.



During
the nine months ended September 30, 2019, we recorded a net change in unrealized appreciation of $10.7 million, to a net unrealized
appreciation of $27.7 million. Such change in unrealized appreciation resulted primarily from the following changes:



| | (i) | Increase in the fair value of our shareholding in MVC of $0.4 million due to an increase in
the share price of MVC and the receipt of dividend payments in the form of additional shares of MVC during the period;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $6.0 million due to improved
operating performance;
| | ---- | --------------------------------------------------------------------------------------------------------------------



| | (iii) | Transfer of unrealized depreciation to realized loss of our holdings in EMDC of $2.8 million
in connection with the dissolution of EMDC and the transfer of its assets to the Fund; and
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Increase in the fair value
                                         of our holdings in Equus Energy, LLC of $1.5 million, principally due to increases in
                                         mineral acreage prices proximate to the company’s leasehold interests and an increase
                                         in the short- and long-term prices for crude oil
                                         during 2019.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During
the nine months ended September 30, 2018, we received dividends in the form of additional shares of $0.2 million relating to our
shareholding in MVC.



During
the nine months ended September 30, 2018, we recorded a net change in unrealized appreciation of $5.9 million, to a net unrealized
appreciation of $19.3 million. Such change in unrealized appreciation resulted primarily from the following changes:



| | (i) | Decrease in the fair value of our shareholding in MVC of $0.5 million due to a decrease in the
share price of MVC, offset by the receipt of dividend payments in the form of additional shares of MVC during the period;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $3.8 million due to improved
operating performance, as well as promising acquisition and growth prospects; and
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Increase in the fair value of our holdings in Equus Energy, LLC of $2.5 million, principally due
to increases in mineral acreage prices proximate to the company’s leasehold interests and a moderate increase in the short-
and long-term prices for crude oil and natural gas.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









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| | (6) | Plan of Reorganization
| | --- | ----------------------



Plan
of Reorganization and Share Exchange with MVC Capital—On May 14, 2014, we announced that the Fund intended to effect
a reorganization pursuant to Section 2(a)(33) of the 1940 Act (hereinafter, the “Plan of Reorganization”). As a first
step to consummating the Plan of Reorganization, we sold to MVC Capital, Inc. (“MVC”) 2,112,000 newly-issued shares
of the Fund’s common stock in exchange for 395,839 shares of MVC (such transaction is hereinafter referred to as the “Share
Exchange”). MVC is a BDCtraded on the NYSE that provides long-term debt and
equity investment capital to fund growth, acquisitions and recapitalizations of companies in a variety of industries. The Share
Exchange was calculated based on the Fund’s and MVC’s respective net asset value per share. At the time of the Share
Exchange, the number of MVC shares received by Equus represented approximately 1.73% of MVC’s total outstanding shares of
common stock.



Pursuant
to the terms of a Share Exchange Agreement, dated May 12, 2014, entered into by Equus and MVC which memorialized the Share Exchange,
we intend to finalize the Plan of Reorganization by pursuing a merger or consolidation with MVC or an operating company, which
operating company may be a subsidiary or portfolio company of MVC. Absent Equus merging or consolidating with/into MVC or a subsidiary
thereof, our current intention is for Equus to (i) terminate its election to be classified as a BDC under the 1940 Act, and (ii)
be restructured as a publicly-traded operating company focused on the energy, natural resources, technology, and/or financial services
sector. While we are presently evaluating various opportunities that could enable us to complete our Plan of Reorganization, we
cannot assure you that we will be able to do so within any particular time period or at all. Moreover, we cannot assure you that
the terms of any such transaction that would embody the transformation of Equus into an operating
companywould be acceptable to us.



Authorization
to Withdraw BDC Election—On January 21, 2019, 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, which was
given as a consequence of our Plan of Reorganization, expired on July 31, 2019, we expect to receive an additional authorization
from our stockholders in the future. 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 “Consolidation”, as such
term is defined in our Plan of Reorganization. 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.



| | (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 September
30, 2019, 280,000 shares of restricted stock which were granted pursuant to the Incentive Plan, remained unvested. 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 threemonths ended September 30, 2019 and
2018, respectively and$0.2 million and $0.4 million for the nine months ended September
30, 2019 and 2018, respectively, in connection with these awards.





