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, 2015

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

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 and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post 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☐
|------------------------ | ------------------ | ---------------------- | --------------------------

Indicate
by check mark whether the registrant is a shell company. Yes☐No☒

There were 12,673,646 shares
of the registrant’s common stock, $.001 par value, outstanding, as of November 12,
2015.






Table of Contents




EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)



INDEX





|                                                                                              | PAGE
|--------------------------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                                                 |     
|Item 1. Financial Statements                                                                  | 3   
|Balance Sheets                                                                                | 3   
|Statements of Operations                                                                      | 4   
|Statements of Changes in Net Assets                                                           | 5   
|Statements of Cash Flows                                                                      | 6   
|Supplemental Information—Selected Per Share Data and Ratios                                   | 7   
|Schedules of Investments                                                                      | 8   
|Notes to Financial Statements                                                                 | 12  
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26  
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             | 30  
|Item 4. Controls and Procedures                                                               | 30  
|PART II. OTHER INFORMATION                                                                    |     
|Item 1. Legal Proceedings                                                                     | 31  
|Item 1A. Risk Factors                                                                         | 31  
|Item 6. Exhibits                                                                              | 32  
|SIGNATURE                                                                                     | 33  
|                                                                                              |     







































2


Table of Contents




EQUUS TOTAL RETURN, INC.

BALANCE SHEETS

(Unaudited)



Part I. Financial Information

Item 1. Financial Statements





|                                                                                           |  | September 30,
                                                                                2015 |         | December 31,
                                                                                2014
|------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------------
|                                                                                           |  |                                                                                                    |         |                                                                                                  
|(in thousands, except per share amounts)                                                   |  |                                                                                                    |         |                                                                                                  
|Assets                                                                                     |  |                                                                                                    |         |                                                                                                  
|Investments in portfolio securities at fair value:                                         |  |                                                                                                    |         |                                                                                                  
|Control investments (cost at $10,050 and $16,058 respectively)                             |  | $                                                                                                  | 7,715   |                                                                                                  
|Affiliate investments (cost at $350 and $350 respectively)                                 |  |                                                                                                    | 7,500   |                                                                                                  
|Non-affiliate investments - related party (cost at $5,871 and $5,706 respectively)         |  |                                                                                                    | 3,463   |                                                                                                  
|Non-affiliate investments (cost at $915 and $1,097 respectively)                           |  |                                                                                                    | 915     |                                                                                                  
|Total investments in portfolio securities at fair value                                    |  |                                                                                                    | 19,593  |                                                                                                  
|Temporary cash investments                                                                 |  |                                                                                                    | 15,000  |                                                                                                  
|Cash and cash equivalents                                                                  |  |                                                                                                    | 17,282  |                                                                                                  
|Restricted cash                                                                            |  |                                                                                                    | 151     |                                                                                                  
|Accounts receivable from investments                                                       |  |                                                                                                    | 614     |                                                                                                  
|Accrued interest receivable                                                                |  |                                                                                                    | 95      |                                                                                                  
|Accrued dividend receivable                                                                |  |                                                                                                    | —       |                                                                                                  
|Accounts receivable and other                                                              |  |                                                                                                    | 125     |                                                                                                  
|Total assets                                                                               |  |                                                                                                    | 52,860  |                                                                                                  
|Liabilities and net assets                                                                 |  |                                                                                                    |         |                                                                                                  
|Accounts payable and accrued liabilities                                                   |  |                                                                                                    | 11      |                                                                                                  
|Accounts payable to related parties                                                        |  |                                                                                                    | 196     |                                                                                                  
|Borrowing under margin account                                                             |  |                                                                                                    | 15,001  |                                                                                                  
|Total liabilities                                                                          |  |                                                                                                    | 15,208  |                                                                                                  
|                                                                                           |  |                                                                                                    |         |                                                                                                  
|Commitments and contingencies (see Note 2)                                                 |  |                                                                                                    |         |                                                                                                  
|                                                                                           |  |                                                                                                    |         |                                                                                                  
|Net assets                                                                                 |  | $                                                                                                  | 37,652  |                                                                                                  
|                                                                                           |  |                                                                                                    |         |                                                                                                  
|Net assets consist of:                                                                     |  |                                                                                                    |         |                                                                                                  
|Common stock, par value                                                                    |  | $                                                                                                  | 13      |                                                                                                  
|Capital in excess of par value                                                             |  |                                                                                                    | 54,226  |                                                                                                  
|Undistributed net investment losses                                                        |  |                                                                                                    | (18,994 | )                                                                                                
|Undistributed net capital gains                                                            |  |                                                                                                    | —       |                                                                                                  
|Unrealized appreciation (depreciation) of portfolio securities, net                        |  |                                                                                                    | 4,815   |                                                                                                  
|Unrealized depreciation of portfolio securities - related party, net                       |  |                                                                                                    | (2,408  | )                                                                                                
|Total net assets                                                                           |  | $                                                                                                  | 37,652  |                                                                                                  
|Shares of common stock issued and outstanding, $.001 par value, 50,000 shares authorized   |  |                                                                                                    | 12,674  |                                                                                                  
|Shares of preferred stock issued and outstanding, $.001 par value, 5,000 shares authorized |  |                                                                                                    | —       |                                                                                                  
|Net asset value per share                                                                  |  | $                                                                                                  | 2.97    |                                                                                                  



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

3


Table of Contents




EQUUS TOTAL RETURN, INC.

STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                              |  | Three months ended
                                                                                September 30, |        | Nine months ended
                                                                                September 30,
|----------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------------------------------------
|(in thousands, except per share amounts)                                      |  | 2015                                                                                                             |        | 2014                                                                                                           
|Investment income:                                                            |  |                                                                                                                  |        |                                                                                                                
|Interest and dividend income:                                                 |  |                                                                                                                  |        |                                                                                                                
|Control investments                                                           |  | $                                                                                                                | —      |                                                                                                                
|Non-affiliate investments - related party                                     |  |                                                                                                                  | 56     |                                                                                                                
|Non-affiliate investments                                                     |  |                                                                                                                  | 33     |                                                                                                                
|Total interest and dividend income                                            |  |                                                                                                                  | 89     |                                                                                                                
|Interest from temporary cash investments                                      |  |                                                                                                                  | 2      |                                                                                                                
|Total investment income                                                       |  |                                                                                                                  | 91     |                                                                                                                
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Expenses:                                                                     |  |                                                                                                                  |        |                                                                                                                
|Professional fees                                                             |  |                                                                                                                  | 81     |                                                                                                                
|Compensation expense                                                          |  |                                                                                                                  | 215    |                                                                                                                
|Director fees and expenses                                                    |  |                                                                                                                  | 68     |                                                                                                                
|General and administrative expense                                            |  |                                                                                                                  | 76     |                                                                                                                
|Mailing, printing and other expenses                                          |  |                                                                                                                  | 17     |                                                                                                                
|Taxes                                                                         |  |                                                                                                                  | 4      |                                                                                                                
|Interest expense                                                              |  |                                                                                                                  | —      |                                                                                                                
|Total expenses                                                                |  |                                                                                                                  | 461    |                                                                                                                
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Net investment loss                                                           |  |                                                                                                                  | (370   | )                                                                                                              
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Net realized gain (loss):                                                     |  |                                                                                                                  |        |                                                                                                                
|Control investments                                                           |  |                                                                                                                  | —      |                                                                                                                
|Non-affiliate investments                                                     |  |                                                                                                                  | —      |                                                                                                                
|Temporary cash investments                                                    |  |                                                                                                                  | —      |                                                                                                                
|Net realized gain (loss)                                                      |  |                                                                                                                  | —      |                                                                                                                
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Net unrealized appreciation (depreciation) of portfolio securities:           |  |                                                                                                                  |        |                                                                                                                
|End of period                                                                 |  |                                                                                                                  | 4,815  |                                                                                                                
|Beginning of period                                                           |  |                                                                                                                  | 3,942  |                                                                                                                
|Net change in unrealized appreciation (depreciation) of portfolio securities  |  |                                                                                                                  | 873    |                                                                                                                
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Net unrealized depreciation of portfolio securities - related party:          |  |                                                                                                                  |        |                                                                                                                
|End of period                                                                 |  |                                                                                                                  | (2,408 | )                                                                                                              
|Beginning of period                                                           |  |                                                                                                                  | (1,572 | )                                                                                                              
|Net change in unrealized depreciation of portfolio securities - related party |  |                                                                                                                  | (836   | )                                                                                                              
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Net increase (decrease) in net assets resulting from operations               |  | $                                                                                                                | (333   | )                                                                                                              
|                                                                              |  |                                                                                                                  |        |                                                                                                                
|Net increase (decrease) in net assets resulting from operations per share:    |  |                                                                                                                  |        |                                                                                                                
|Basic and diluted                                                             |  | $                                                                                                                | (0.03  | )                                                                                                              
|Weighted average shares outstanding:                                          |  |                                                                                                                  |        |                                                                                                                
|Basic and diluted                                                             |  |                                                                                                                  | 12,674 |                                                                                                                





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

4


Table of Contents




EQUUS TOTAL RETURN, INC.