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



Equus Energy
was formed in November 2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector, with
particular emphasis on income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus
Energy. On December 27, 2012, we invested an additional $6.8 million in Equus Energy for the purpose of additional working capital
and to fund the purchase of $6.6 million in working interests, which presently comprise 141 producing and non-producing oil and
gas wells. The working interests include associated development rights of approximately 21,520 acres situated on 11 separate properties
in Texas and Oklahoma. The working interests range from a de minimus amount to 50% of the leasehold that includes these wells.



The wells
are operated by a number of experienced operators, including Chevron USA, Inc., which has operating responsibility for all of Equus
Energy’s 40 well interests located in the Conger Field, a productive oil and gas field on the edge of the Permian Basin that
has experienced successful gas and hydrocarbon extraction in multiple formations. Equus Energy, which holds a 50% working interest
in each of these Conger Field wells, is working with Chevron in a recompletion program of existing Conger Field wells to the Wolfcamp
formation, a zone containing oil as well as gas and natural gas liquids. Part of Equus Energy’s acreage rights described
above also includes a 50% working interest in possible new drilling to the base of the Canyon formation 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.



Revenue
and Income—During the three months ended September 30, 2019, Equus Energy’s revenue, operating revenue ($0.12
million) less direct operating expenses ($0.2 million), and net loss were $0.1 million,($0.08) million, and ($0.2) million,
respectively, as compared to revenue, operating revenue ($0.28 million) less direct operating expenses ($0.22 million), and net loss
which $0.3 million, $0.06 million, and ($0.09) million, respectively, for the three months ended September 30, 2018.



Capital
Expenditures—During the three months ended September30, 2019 and September
30, 2018, Equus Energy’s investment, respectively, in capital expenditures for small repairs and improvements was not significant.
The operators of the various working interest communicated their intent to wait until 2020, commensurate with an anticipated gradual
rise in the price of crude oil, to commence new drilling and recompletion projects.



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 using a discounted cash flow analysis based 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).







23


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Below is summarized consolidated
financial information for Equus Energy as of September 30, 2019 and December 31, 2018 and for the nine months September 30, 2019
and 2018, respectively (in thousands):



EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Balance
Sheets







|                                                           |  | September 30, |        | December 31,
|---------------------------------------------------------- |  | ------------- | ------ | ------------
|                                                           |  | 2019          |        | 2018        
|                                                           |  |               |        |             
|                                                           |  |               |        |             
|Assets                                                     |  |               |        |             
|Current assets:                                            |  |               |        |             
|Cash and cash equivalents                                  |  | $             | 745    |             
|Accounts receivable                                        |  |               | 70     |             
|Other current assets                                       |  |               | 44     |             
|Total current assets                                       |  |               | 859    |             
|Oil and gas properties                                     |  |               | 8,011  |             
|Less: accumulated depletion, depreciation and amortization |  |               | (7,937 | )           
|Net oil and gas properties                                 |  |               | 74     |             
|Total assets                                               |  | $933          |        |             
|                                                           |  |               |        |             
|Liabilities and member's equity                            |  |               |        |             
|Current liabilities:                                       |  |               |        |             
|Accounts payable and other                                 |  | $             | 172    |             
|Due to affiliate                                           |  |               | 561    |             
|Total current liabilities                                  |  |               | 733    |             
|Asset retirement obligations                               |  |               | 199    |             
|Total liabilities                                          |  | 932           |        |             
|                                                           |  |               |        |             
|Total member's equity                                      |  |               | 1      |             
|                                                           |  |               |        |             
|Total liabilities and member's equity                      |  | $933          |        |             











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. The revenue and direct operating
expenses presented herein relate only to the interests in the producing oil and natural gas properties and do not represent all
of the oil and natural gas operations of all of these properties. Direct operating expenses include lease operating expenses and
production and other related taxes. General and administrative expenses, depletion, depreciation and amortization (“DD&A”)
of oil and gas properties and federal and state taxes have been excluded from direct operating expenses in the accompanying statements
of operations because the allocation of certain expenses would be arbitrary and would not be indicative of what such costs would
have been had Equus Energy been operated as a stand-alone entity. The statements of operations presented are not indicative of
the financial condition or results of operations of Equus Energy on a go forward basis due to changes in the business and the omission
of various operating expenses.