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)







|                                                       |  | Nine months ended September 30,
|------------------------------------------------------ |  | -------------------------------
|(in thousands)                                         |  | 2015                           
|                                                       |  |                                
|Net increase in net assets resulting from operations   |  | $                              
|Shares issued for portfolio securities - related party |  |                                
|Increase in net assets                                 |  |                                
|Net assets at beginning of period                      |  |                                
|Net assets at end of period                            |  | $                              





































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

5


Table of Contents




EQUUS TOTAL RETURN, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)





|                                                                                          |  | Nine months ended September 30,
|----------------------------------------------------------------------------------------- |  | -------------------------------
|(in thousands)                                                                            |  | 2015                           
|Reconciliation of increase in net assets resulting from operations to net cash            |  |                                
|provided by operating activities:                                                         |  |                                
|Net increase in net assets resulting from operations                                      |  | $                              
|Adjustments to reconcile net increase in net assets resulting from operations to net cash |  |                                
|provided by operating activities:                                                         |  |                                
|Net realized loss (gain)                                                                  |  |                                
|Net change in unrealized appreciation (depreciation) of portfolio securities              |  |                                
|Net change in unrealized depreciation of portfolio securities - related party             |  |                                
|Changes in operating assets and liabilities:                                              |  |                                
|Purchase of portfolio securities                                                          |  |                                
|Net proceeds from dispositions of portfolio securities                                    |  |                                
|Principal payments received from portfolio securities                                     |  |                                
|(Puchases) sales of temporary cash investments, net                                       |  |                                
|Increase in accounts receivable from investments                                          |  |                                
|Increase in accrued interest receivable                                                   |  |                                
|(Increase) decrease in accounts receivable and other                                      |  |                                
|(Decrease) increase in accounts payable and accrued liabilities                           |  |                                
|Increase in accounts payable to related parties                                           |  |                                
|Net cash provided by operating activities                                                 |  |                                
|Cash flows from financing activities:                                                     |  |                                
|Borrowings under margin account                                                           |  |                                
|Repayments under margin account                                                           |  |                                
|Net cash provided by (used in) financing activities                                       |  |                                
|Net increase (decrease) in cash and cash equivalents                                      |  |                                
|Cash and cash equivalents at beginning of period                                          |  |                                
|                                                                                          |  |                                
|Cash and cash equivalents at end of period                                                |  | $                              
|Non-cash operating and financing activities:                                              |  |                                
|Shares issued in lieu of cash for portfolio securities                                    |  | $                              
|Accrued interest or dividends exchanged for portfolio securities                          |  | $                              
|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


Table of Contents




EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED
PER SHARE DATA AND RATIOS

(Unaudited)





|                                                                                    |  | Nine months ended September 30,
|----------------------------------------------------------------------------------- |  | -------------------------------
|                                                                                    |  | 2015                           
|                                                                                    |  |                                
|Investment income                                                                   |  | $                              
|Expenses                                                                            |  |                                
|                                                                                    |  |                                
|Net investment loss                                                                 |  |                                
|                                                                                    |  |                                
|Net realized (loss) gain                                                            |  |                                
|Net change in unrealized appreciation (depreciation)                                |  |                                
|Net change in unrealized depreciation - related party                               |  |                                
|Net increase (decrease) in net assets  from operations                              |  |                                
|Capital transactions:                                                               |  |                                
|Shares issued for portfolio securities                                              |  |                                
|Dilutive effect of shares issued                                                    |  |                                
|Decrease in net assets resulting from capital transactions                          |  |                                
|Net increase (decrease) in net assets                                               |  |                                
|Net assets at beginning of period                                                   |  |                                
|Net assets at end of period, basic and diluted                                      |  | $                              
|Weighted average number of shares outstanding during period,                        |  |                                
|in thousands                                                                        |  |                                
|Market price per share:                                                             |  |                                
|Beginning of period                                                                 |  | $                              
|End of period                                                                       |  | $                              
|Selected information and ratios:                                                    |  |                                
|Ratio of expenses to average net assets                                             |  |                                
|Ratio of net investment loss to average net assets                                  |  |                                
|Ratio of net increase in net assets resulting from operations to average net assets |  |                                
|Total return on market price (1)                                                    |  |                                





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











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

7


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2015

(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      | $ | 7,500   
|Equus Media Development Company, LLC
                                 Houston, TX                     | Media                          | January 2007    | Member interest (100%)                 |        |           |        | 3,000      |   | 215     
|Total Control Investments: Majority-owned (represents 22.3% of total investments at fair value)       |                                |                 | $                                      | 10,050 | $         | 7,715 
|Affiliate Investments (4):                                                                            |                                |                 |                                        |        |           |        |            |   |         
|PalletOne, Inc.
        Bartow, FL                                                                    | Shipping products and services | October 2001    | 350,000 shares of common stock (18.8%) |        |           | $      | 350        | $ | 7,500   
|Total Affiliate Investments (represents 21.7% of total investments at fair value)                     |                                |                 | $                                      | 350    | $         | 7,500 
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                        |        |           |       
|MVC Capital, Inc.
                                    Purchase, NY                                    | Financial services             | September 2014  | 421,826 shares of common stock (1.7%)  |        |           | $      | 5,871      | $ | 3,463   
|Total Non-Affiliate Investments - Related Party (represents 10.0% of total investments at fair value) |                                |                 | $                                      | 5,871  | $         | 3,463 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                        |        |           |       
|5TH Element
        Tracking LLC Boston, MA                                                           | Business products and services | January 2015    | 14% promissory note due 1/16 (2)       | $      | 915       | $      | 915        | $ | 915     
|Total Non-Affiliate Investments (represents 2.6% of total investments at fair value)                  |                                |                 | $                                      | 915    | $         | 915   
|Total Investment in Portfolio Securities                                                              |                                |                 | $                                      | 17,186 | $         | 19,593
|Temporary Cash Investments                                                                            |                                |                 |                                        |        |           |        |            |  
|U.S. Treasury Bill                                                                                    | Government                     | November 2015   | UST 0% 11/15                           | $      | 15,000    | $      | 15,000     | $ | 15,000  
|Total Temporary Cash Investments (represents 43.4% of total investments at fair value)                |                                |                 | $                                      | 15,000 | $         | 15,000
|Total Investments                                                                                     |                                |                 |                                        |        |           | $      | 32,186     | $ | 34,593  





|(1) | See Note 3 to the financial statements, Valuation of Investments.                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Income-producing.                                                                                                                                                                    
|(3) | Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more than 50% of the voting securities of the company.        
|(4) | Affiliate investments are generally defined under the Investment Company Act of 1940 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


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS –
(Continued)

SEPTEMBER 30, 2015

(Unaudited)



Except for our holding of shares of
MVC Capital, Inc. (“MVC”), substantially 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 foreign 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.



We may invest up to 30% of our assets
in non-qualifying portfolio investments, as permitted by the Investment Company Act of 1940 (hereafter, 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, 2015, 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 39.4% of the total
value of the investments in portfolio securities as of September 30, 2015.



Our investments in portfolio securities
consist of the following types of securities as of September 30, 2015 (in thousands):



|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as
                                                                                Percentage of
                                                                                Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Limited liability company investments |  | $    | 10,050 |            |  | $                                                                                                                                                                                                     
|Common stock                          |  |      | 6,221  |            |  |                                                                                                                                                                                                       
|Secured and subordinated debt         |  |      | 915    |            |  |                                                                                                                                                                                                       
|Total                                 |  | $    | 17,186 |            |  | $                                                                                                                                                                                                     





The following is a summary by industry
of the Fund’s investments in portfolio securities as of September 30, 2015 (in thousands):





|Industry                       |  | Cost |        | Fair Value |  | Fair Value as Percentage of
                                                                                Net
                                         Assets
|------------------------------ |  | ---- | ------ | ---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Energy                         |  | $    | 7,050  |            |  | $                                                                                                                                                              
|Shipping products and services |  |      | 350    |            |  |                                                                                                                                                                
|Financial services             |  |      | 5,871  |            |  |                                                                                                                                                                
|Business products and services |  |      | 915    |            |  |                                                                                                                                                                
|Media                          |  |      | 3,000  |            |  |                                                                                                                                                                
|Total                          |  | $    | 17,186 |            |  | $                                                                                                                                                              



















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

9


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2014

(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 (4):                                                              |                                |                 |                                                                      |        |           |        |            |   |         
|Equus Energy, LLC
        Houston, TX                                                                 | Energy                         | December 2011   | Member interest (100%)                                               |        |           | $      | 7,050      | $ | 9,800   
|Equus Media Development Company, LLC
        Houston, TX                                              | Media                          | January 2007    | Member interest (100%)                                               |        |           |        | 3,000      |   | 215     
|Spectrum Management, LLC
        Carrolton, TX                                                        | Business products and services | December 1999   | 285,000 units of Class A member interest (92.1%/82.5% fully diluted) |        |           |        | 2,850      |   | -       
|                                                                                                      |                                |                 | 16% subordinated promissory note due 11/11 (3)                       | $      | 3,158     |        | 3,158      |   | 3,158   
|                                                                                                      |                                |                 |                                                                      |        |           |        | 6,008      |   | 3,158   
|Total Control Investments: Majority-owned (represents 38.0% of total investments at fair value)       |                                |                 | $                                                                    | 16,058 | $         | 13,173
|Affiliate Investments (5):                                                                            |                                |                 |                                                                      |        |           |        |            |   |         
|PalletOne, Inc.
        Bartow, FL                                                                    | Shipping products and services | October 2001    | 350,000 shares of common stock (18.8%)                               |        |           | $      | 350        | $ | 960     
|                                                                                                      |                                |                 |                                                                      |        |           |        |            |   |         
|Total Affiliate Investments (represents 2.8% of total investments at fair value)                      |                                |                 | $                                                                    | 350    | $         | 960   
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                                                      |        |           |       
|MVC Capital, Inc.
        Purchase, NY                                                                | Financial services             | September 2014  | 404,968 shares of common stock (1.7%) (6)                            |        |           | $      | 5,706      | $ | 3,981   
|Total Non-Affiliate Investments - Related Party (represents 11.5% of total investments at fair value) |                                |                 | $                                                                    | 5,706  | $         | 3,981 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                                                      |        |           |       
|Orco Property Group S. A.
        Paris, France                                                       | Real estate                    | April 2011      | 10% promissory note due 2/18 (2)(7)                                  | $      | 597       |        | 597        |   | 1,032   
|Security Monitor Holdings, LLC
        Boston, MA                                                     | Business products and services | November 2013   | 14% promissory note due 6/14 (2)                                     |        | 500       |        | 500        |   | 500     
|Total Non-Affiliate Investments (represents 4.4% of total investments at fair value)                  |                                |                 | $                                                                    | 1,097  | $         | 1,532 
|Total Investment in Portfolio Securities                                                              |                                |                 |                                                                      |        |           | $      | 23,211     | $ | 19,646  
|Temporary Cash Investments                                                                            |                                |                 |                                                                      |        |           |        |            |   |         
|U.S. Treasury Bill                                                                                    | Government                     | December 2014   | UST 0% 6/15                                                          |        | 14,999    | $      | 14,999     | $ | 14,996  
|Total Temporary Cash Investments (represents 43.3% of total investments at fair value)                |                                |                 | $                                                                    | 14,999 | $         | 14,996
|Total Investments                                                                                     |                                |                 |                                                                      |        |           | $      | 38,210     | $ | 34,642  



|(1) | See Note 3 to the financial statements, Valuation of Investments.                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Income-producing.                                                                                                                                                                                                                                                                                                                            
|(3) | Non-income producing.                                                                                                                                                                                                                                                                                                                        
|(4) | Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more than 50% of the voting securities of the company.                                                                                                                                                                
|(5) | Affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which we own at least 5% but not more than 25% voting securities of the company.                                                                                                                                                        
|(6) | Pursuant to a Share Exchange Agreement between the Fund and MVC dated May 14, 2014, MVC has the right to rescind the Agreement and cancel the Share Exchange if Equus does not complete a “reorganization” (as defined under Section 2(a)(33) of the 1940 Act) within a 90-day period following the 1-year anniversary date of the Agreement.
|(7) | In October 2014, the terms of these notes were amended to provide, among other changes, an extension of the maturity date to October 2019, and a reduction in the interest rate applicable to the notes from a combination of 5% cash and 5% payment-in-kind securities, to 7% in cash.                                                      





















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

10


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

DECEMBER 31, 2014

(Unaudited)



Except for our holding of shares of
MVC and our notes of Orco Property Group S.A. (“OPG”), substantially all of our portfolio securities are restricted
from public sale without prior registration under the Securities Act. We negotiate certain aspects of the method and timing of
the disposition of our investment in each portfolio company, including registration rights and related costs.



As defined in the 1940 Act, all of our
investments are in eligible portfolio companies. We provide significant managerial assistance to portfolio companies that comprise
67.1% of the total value of the investments in portfolio securities as of December 31, 2014.



Our investments in portfolio securities
consist of the following types of securities as of December 31, 2014 (in thousands):



|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as
        Percentage of
        Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | ------------------------------------------------------
|Limited liability company investments |  | $    | 12,900 |            |  | $                                                     
|Secured and subordinated debt         |  |      | 4,255  |            |  |                                                       
|Common stock                          |  |      | 6,056  |            |  |                                                       
|Total                                 |  | $    | 23,211 |            |  | $                                                     



Interest payments are being received
and/or accrued on notes with a fair value of $1.5 million, while accrued interest has been impaired on notes receivable included
in secured and subordinated debt with a fair value of $3.2 million.



The following is a summary by industry of our investments
in portfolio securities as of December 31, 2014 (in thousands):





|Industry                       |  | Cost |        | Fair Value |  | Fair Value as Percentage of Net Assets
|------------------------------ |  | ---- | ------ | ---------- |  | --------------------------------------
|Energy                         |  | $    | 7,050  |            |  | $                                     
|Financial services             |  |      | 5,706  |            |  |                                       
|Business products and services |  |      | 6,508  |            |  |                                       
|Real estate                    |  |      | 597    |            |  |                                       
|Shipping products and services |  |      | 350    |            |  |                                       
|Media                          |  |      | 3,000  |            |  |                                       
|Total                          |  | $    | 23,211 |            |  | $                                     





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



11


Table of Contents




EQUUS TOTAL RETURN, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)



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



Description of Business—
Equus Total Return, Inc. (“we,” “us,” “our,” “Equus” the “Company”
and the “Fund”), a Delaware corporation, was formed by Equus Investments II, L.P. (the “Partnership”)
on August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were
transferred to the Fund in exchange for shares of common stock of the Fund. Our shares trade on the 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.



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 (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 business
development company (“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 of 1933 and the Securities Exchange Act of 1934, 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, or 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 Securities Exchange Act of 1934, as amended. Accordingly, they are unaudited and exclude some disclosures required
for annual financial statements. Management believes it has 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 nine
months ended September 30, 2015 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, 2014, as filed
with the Securities and Exchange Commission (“SEC”). Certain amounts previously reported in respect of the nine months
ended September 30, 2014 have been reclassified to conform with the current presentation.







12


Table of Contents




| | (2) | Liquidity and Financing Arrangements
| | --- | ------------------------------------



Liquidity—There are several
factors that may materially affect our liquidity during the reasonably foreseeable future. We view this period as the twelve month
period from the date of the financial statements in this Form 10-Q, i.e., the period through September 30, 2016. 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 finance routine follow-on investments, if any, through the next twelve months.



Cash and Cash Equivalents—As
of September 30, 2015, we had cash and cash equivalents of $17.3 million. We had $19.6million
of our net assets of $37.7 million invested in portfolio securities. We also had $15.1 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, $15.0 million was invested in U.S.
Treasury bills and $0.2 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
October 1, 2015 and we subsequently repaid this margin loan, plus interest, on October 5, 2015.



As of December 31, 2014, we had cash
and cash equivalents of $15.7 million. We had $19.6 million of our net assets of $36.2 million invested in portfolio securities.
We also had $15.1 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, $15.0 million was invested in U.S. Treasury bills and $0.1 million represented a required 1% brokerage
margin deposit. These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment
of the margin loan. The U.S. Treasury bills were sold on January 2, 2015 and we subsequently repaid this margin loan, plus interest,
on February 4, 2015.