24


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EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements
of Operations







|                                                    |  | Three Months Ended September 30, |      | Nine Months Ended September 30, | 
|--------------------------------------------------- |  | -------------------------------- | ---- | ------------------------------- | 
|                                                    |  | 2019                             |      | 2018                            | 
|                                                    |  |                                  |      |                                 | 
|                                                    |  |                                  |      |                                 | 
|Operating revenue                                   |  | $                                | 120  |                                 | 
|Operating expenses                                  |  |                                  |      |                                 | 
|Direct operating expenses                           |  |                                  | 200  |                                 | 
|General and administrative                          |  |                                  | 38   |                                 | 
|Depletion, depreciation, amortization and accretion |  |                                  | 84   |                                 | 
|Total operating expenses                            |  |                                  | 322  |                                 | 
|Operating loss before income tax expense            |  |                                  | (202 | )                               | 
|Income tax benefit (expense)                        |  |                                  | —    |                                 | 
|Net loss                                            |  | $                                | (202 | )                               | 







EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements
of Cash Flows





|                                                     |  | Nine Months Ended September 30,
|---------------------------------------------------- |  | -------------------------------
|                                                     |  | 2019                           
|                                                     |  |                                
|Cash flows from operating activities:                |  |                                
|Net loss                                             |  |                                
|Adjustments to reconcile net loss to                 |  |                                
|net cash (used in) provided by operating activities: |  |                                
|Depletion, depreciation, amortization and accretion  |  |                                
|Changes in operating assets and liabilities:         |  |                                
|Accounts receivable                                  |  |                                
|Prepaid expenses and other current assets            |  |                                
|Accounts payable and other                           |  |                                
|Due to affiliate                                     |  |                                
|Net cash (used in) provided by operating activities  |  |                                
|                                                     |  |                                
|Cash flows from investing activities:                |  |                                
|Investment in oil & gas properties                   |  |                                
|Proceeds from sale of oil & gas properties           |  |                                
|Net cash (used in) provided by investing activities  |  |                                
|Net (decrease) increase 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—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.



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 $0.08 million and $0.1 million for the three months
ended September 30, 2019 and 2018, respectively and $0.2 million and $0.3 million for the nine months ended September 30, 2019
and September 30, 2018, 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 September 30, 2019, 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 did not recognize an impairment loss on its oil and gas properties during the three
and ninemonths ended September 30, 2019 and September
30,2018, 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—Revenue recognized for oil and natural gas sales under the sales method of accounting. Under this method,
revenue is recognized on production as it is taken and delivered to its purchasers. The volumes sold may be more or less than the
volumes entitled to, based on the owner’s net leasehold interest. These differences result from production imbalances, which
are not significant, and are reflected as adjustments to proven reserves and future cash flows in the unaudited consolidated financial
information included herein.



Depreciation,
Depletion and Amortization—The Company employs the “Units of Production” method in calculating depletion
of its proved oil and gas properties, wherein capitalized costs, as adjusted for future development costs and asset retirement
obligations, are amortized over the total estimated proved reserves.



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 and nine month periods ending September 30, 2019 and 2018.



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.



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



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



On October
5, 2019, we sold $27.0 million of U.S. Treasury Bills we acquired on margin in September 2019 and used the proceeds to repay the
margin loan.



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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, 2018, 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; and
| | - | ---------------------------------------------

| | • | market conditions and our ability to access additional capital, if deemed necessary.
| | - | ------------------------------------------------------------------------------------



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, 2018. 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.







27


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We
attempt to maximize the return to stockholders in the form of current investment income and long-term capital gains by investing
in the debt and equity securities of companies with a total enterprise value of between $5.0 million and $75.0 million, although
we may engage in transactions with smaller or larger investee companies from time to time. We seek to invest primarily in companies
pursuing growth either through acquisition or organically, leveraged buyouts, management buyouts and recapitalizations of existing
businesses or special situations. Our income-producing investments consist principally of debt securities including subordinate
debt, debt convertible into common or preferred stock, or debt combined with warrants and common and preferred stock. Debt and
preferred equity financing may also be used to create long- term capital appreciation through the exercise and sale of warrants
received in connection with the financing. We seek to achieve capital appreciation by making investments in equity and equity-oriented
securities issued by privately-owned companies (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 certain wholly owned
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 investments. We reflect any such income tax expense on our Statements of Operations.



Plan of Reorganization



Plan
of Reorganization and Share Exchange with MVC Capital—On May 14, 2014, we announced that the Fund intended to effect
a reorganization pursuant to Section 2(a)(33) of the 1940 Act (hereinafter, the “Plan of Reorganization”). As a first
step to consummating the Plan of Reorganization, we sold to MVC Capital, Inc. (“MVC”) 2,112,000 newly-issued shares
of the Fund’s common stock in exchange for 395,839 shares of MVC (such transaction is hereinafter referred to as the “Share
Exchange”). MVC is a BDCtraded on the NYSE that provides long-term debt and
equity investment capital to fund growth, acquisitions and recapitalizations of companies in a variety of industries. The Share
Exchange was calculated based on the Fund’s and MVC’s respective net asset value per share. At the time of the Share
Exchange, the number of MVC shares received by Equus represented approximately 1.73% of MVC’s total outstanding shares of
common stock.



Pursuant
to the terms of a Share Exchange Agreement, dated May 12, 2014, entered into by Equus and MVC which memorialized the Share Exchange,
we intend to finalize the Plan of Reorganization by pursuing a merger or consolidation with MVC or an operating company, which
operating company may be a subsidiary or portfolio company of MVC. Absent Equus merging or consolidating with/into MVC or a subsidiary
thereof, our current intention is for Equus to (i) terminate its election to be classified as a BDC under the 1940 Act, and (ii)
be restructured as a publicly-traded operating company focused on the energy, natural resources, technology, and/or financial services
sector. While we are presently evaluating various opportunities that could enable us to complete our Plan of Reorganization, we
cannot assure you that we will be able to do so within any particular time period or at all. Moreover, we cannot assure you that
the terms of any such transaction that would embody a “Consolidation”, as such term is defined in our Plan of Reorganization,
would be acceptable to us.





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Authorization
to Withdraw BDC Election—On January 21, 2019, 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, which was
given as a consequence of our Plan of Reorganization, expired on July 31, 2019, we expect to receive an additional authorization
from our stockholders in the future. 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 “Consolidation”, as such
term is defined in our Plan of Reorganization. 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.



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 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. We recorded compensation expense of $0.08 million for the threemonths ended September 30, 2019 and 2018, respectively, and$0.2 million and $0.4
million for the nine months ended September 30, 2019 and 2018, respectively, 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, 2018.



Current Market Conditions



The U.S.
economy expanded at an annualized rate of 1.9% during the third
quarter of 2019, following growth of 2.0% and3.1% during the first and second quarters,
respectively, of 2019 and an increase of 2.9% for all of 2018. The decrease in GDP during the third quarter of 2019 was principally
due to decreased exports, higher inventories, lower fixed residential and nonresidential investment, and increased imports. Despite
rising trade tensions, the Conference Board Economic Forecast projects GDP growth in the fourth
quarter of2019 to be 1.9% and thereafter 2.0% for 2020. The U.S. unemployment
rate is near a 50-year low, continuing to present a tight labor market for employers, but weakening business investment and slightly
diminished consumer spending suggest a weaker long-term outlook for the economy. Meanwhile, housing starts and building permits
slowed during 2018 and trended downward during the first six months of 2019 before increasing in the third quarter of 2019, which
has contrasted with strong growth in existing home sales during the same period. (Sources: U.S. Dept. of Commerce Bureau of
Economic Analysis, Bureau of Labor Statistics, Conference Board Leading Economic Index).