Dividends - We will pay out net
investment income and/or realized capital gains, if any, on an annual basis as required under the 1940 Act.



Investment Commitments -As of
September 30, 2015, we had no outstanding commitments to our portfolio company investments.



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.



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. There is no assurance that such arrangement will be available in the future.
If we are unable to borrow funds to make qualifying investments, we may no longer qualify as a RIC. We would then be subject to
corporate income tax on the Fund’s net investment income and realized capital gains, and distributions to stockholders would
be subject to income tax as ordinary dividends. Failure to continue to qualify as a RIC could be materially adverse to us and our
stockholders.



As of September 30, 2015, we borrowed
$15.0 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 $15.1 million..



As of December 31, 2014, we borrowed
$15.0 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 $15.1 million.



Certain Risks and Uncertainties -
Market and economic volatility which has become endemic in the past few years has resulted in a relatively limited amount of available
debt financing for small and medium-sized companies such as Equus and its portfolio companies. Such debt financing generally has
shorter maturities, higher interest rates and fees, and more restrictive terms than debt facilities available in the past. In addition,
during these years and continuing into the first nine months of 2015, 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. Although we cannot assure you that such initiatives will be
sufficient, we believe we have sufficient liquidity to meet our operating requirements for the remainder of 2015 and the first
nine months of 2016.



13


Table of Contents




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



The following is a summary of significant
accounting policies followed by the Fund in the preparation of its financial statements:



Use of Estimates -The preparation
of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Although we believe the estimates and assumptions used in preparing these financial
statements and related notes are reasonable in light of known facts and circumstances, actual results could differ from those estimates.



Valuation of Investments -We
follow ASC Topic 820 for measuring fair value. Prior to our election to become a BDC, we also followed the guidance in ASC Topic
820 in disclosing the fair value reported for all financial instruments that were either impaired or available for sale securities,
using the definitions provided in Accounting Standards Codification Topic 320, “Investments – Debt and Equity Securities”
(“ASC Topic 320”). Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Inputs are broadly defined under ASC Topic 820 as assumptions market participants would
use in pricing an asset or liability. The three levels of the fair value hierarchy under ASC Topic 820 are described below:



Level 1 - Unadjusted quoted prices in
active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.



Level 2 Inputs other than quoted prices
within Level 1 that are observable for the asset or liability, either directly or indirectly; and fair value is determined through
the use of models or other valuation methodologies.



Level 3 - Inputs are unobservable for
the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs
into the determination of fair value are based upon the best information under the circumstances and may require significant management
judgment or estimation.



We consider a two-step process when
appraising investments of privately held companies. The first step involves determining the enterprise value of the portfolio company.
During this step, we consider three different valuation approaches: a market approach, an income approach, and a cost approach.
The particular facts and circumstances of each portfolio company determine which approach, or combination of approaches, will be
utilized. The second step when appraising equity investments of privately held companies involves allocating value to the various
debt and equity securities of the company. We allocate value to these securities based on their relative priorities. For equity
securities such as warrants, we may also incorporate alternative methodologies including the Black-Scholes Option Pricing Model.
Yield analysis is also employed to determine if a debt security has been impaired.



In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within
the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment
of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the investment.



Investments for which prices are not
observable are generally private investments in the debt and equity securities of operating companies. The primary valuation method
used to estimate the fair value of these Level 3 investments is the discounted cash flow method (although a liquidation analysis,
option theoretical, or other methodology may be used when more appropriate). The discounted cash flow approach to determine fair
value (or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various
relevant factors depending on investment type, including comparing the latest arm’s length or market transactions involving
the subject security to the selected benchmark credit spread, assumed growth rate (in cash flows), and capitalization rates/multiples
(for determining terminal values of underlying portfolio companies). The valuation based on the inputs determined to be the most
reasonable and probable is used as the fair value of the investment. The determination of fair value using these methodologies
may take into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the
nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected
operating performance, financing transactions subsequent to the acquisition of the investment and anticipated financing transactions
after the valuation date. Application of these valuation methodologies involves a significant degree of judgment by management.
Fair values of new investments are generally assumed to be equal to their cost to the Company for up to three months after their
initial purchase.



14


Table of Contents




To assess the reasonableness of the
discounted cash flow approach, the fair value of equity securities, including warrants, in portfolio companies may also consider
the market approach—that is, through analyzing and applying to the underlying portfolio companies, market valuation multiples
of publicly-traded firms engaged in businesses similar to those of the portfolio companies. The market approach to determining
the fair value of a portfolio company’s equity security (or securities) will typically involve: (1) applying to the portfolio
company’s trailing twelve months (or current year projected) EBITDA a low to high range of enterprise value to EBITDA multiples
that are derived from an analysis of publicly-traded comparable companies, in order to arrive at a range of enterprise values for
the portfolio company; (2) subtracting from the range of calculated enterprise values the outstanding balances of any debt or equity
securities that would be senior in right of payment to the equity securities we hold; and (3) multiplying the range of equity values
derived therefrom by our ownership share of such equity tranche in order to arrive at a range of fair values for our equity security
(or securities). Application of these valuation methodologies involves a significant degree of judgment by Management.



Due to the inherent uncertainty of determining
the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may
differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially
from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other
restrictions or otherwise are less liquid than publicly traded instruments. If we were required to liquidate a portfolio investment
in a forced or liquidation sale, we might realize significantly less than the value at which such investment had previously been
recorded. With respect to Level 3 investments, where sufficient market quotations are not readily available or for which no or
an insufficient number of indicative prices from pricing services or brokers or dealers have been received, we undertake, on a
quarterly basis, a valuation process as described below:



|• |  | For each debt investment, a basic credit review process is completed. The risk profile on every credit facility is reviewed and either reaffirmed or revised by our Investment Committee.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|• |  | Each portfolio company or investment is valued by an investment professional
|- |  | ----------------------------------------------------------------------------



|• |  | Third party valuation firm(s) are engaged to provide valuation services as requested, by reviewing Management’s preliminary valuations and/or analysis of the portfolio investment in question. For investments with a fair value exceeding $2.5 million, our Management’s preliminary fair value conclusions on each of the Fund’s assets for which sufficient market quotations are not readily available is reviewed and assessed by a third-party valuation firm at least once in every 12-month period, and more often as determined by the Audit Committee or required by our valuation policy. Such valuation assessment may be in the form of positive assurance, range of values or another valuation method based on the discretion of our Board.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|• |  | The Audit Committee reviews the preliminary valuations of our Management and independent valuation firms and, if appropriate, recommends the approval of the valuations by the Board.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|• |  | Our Board discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of Management, the Audit Committee and, where appropriate, the respective independent valuation firms.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following sections describe the
valuation techniques we use to measure different financial instruments at fair value and include the levels within the fair value
hierarchy in which the financial instruments are categorized.



Market approach – The market approach
typically employed by Management calculates the enterprise value of a company as a multiple of earnings before interest, taxes,
depreciation and amortization (“EBITDA”) generated by the company for the trailing twelve month period. Adjustments
to the company’s EBITDA, including those for non-recurring items, may be considered. Multiples are estimated based on current
market conditions and past experience in the private company marketplace and are subjective in nature. We will apply liquidity
and other discounts as deemed appropriate to equity valuations where applicable. We may also use, when available, third-party transactions
in a portfolio company’s securities as the basis of valuation (the “private market method”). The private market
method will be used only with respect to completed transactions or firm offers made by sophisticated, independent investors.



Income approach – The income
approach typically utilized by our Management calculates the enterprise value of a company utilizing a discounted cash flow model
incorporating projected future cash flows of the company. Projected future cash flows consider the historical performance of the
company as well as current and projected market participant performance. Discount rates are estimated based on current market conditions
and past experience in the private company marketplace and are subjective in nature. We will apply liquidity and other discounts
as deemed appropriate to equity valuations where applicable.



15


Table of Contents




Asset approach – We consider
the asset approach to determine the fair value of significantly deteriorated investments demonstrating circumstances indicative
of a liquidation analysis. This situation may arise when a portfolio company: 1) cannot generate adequate cash flow to meet the
principal and interest payments on its indebtedness; 2) is not successful in refinancing its debt upon maturity; 3) we believe
the credit quality of a loan has deteriorated due to changes in the business and underlying asset or market conditions may result
in the company’s inability to meet future obligations; or 4) the portfolio company’s reorganization or bankruptcy.
Consideration is also given as to whether a liquidation event would be orderly or forced.