Merger
and acquisition activity was strong in 2018, with $3.5 trillion in worldwide transactions consummated during the year.
Although such activity slowed during the first quarter of 2019, it accelerated during the second quarter of 2019, resulting
in approximately $2 trillion in global transactions announced during the six-month period with another $2.4 trillion in
undeployed capital, $732 billion of which is held by private equity firms. In the United States, merger and acquisition
activity was up 19% in the first six months of 2019 as compared to the six months ended June 30, 2018. Private equity funds
raised almost $52 billion during the first half of 2019, down 19% from the comparable period in 2018, and
did so in an increasingly smaller number of vehicles, resulting in larger fund sizes overall. Total investments during the
quarter were approximately $159 billion, a decreaseof 4%
from the second quarter of 2018. Data for the thirdquarter
of 2019 have not yet been released but larger amounts of capital have pushed median valuation multiples to11x
EBITDA during the first six  months of 2019, constraining investment yields (Sources: Institutional
Investor;The New York Times; The Wall Street Journal, PitchBook).





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During the nine months ended September
30, 2019, our net asset value increased from $3.22 per share to $3.63 per share, an increase of 12.7%. As of September 30, 2019,
our common stock is trading at a 55.6% discount to our net asset value as compared to 39.1% as of December 31, 2018.



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.



Results of Operations



Investment Income and Expense



Net investment
loss was $0.8 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and unchanged
at$2.6 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.



Investment
income was $0.1 million for the three months ended September 30, 2019 and 2018, respectively and $0.2 million and $0.3 million
for the nine months ended September 30, 2019 and 2018. The decrease is due to the decline of interest-bearing investments. Total
expense was $0.9 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively, and $2.8 million
and $3.0 million for the nine months ended September 30, 2019. This decrease was mainly due to the decline in professional fees.



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Realized Gains and Losses on Sales of Portfolio
Securities



During the nine months ended
September 30, 2019, we realized a loss of $2.8 million from the dissolution and liquidation of Equus Media Development Company
LLC (“EMDC”).



During the nine months ended September 30, 2018, we
realized a gain of $4.0 thousand from the sale of temporary cash investments.



Changes in Unrealized Appreciation/Depreciation of
Portfolio Securities



During the nine months ended
September 30, 2019, we recorded a net change in unrealized appreciation of $10.7 million, to a net unrealized appreciation of $27.7
million. Such change in unrealized appreciation resulted primarily from the following changes:



| | (i) | Increase in the fair value of our shareholding in MVC of $0.4 million due to an increase in
the share price of MVC and the receipt of dividend payments in the form of additional shares of MVC during the period;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $6.0 million due to improved
operating performance;
| | ---- | --------------------------------------------------------------------------------------------------------------------



| | (iii) | Transfer of unrealized depreciation to realized loss of our holdings in EMDC of $2.8 million
in connection with the liquidation and dissolution of EMDC; and
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Increase in the fair value
                                         of our holdings in Equus Energy, LLC of $1.5 million, principally due to increases in
                                         mineral acreage prices proximate to the company’s leasehold interests and an
                                         increase in the short- and long-term prices for crude oil during 2019.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During
the nine months ended September 30, 2018, we recorded a net change in unrealized appreciation of $5.9 million, to a net unrealized
appreciation of $19.3 million. Such change in unrealized appreciation resulted primarily from the following changes:



| | (i) | Decrease in the fair value of our shareholding in MVC of $0.5 million due to a decrease in the
share price of MVC, offset by the receipt of dividend payments in the form of additional shares of MVC during the period;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $3.8 million due to improved
operating performance; and
| | ---- | ------------------------------------------------------------------------------------------------------------------------



| | (iii) | Increase in the fair value of our holdings in Equus Energy, LLC of $2.5 million, principally
due to increases in mineral acreage prices proximate to the company’s leasehold interests and a moderate increase in the
short- and long-term prices for crude oil and natural gas.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



Portfolio Securities



During
the nine months ended September 30, 2019, we received dividends in the form of additional shares of MVC in the amount of
$0.2 million.



Also during the nine months
ended September 30, 2019, we dissolved EMDC, a wholly-owned subsidiary of the Fund and transferred EMDC’s assets, consisting
of approximately $211,000 in cash and various creative entertainment properties, to the Fund.



During the nine months ended
September 30, 2018, we received dividends in the form of additional shares of MVC in the amount of $0.2 million.



During the nine months ended
September 30, 2018, our investment in 5th Element Tracking, LLC, consisting of a promissory note in the face amount of $0.9 million,
became due. On August 13, 2018, we issued a demand for payment of all outstanding principal and accrued and outstanding interest
on the note, and on November 8, 2018, we filed a complaint against the guarantor of the note to enforce collection. We have assessed
the fair value of our holdings and determined that the event of default has not indicated a decrease in fair value below the carrying
cost of the investment, based on the security interests we hold and the relative timing of collection.





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Subsequent Events



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



On October
5, 2019, we sold $27.0 million of U.S. Treasury Bills we acquired on margin in September
2019 and used the proceeds to repay the margin loan.



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 September 30, 2019. 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 September 30, 2019, 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



Shareholder
Complaint—On November 16, 2016, Samuel Zalmanoff filed a lawsuit against the Fund and members of the Board of Directors in
the Court of Chancery in the State of Delaware. The lawsuit was filed in connection with the Fund’s 2016 Equity Incentive
Plan (“Incentive Plan”) which was adopted by the Board of Directors on April 15, 2016, approved by the Equus shareholders
on June 13, 2016, and approved, with certain standard exceptions, by the Securities and Exchange Commission on January 10, 2017.
Mr. Zalmanoff’s complaint, which purports to be on behalf of all non-affiliate Equus shareholders entitled to vote for the
Incentive Plan, purports to allege a breach by the Board of Directors of its fiduciary duties of disclosure in connection with
the Incentive Plan, and seeks an order from the court: (i) enjoining implementation of the Incentive Plan, (ii) requiring the Fund
to revise its disclosures relating to the Incentive Plan, and (iii) for an award of costs, attorneys’ fees, and expenses.
We believe that this lawsuit, and the allegations included therein, are without merit. On September 22, 2017, we filed a motion
for summary judgment regarding this action, which was granted by the Chancery Court on November 13, 2018. Mr. Zalmanoff appealed
the Chancery Court ruling to the Delaware Supreme Court. On May 16, 2019, the Delaware Supreme Court affirmed the Chancery Court
decision and terminated the proceedings.



From time
to time, the Fund is also a party to certain proceedings incidental to the normal course of our business including the enforcement
of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be
predicted with certainty, we do not expect that these proceedings will have a material effect upon the Fund’s financial condition
or results of operations.



Item 1A. Risk Factors



In connection
with our efforts to convert Equus into an operating company in furtherance of our Plan of Reorganization, 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 would 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 Commission.



Readers
should carefully consider these risks and all other information contained in our annual report on Form 10-K for the year ended
December 31, 2018, including the Fund’s financial statements and the related notes thereto. Although there have been no changes
to the risk factors facing the Fund since the filing of our Form 10-K, the risks and uncertainties described therein 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 and by-laws                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Restated Certificate of Incorporation of the Fund, as amended. [Incorporated by reference to Exhibit 3(a) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007]                                
| | (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, 2008.]                
| | (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) | Form of Release Agreement between the Fund and certain of its officers and former officers. [Incorporated by reference to Exhibit 10(h) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.] 
| | (d) | 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.]                                                     
| | (e) | Share Exchange Agreement between the Fund and MVC Capital, Inc., dated May 14, 2014. [Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on May 15, 2014.]                                    
| | (f) | 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. | Section 1350 Certifications                                                                                                                                                                                               
| | 1.  | Certification by Chief Executive Officer                                                                                                                                                                                  
| | 2.  | Certification by Chief Financial Officer                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                           











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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: November 13, 2019



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









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