We base adjustments upon such factors
as the portfolio company’s earnings, cash flow and net worth, the market prices for similar securities of comparable companies,
an assessment of the company’s current and future financial prospects and various other factors and assumptions. In the case
of unsuccessful or substantially declining operations, we may base a portfolio company’s fair value upon the company’s
estimated liquidation value. Fair valuations are necessarily subjective, and our estimate of fair value may differ materially from
amounts actually received upon the disposition of its portfolio securities. Also, any failure by a portfolio company to achieve
its business plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant
and rapid change in its value.



Our general intent is to hold our loans
to maturity when appraising our privately held debt investments. As such, we believe that the fair value will not exceed the cost
of the investment. However, in addition to the previously described analysis involving allocation of value to the debt instrument,
we will often perform a yield analysis to determine if a debt security has been impaired. Certificates of deposit purchased by
the Fund generally will be valued at their face value, plus interest accrued to the date of valuation.



For most of our investments, market
quotations are not available. With respect to investments for which market quotations are not readily available or when such market
quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described
below:



|1. |  | Each portfolio company or investment is reviewed by our investment professionals and, where necessary, with independent valuation firms engaged by the Fund;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | The independent valuation firms conduct independent valuations and make their own independent assessments;
|-- |  | ----------------------------------------------------------------------------------------------------------



|3. |  | The Audit Committee of our Board reviews and discusses the preliminary valuation of the Fund and that of the independent valuation firms; and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our Management, the respective independent valuation firm and the Audit Committee.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Investments are valued utilizing a yield
analysis, enterprise value (“EV”) analysis, net asset value analysis, liquidation analysis, discounted cash flow analysis,
or a combination of methods, as appropriate. The yield analysis uses loan spreads and other relevant information implied by market
data involving identical or comparable assets or liabilities. Under the EV analysis, the EV of a portfolio company is first determined
and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall”
allocation). To determine the EV, we typically use a market multiples approach that considers relevant and applicable market trading
data of guideline public companies, transaction metrics from precedent M&A transactions and/or a discounted cash flow analysis.
The net asset value analysis is used to derive a value of an underlying investment (such as real estate property) by dividing a
relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar
properties as may be obtained from guideline public companies and/or relevant transactions. The liquidation analysis is intended
to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds
based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow analysis uses valuation techniques
to convert future cash flows or earnings to a range of fair values from which a single estimate may be derived utilizing an appropriate
discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts.



In applying these methodologies, additional
factors that we consider in fair value pricing our investments may include, as we deem relevant: security covenants, call protection
provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to
make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer
companies; the principal market; and enterprise values, among other factors.



Because of the inherent uncertainty
of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $16.1 million and
$15.7 million as of September 30, 2015 and December 31, 2014, 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, 2015, one of our
portfolio investments, 421,826 common shares of MVC, was publicly listed on the NYSE. As of December 31, 2014, one of our portfolio
investments, 404,968 common shares of MVC, was publicly listed on the NYSE and our holding of €1,200,790 [$1.5 million] in
OPG notes was publicly listed on the Luxembourg Stock Exchange.

16


Table of Contents






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’sand The Wall Street Journal.



For loan and debt securities held for
longer than one year, the Fund will often perform a yield analysis assuming a hypothetical current sale of the security. The yield
analysis considers changes in interest rates and changes in leverage levels of the portfolio company as compared to the market
interest rates and leverage levels. Assuming the credit quality of the portfolio company remains stable, the Fund will use the
value determined by the yield analysis as the fair value for that security.



We will record unrealized depreciation
on investments when we determine that the fair value of a security is less than its cost basis, and will record unrealized appreciation
when we determine that the fair value is greater than its cost basis.



We assess the levels of the investments
at each measurement date, and transfers between levels are recognized on the subsequent measurement date closest in time to the
actual date of the event or change in circumstances that caused the transfer. There were no transfers among Level 1, 2 and 3 for
the quarter ended September 30, 2015 and the year ended December 31, 2014.



As of September 30, 2015, investments
measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input
to the valuations:





|                                                 |  |       | Fair
                               Value Measurements as of September 30, 2015
|------------------------------------------------ |  | ----- | -------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |                                                                                
|Assets                                           |  |       |                                                                                
|Investments:                                     |  |       |                                                                                
|Control investments                              |  | $     | 7,715                                                                          
|Affiliate investments                            |  |       | 7,500                                                                          
|Non-affiliate investments - related party        |  |       | 3,463                                                                          
|Non-affiliate investments                        |  |       | 915                                                                            
|Total investments in portfolio securities        |  |       | 19,593                                                                         
|Temporary cash investments                       |  |       | 15,000                                                                         
|Total investments and temporary cash investments |  | $     | 34,593                                                                         





17


Table of Contents




As of December 31, 2014, investments
measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input
to the valuations:



|                                                 |  |       |        | Fair Value Measurements as of December 31, 2014                               
|------------------------------------------------ |  | ----- | ------ | ------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for
        Identical Assets
        (Level 1)
|Assets                                           |  |       |        |                                                                               
|Investments:                                     |  |       |        |                                                                               
|Control investments                              |  | $     | 13,173 |                                                                               
|Affiliate investments                            |  |       | 960    |                                                                               
|Non-affiliate investments - related party        |  |       | 3,981  |                                                                               
|Non-affiliate investments                        |  |       | 1,532  |                                                                               
|Total investments                                |  |       | 19,646 |                                                                               
|Temporary cash investments                       |  |       | 14,996 |                                                                               
|Total investments and temporary cash investments |  | $     | 34,642 |                                                                               



The following table provides a reconciliation
of fair value changes during the nine months ended September 30, 2015 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 December 31, 2014               |                                                                                                                 
|Realized gains (losses)                          |                                                                                                                 
|Change in unrealized appreciation (depreciation) |                                                                                                                 
|Purchases of portfolio securities                |                                                                                                                 
|Proceeds from sales/dispositions                 |                                                                                                                 
|Fair value as of September 30, 2015 (unaudited)  |                                                                                                                 





The following table provides a reconciliation
of fair value changes during the nine months ended September 30, 2014 for all investments for which we determine fair value using
unobservable (Level 3) factors:



Foreign Exchange—We record
temporary changes in foreign exchange rates of portfolio securities denominated in foreign currencies as changes in fair value.
These changes are therefore reflected as unrealized gains or losses until realized.





|                                                 | Fair
                                         value measurements using significant unobservable inputs (Level 3)
|------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |                                                                                                                 
|Fair value as of December 31, 2013               |                                                                                                                 
|Realized gains (losses)                          |                                                                                                                 
|Change in unrealized appreciation (depreciation) |                                                                                                                 
|Purchases of portfolio securities                |                                                                                                                 
|Proceeds from sales/dispositions                 |                                                                                                                 
|Fair value as of September 30, 2014 (unaudited)  |                                                                                                                 







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

18


Table of Contents




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



As of September 30, 2015 and December
31, 2014, we had no outstanding commitments to our portfolio company investments; however, under certain circumstances, we may
be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make follow-on
investments, the portfolio company in need of the investment may be negatively impacted. Also, our equity interest in the estimated
fair value of the portfolio company could be reduced. Follow-on investments may include capital infusions which are expenditures
made directly to the portfolio company to ensure that operations are completed, thereby allowing the portfolio company to generate
cash flows to service 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.



Payment in Kind Interest (PIK)—We
have loans in our portfolio that may pay PIK interest. We add PIK interest, if any, computed at the contractual rate specified
in each loan agreement, to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC,
we must pay out to stockholders this non-cash source of income in the form of dividends even if we have not yet collected any cash
in respect of such investments. We will continue to pay out net investment income and/or realized capital gains, if any, on an
annual basis as required under the Investment Company Act of 1940.



Cash Flows—For purposes
of the Statements of Cash Flows, we consider all highly liquid temporary cash investments purchased with an original maturity of
three months or less to be cash equivalents. We include our investing activities within cash flows from operations. We exclude
“Restricted Cash and Temporary Cash Investments” used for purposes of complying with RIC requirements from cash equivalents.



Taxes—We intend to comply
with the requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and, as such, will not
be subject to federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed to stockholders.
Therefore, no provision for federal income taxes is recorded in the financial statements. We borrow money from time to time to
maintain our tax status under the Internal Revenue Code as a RIC. See Note 1 for discussion of Taxable Subsidiaries and see Note
2 for further discussion of the Fund’s RIC borrowings.



All corporations incorporated in the
State of Delaware are required to file an Annual Report and to pay a franchise tax. As a result, we paid Delaware Franchise tax
in the amount of $0.02 million for the year ended December 31, 2014.



Texas margin tax applies to legal entities
conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a
tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result,
we did not owe state income tax for the year ended December 31, 2014.



Significant Unobservable Inputs—
Our investment portfolio is not composed of homogeneous debt and equity securities that can be valued with a small number of inputs.
Instead, the majority of our investment portfolio is composed of complex debt and equity securities with distinct contract terms
and conditions. As such, our valuation of each investment in our portfolio is unique and complex, often factoring in numerous different
inputs, including historical and forecasted financial and operational performance of the portfolio company, project cash flows,
market multiples comparable market transactions, the priority of our securities compared with those of other investors, credit
risk, interest rates, independent valuations and reviews and other inputs.



19


Table of Contents




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, 2015 (unaudited):





|                                      |  |            |        |                      |  |                                                    |  | Range                                                             
|------------------------------------- |  | ---------- | ------ | -------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------
|(in thousands)                        |  | Fair Value |        | Valuation Techniques |  | Unobservable Inputs                                |  | Minimum                                                           
|Secured and subordinated debt         |  | $          | 915    |                      |  | Yield-to-maturity                                  |  | Discount for lack of marketability                                
|Common stock                          |  |            | 7,500  |                      |  | Income/Market approach                             |  | EBITDA Multiple/Discount for lack of marketability/Control premium
|                                      |  |            |        |                      |  |                                                    |  |                                                                   
|                                      |  |            |        |                      |  | Asset approach                                     |  | Recovery rate                                                     
|Limited liability company investments |  |            | 7,715  |                      |  | Discounted cash flow; Guideline transaction method |  | Reserve adjustment factors                                        
|                                      |  | $          | 16,130 |                      |  |                                                    |  |                                                                   







| | (4) | Related Party Transactions and Agreements
| | --- | -----------------------------------------



Except as noted below, as compensation
for services to the Fund, each Independent Director receives an annual fee of $20,000 paid quarterly in arrears, a fee of $2,000
for each meeting of the Board of Directors attended in person, a fee of $1,000 for participation in each telephonic meeting of
the Board and a fee of $1,000 for each committee meeting attended, and reimbursement of all out-of-pocket expenses relating to
attendance at such meetings. A quarterly fee of $15,000 is paid to the Chairman of the Audit Committee and a quarterly fee of $3,750
is paid to the Chairman of the Independent Directors. We may also pay other one-time or recurring fees to members of our Board
of Directors in special circumstances. None of our interested directors receive annual fees for their service on the Board of Directors.



In 2011, Equus Energy, LLC, a wholly-owned
subsidiary of the Fund, entered into a consulting agreement with Global Energy Associates, LLC (“Global Energy”) to
provide consulting services for energy related investments. Henry W. Hankinson, Director, is a managing partner and co-founder
of Global Energy. Payments to Global Energy totaled $56,250 for each of the nine months ended September 30, 2015 and 2014.



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 fixed amount at a rate
of $250 per hour for services rendered. During the nine months ended September 30, 2015 and 2014, we paid Kenneth I. Denos, P.C.,
a professional corporation owned by Kenneth I. Denos, a director of the Fund, $215,438 and $257,438 respectively, for services
provided to the Fund.



| | (5) | Dividends
| | --- | ---------



We will pay out net investment income
and/or realized capital gains, if any, on an annual basis as required under the 1940 Act.



| | (6) | Portfolio Securities
| | --- | --------------------



On January 6, 2015, we sold our
interests in Spectrum to 5th Element Tracking, LLC (“5th
Element”). The purchase price of $3.9 million paid by 5th Element
consisted of $3.0 million in cash and a 1-year subordinated note in the original principal amount of $0.9 million, bearing interest
at the rate of 14% per annum. We realized a net capital loss of $2.8 million in connection with the sale of our interest in Spectrum.

Also on January 6, 2015, in connection
with the sale of our interest in Spectrum, our $0.5 million loan to Security Monitor Holdings, LLC, together with all accrued interest
amounting to approximately $0.1 million, was repaid.



On January 30, 2015, we received a partial
redemption payment in respect of our holding of OPG Notes in the amount of €36,587 [$41,478].



20


Table of Contents


On February 20, 2015, we sold
our OPG Notes at a discount of 23% to their par value, receiving $1.0 million in cash and a realized gain of $0.4 million.

During the nine months ended September
30, 2015, 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, 2015, we recorded a net change in unrealized appreciation of $6.0 million, to a net unrealized appreciation of $2.4 million.
Such change in unrealized appreciation resulted primarily from the following changes:



| | (i) | Decrease in the fair value of our holdings in Equus Energy, LLC of $2.3 million, principally due to a combination of production without a corresponding increase in proved reserves and declining short- and long-term prices for crude oil and natural gas;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Decrease in the fair value of our shareholding in MVC of $0.7 million due to a decrease in the MVC share price during the period, which was partially offset by $0.2 million in dividends received in the form of additional MVC shares;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Increase in fair value of our shareholding in PalletOne, Inc. of $6.5 million due to an overall improvement in comparable industry sectors, as well as continued revenue and earnings growth;
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Transfer of unrealized depreciation to realized gain on our holding of OPG Notes of $0.4 million in connection with the sale of our interest in the OPG Notes; and
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | Transfer of unrealized depreciation to realized loss on our holdings in Spectrum of $2.9 million in connection with the sale of our interest in Spectrum.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



During the nine months ended September
30, 2014, we realized net capital gains of $0.7 million, including the following significant transactions:



| | (i) | On April 3, 2014, we sold all of our 73,666 remaining shares of OPG, wherein we received $61,867 in net proceeds and reported a realized loss of $0.06 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | During the nine months ended September, 2014, we realized net capital gains of $0.7 million related to our Share Exchange with MVC (see Plan of Reorganization above).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May 14, 2014, we sold to MVC 2,112,000 shares
of the Fund’s common stock in exchange for 395,839 shares of MVC. (see Plan of Reorganization below). On July 31,
2014, we received 4,308 shares ($53,438) of MVC in the form of a dividend payment.



Net unrealized depreciation on investments
decreased $1.0 million during the nine months ended September 30, 2014, to a net unrealized depreciation of $3.0 million. Such
decrease in unrealized depreciation is largely due to the following changes:



| | (i) | Increase in fair value of our holding in Equus Energy, LLC of $1.8 million due to an increase in comparable transactions for mineral leases, increased oil and gas production, as well as additional proved reserves from new drilling and recompletion activities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $0.7 million due to an improvement in comparable industry sectors and continued revenue and earnings growth.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Decrease in fair value of our shareholding in MVC of $1.3 million due to a difference between our cost basis in the MVC shares and the closing trading price of the MVC shares on September 30, 2014. Our cost basis included the closing trading price of the shares on May 14, 2014 (the closing date of the Share Exchange) as well as capitalized transaction costs of $0.5 million incurred in connection with the Share Exchange.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iv)  | Decrease in fair value of our holding of OPG Notes of $0.1 million due to adverse changes in the USD-EUR exchange rate.                                                                                                                                                                                                                                                                                                                



During the nine months ended September 30,
2014, we capitalized legal and consulting expenses of $0.1 million relating to our investment in Spectrum Management. We also received
a semi-annual interest payment of $0.04 million in cash and $0.1 million in the form of PIK’d interest in respect of our
€1.2 million [$1.5 million] in OPG notes.

21


Table of Contents




| | (7) | Plan of Reorganization - 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. As a first step to consummating the reorganization,
we sold to 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 business development company traded on the New York Stock
Exchange 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 reorganization
by pursuing a merger or consolidation with MVC, a subsidiary of MVC, or one or more of MVC’s portfolio companies (the “Consolidation”).
Absent Equus merging or consolidating with/into MVC or a subsidiary thereof, our current intention is for Equus to (i) consummate
the Consolidation with a portfolio company of MVC, (ii) terminate its election to be classified as a BDC under the 1940 Act, and
(iii) be restructured as a publicly-traded operating company focused on the energy and/or financial services sector. Our original
intention was to consummate the Consolidation within one year from the date of our announcement, although actual completion will
require additional time.



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



Equus Energy was formed in November
2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector, with particular emphasis on
income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus Energy. On December
27, 2012, we invested an additional $6.8 million in Equus Energy for the purpose of additional working capital and to fund the
purchase of $6.6 million in working interests in 132 producing and non-producing oil and gas wells (which has since decreased to
130). The working interests include associated development rights of approximately 21,220 acres situated on 13 separate properties
in Texas and Oklahoma. The working interests range from a de minimus amount to 50% of the leasehold that includes these
wells.



The wells are operated by a number of
experienced operators, including Chevron USA, Inc., which has operating responsibility for all of Equus Energy’s 40 producing
well interests located in the Conger Field, a productive oil and gas field on the edge of the Permian Basin that has experienced
successful gas and hydrocarbon extraction in multiple formations. Equus Energy, which holds a 50% working interest in each of these
Conger Field wells, is working with Chevron in a recompletion program of existing Conger Field wells to the Wolfcamp formation,
a zone containing oil as well as gas and natural gas liquids. Part of Equus Energy’s acreage rights described above also
includes a 50% working interest in possible new drilling to the base of the Canyon formation (approximately 8,500 feet) on 2,400
acres in the Conger Field. Also included in the interests acquired by Equus Energy are working interests of 7.5% and 2.5% in the
Burnell and North Pettus Units, respectively, which collectively comprise approximately 13,000 acres located in the area known
as the “Eagle Ford Shale” play.



Revenue and Income. During the
three months ended September 30, 2015, Equus Energy’s revenue, operating revenue less direct operating expenses, and net
loss were $0.2 million, ($0.05) million, and ($0.2) million, respectively, as compared to revenue, operating revenue less direct
operating expenses, and net incomes of $0.7 million, $0.4 million, and $0.2 million, respectively, for the three months ended September
30, 2014. During the nine months ended September 30, 2015, Equus Energy’s revenue, operating revenue less direct operating
expenses, and net loss were $0.8 million, $0.02 million, and ($0.7) million, respectively, as compared to revenue, operating revenue
less direct operating expenses, and net loss of $1.7 million, $0.9 million, and ($0.06) million, respectively, for the nine months
ended September 30, 2014.



Capital Expenditures. During
the nine months ended September 30, 2015, Equus Energy invested $0.05 million in capital expenditures for recompletion activities.
The operators of the various working interest have communicated their intent to wait until 2016, 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 statement of
assets and liabilities. 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).

22


Table of Contents






Below is summarized consolidated financial
information for Equus Energy as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30,
2015 and 2014, respectively, (in thousands):



EQUUS ENERGY, LLC

Consolidated Balance Sheets

(unaudited)





|                                                           |  | September 30,  2015 |        | December 31,  2014
|---------------------------------------------------------- |  | ------------------- | ------ | ------------------
|Assets                                                     |  |                     |        |                   
|Current assets:                                            |  |                     |        |                   
|Cash and cash equivalents                                  |  | $                   | 520    |                   
|Accounts receivable                                        |  |                     | 122    |                   
|Other current assets                                       |  |                     | 14     |                   
|Total current assets                                       |  |                     | 656    |                   
|Oil and gas properties                                     |  |                     | 8,246  |                   
|Less: accumulated depletion, depreciation and amortization |  |                     | (2,231 | )                 
|Net oil and gas properties                                 |  |                     | 6,015  |                   
|Other non-current investment                               |  |                     | 193    |                   
|Total assets                                               |  | $                   | 6,864  |                   
|Liabilities and member's capital                           |  |                     |        |                   
|Current liabilities:                                       |  |                     |        |                   
|Accounts payable and other                                 |  | $                   | 72     |                   
|Due to affiliate                                           |  |                     | 611    |                   
|Total current liabilities                                  |  |                     | 683    |                   
|Asset retirement obligations                               |  |                     | 183    |                   
|Total liabilities                                          |  |                     | 866    |                   
|Total member's capital                                     |  |                     | 5,998  |                   
|Total liabilities and member's capital                     |  | $                   | 6,864  |                   



Revenue and direct operating expenses
for the various oil and gas assets included in the accompanying statements 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 revenues and direct operating expenses 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 revenue and direct operating expenses 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.



23


Table of Contents




EQUUS ENERGY, LLC

Consolidated Statements of Operations

(unaudited)





|                                                    |  | Three months ended September 30, |      | Nine months ended September 30,
|--------------------------------------------------- |  | -------------------------------- | ---- | -------------------------------
|                                                    |  | 2015                             |      | 2014                           
|Operating revenue                                   |  | $                                | 196  |                                
|Operating expenses                                  |  |                                  |      |                                
|Direct operating expenses                           |  |                                  | 242  |                                
|Depletion, depreciation, amortization and accretion |  |                                  | 114  |                                
|General and administrative                          |  |                                  | 78   |                                
|Total operating expenses                            |  |                                  | 434  |                                
|Net loss (income)                                   |  | $                                | (238 | )                              





EQUUS ENERGY, LLC

Consolidated Statements of Cash Flows

(unaudited)





|                                                     |  | Nine months ended September 30,
|---------------------------------------------------- |  | -------------------------------
|                                                     |  | 2015                           
|Cash flows from operating activities:                |  |                                
|Net loss                                             |  | $                              
|Adjustments to reconcile net loss to                 |  |                                
|net cash (used in) provided by operating activities: |  |                                
|Depletion, depreciation and amortization             |  |                                
|Changes in operating assets and liabilities:         |  |                                
|Accounts receivable and other current assets         |  |                                
|Affiliate payable/receivable                         |  |                                
|Accounts payable and other                           |  |                                
|Net cash (used in) provided by operating activities  |  |                                
|Cash flows from investing activities:                |  |                                
|Investment in oil & gas properties                   |  |                                
|Other investments                                    |  |                                
|Net cash used in investing activities                |  |                                
|Net decrease in cash                                 |  |                                
|Cash and cash equivalents at beginning of period     |  |                                
|Cash and cash equivalents at end of period           |  | $                              



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 and amortization
expense for the Company’s oil and gas properties totaled $0.1 million for the three months ended September 30, 2015 and September
30, 2014, respectively, and $0.5 million for the nine months ended September 30, 2015 compared to $0.6 million for the nine months
ended September 30, 2014.



24


Table of Contents




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, 2015, 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 2014 or during the nine months ended September
30, 2015.



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 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.



Accounting Policy on DD&A
- 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.  As of September 30, 2015 and September 30, 2014, the Company recorded
$0 in federal income taxes, respectively.



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



| | (9) | Recent Accounting Pronouncements
| | --- | --------------------------------



In February 2015, the FASB issued
ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new guidance modifies the consolidation
analysis for limited partnerships and similar type entities as well as variable interests in a variable interest entity, particularly
those that have fee arrangements and related party relationships. Additionally, it provides a scope exception to the consolidation
guidance for certain entities. The amendments in ASU No. 2015-02 are effective for annual reporting periods beginning after
December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company is currently
evaluating the impact of adopting this ASU on its consolidated financial statements.



25


Table of Contents




In May 2015, the FASB issued ASU No.
2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent). The new guidance removes the requirement that investments for which NAV is determined based on practical
expedient reliance be reported utilizing the fair value hierarchy. ASU No. 2015-07 shall be applied retrospectively for periods
beginning on or after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company
is currently evaluating the impact of adopting this ASU on its consolidated financial statements.



| | (10) | Subsequent Events
| | ---- | -----------------



Management performed an evaluation of
the Fund’s activity through the date the financial statements were issued, noting there were no subsequent events.



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



Equus Total Return, Inc. (“we,”
“us,” “our,” “Equus,” the “Company,” 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.



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



On May 14, 2014, we announced
that the Fund intended to effect a reorganization pursuant to Section 2(a)(33) of the 1940 Act. As a first step to consummating
the reorganization, we sold to 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 business development company
traded on the New York Stock Exchange 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. The number of MVC shares received by Equus represents approximately 1.73% of MVC’s
total outstanding shares of common stock. The number of Equus shares sold to MVC pursuant to the Share Exchange represents approximately
16.7% of our issued and outstanding shares of common stock at March 31, 2015. We incurred dilution of $0.11 per share as a result
of the Share Exchange. Since the announcement, we have received 25,987 shares of MVC (market value of $0.2 million calculated as
of the date of receipt) in the form of dividend payments.

26


Table of Contents






Pursuant to the terms of
a Share Exchange Agreement, dated May 14, 2014, entered into by Equus and MVC which memorialized the Share Exchange, we intend
to finalize the reorganization by pursuing a merger or consolidation with MVC, or a subsidiary of MVC, or one or more of MVC’s
portfolio companies (the “Consolidation”). Absent Equus merging or consolidating with/into MVC, our current intention
is for Equus to (i) consummate the Consolidation, (ii) terminate its election to be classified as a business development company
under the 1940 Act, and (iii) be restructured as a publicly-traded operating company focused on the energy and/or financial services
sector.



Critical Accounting Policies



See the Fund’s Critical Accounting
Policies from the disclosure set forth in the Annual Report on Form10-K for the year ended December 31, 2014.



Recent Accounting Pronouncements



In February 2015, the FASB issued
ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new guidance modifies the consolidation
analysis for limited partnerships and similar type entities as well as variable interests in a variable interest entity, particularly
those that have fee arrangements and related party relationships. Additionally, it provides a scope exception to the consolidation
guidance for certain entities. The amendments in ASU No. 2015-02 are effective for annual reporting periods beginning after
December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company is currently
evaluating the impact of adopting this ASU on its consolidated financial statements.



In May 2015, the FASB issued ASU No.
2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent). The new guidance removes the requirement that investments for which NAV is determined based on practical
expedient reliance be reported utilizing the fair value hierarchy. ASU No. 2015-07 shall be applied retrospectively for periods
beginning on or after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company
is currently evaluating the impact of adopting this ASU on its consolidated financial statements.



Current Market Conditions



Although the U.S. economy expanded 2.43%
in 2014, results in 2015 have been somewhat mixed. Despite a low unemployment rate, U.S. GDP growth in the third quarter of 2015
was at a 1.5% annualized rate after expanding at a 3.9% annualized rate in the second quarter of 2015. The decrease during the
third quarter was principally attributed to a strong U.S. dollar, which hampered U.S. exports. In a survey of 60 economists, the
Wall Street Journal has predicted GDP growth of 2.7% for the fourth quarter of 2015. In respect of the energy industry,
Schlumberger reported in October 2015 that it did not expect a recovery in demand for energy before 2017 and predicted that exploration
and production spending would decrease again in 2016. (Sources: U.S. Dept. of Commerce Bureau of Economic Analysis, Wall Street
Journal, CNBC)



Market conditions for business transactions
including mergers and acquisitions and private equity investments during 2014 and the first nine months of 2015 improved to their
highest level since prior to the 2008 financial crisis, as corporations have been deleveraging and are holding significant amounts
of cash and many have focused on acquisitions as part of future growth plans. The U.S., which has accounted for almost half of
worldwide merger and acquisition activity so far during 2015, recorded a record $1 trillion worth of transactions during the first
six months of 2015, an increase of approximately 60% over the same period in 2014. Commensurately, worldwide and U.S. private equity
activity grew sharply as well during the first six months of 2015, increasing approximately 49% and 93%, respectively, as compared
to the same period in 2014. Comparable figures for the 3rd quarter of 2015 have not yet been released. (Source: Fortune)



During the nine months ended September
30, 2015, our net asset value increased from $2.86 per share to $2.97 per share, an increase of 3.8%. As of September 30, 2015,
our common stock is trading at a 41.1% discount to our net asset value as compared to 26.5% as of December 31, 2014.



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, we expect to
achieve efficiencies in our cost structure if we are able to grow the Fund.

27


Table of Contents






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 the Fund is unable to borrow funds to make qualifying investments, it may 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.



The Fund reserves 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 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 finance
routine capital expenditures through the next twelve months.



Results of Operations



Investment Income and Expense



Net investment loss was unchanged at
$0.4 million for the three months ended September 30, 2015 and 2014, and $2.0 million and $1.6 million for the nine months ended
September 30, 2015 and 2014, respectively. The increase in net investment loss generated at September 30, 2015 compared to September
30, 2014 is due primarily to a decrease in total investment income and an increase in operating expense.



Investment income was unchanged at
$0.1 million for the three months ended September 30, 2015 and 2014,  and $0.2 million and $0.4 million for the
nine months ended September 30, 2015 and 2014, respectively. The decrease in investment income was primarily due to the
decrease in income producing investments due to the sale of our interests in SMH, Spectrum, and OPG during the three months
ended March 31, 2015.



Total expenses were $0.5 million for
the three months ended September 30, 2015 and $0.5 million for the three months ended September 30, 2014, principally due to lower
professional fees incurred during the third quarter of 2015. Total expenses for the nine months ended September 30, 2015 and 2014
were $2.3 million and $2.0 million, respectively. The increase in expenses was primarily due to officer and employee bonuses earned
during the period.



Realized
Gains and Losses on Sales of Portfolio Securities



During the nine months ended September
30, 2015, we realized net capital losses of $2.5 million, including the following significant transactions (in thousands):





|Portfolio Company         |  | Industry                        |  | Type |               | Transaction Type |  | Realized Gain (Loss)
|------------------------- |  | ------------------------------- |  | ---- | ------------- | ---------------- |  | --------------------
|Spectrum Management, LLC  |  | Business products  and services |  |      | Control       |                  |  | Disposition         
|Orco Property Group S. A. |  | Real Estate                     |  |      | Non-affiliate |                  |  | Disposition         
|Various others            |  |                                 |  |      |               |                  |  | Disposition         
|                          |  |                                 |  |      |               |                  |  |                     



28


Table of Contents






During the nine months ended September
30, 2014, we realized net capital gains of $0.7 million, including the following significant transactions:



| | (i) | On April 3, 2014, we sold all of our 73,666 remaining shares of OPG, wherein we received $61,867 in net proceeds and reported a realized loss of $0.06 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | During the nine months ended September, 2014, we realized net capital gains of $0.7 million related to our Share Exchange with MVC (see Plan of Reorganization above).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Changes in Unrealized Appreciation/Depreciation
of Portfolio Securities



During the nine months ended September
30, 2015, we recorded a net change in unrealized appreciation of $6.0 million, to a net unrealized appreciation of $2.4 million.
Such change in unrealized appreciation resulted primarily from the following changes:



| | (i) | Decrease in the fair value of our holdings in Equus Energy, LLC of $2.3 million, principally due to a combination of production without a corresponding increase in proved reserves and declining short- and long-term prices for crude oil and natural gas;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Decrease in the fair value of our shareholding in MVC of $0.7 million due to a decrease in the MVC share price during the period, which was partially offset by $0.2 million in dividends received in the form of additional MVC shares;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Increase in fair value of our shareholding in PalletOne, Inc. of $6.5 million due to an overall improvement in the industry sector for packaging companies, as well as continued revenue and earnings growth;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Transfer of unrealized depreciation to realized gain on our holding of OPG Notes of $0.4 million in connection with the sale of our interest in the OPG Notes; and
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | Transfer of unrealized depreciation to realized loss on our holdings in Spectrum of $2.9 million in connection with the sale of our interest in Spectrum.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



Net unrealized depreciation on investments
decreased $1.0 million during the nine months ended September 30, 2014, to a net unrealized depreciation of $3.0 million. Such
decrease in unrealized depreciation is largely due to the following changes:



| | (i) | Increase in fair value of our holding in Equus Energy, LLC of $1.8 million due to an increase in comparable transactions for mineral leases, increased oil and gas production, as well as additional proved reserves from new drilling and recompletion activities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $0.7 million due to an improvement in the industry sector for packaging companies and continued revenue and earnings growth.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Decrease in fair value of our shareholding in MVC of $1.3 million due to a difference between our cost basis in the MVC shares and the closing trading price of the MVC shares on September 30, 2014. Our cost basis included the closing trading price of the shares on May 14, 2014 (the closing date of the Share Exchange) as well as capitalized transaction costs of $0.5 million incurred in connection with the Share Exchange.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iv)  | Decrease in fair value of our holding of OPG Notes of $0.1 million due to adverse changes in the USD-EUR exchange rate.                                                                                                                                                                                                                                                                                                                



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



On January 6, 2015, we sold our
interests in Spectrum to 5th Element Tracking, LLC (“5th
Element”). The purchase price of $3.9 million paid by 5th Element
consisted of $3.0 million in cash and a 1-year subordinated note in the original principal amount of $0.9 million, bearing interest
at the rate of 14% per annum. We realized a net capital loss of $2.8 million in connection with the sale of our interest in Spectrum.

29


Table of Contents




Also on January 6, 2015, in connection
with the sale of our interest in Spectrum, our $0.5 million loan to Security Monitor Holdings, LLC, together with all accrued interest
amounting to approximately $0.1 million, was repaid.



On January 30, 2015, we received a partial
redemption payment in respect of our holding of OPG Notes in the amount of €36,587 [$41,478].



On February 20, 2015, we sold our OPG
Notes at a discount of 23% to their par value, receiving $1.0 million in cash and a realized gain of $0.4 million.



During the nine months ended September
30, 2015, 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,
2014, we capitalized legal and consulting expenses of $0.1 million relating to our investment in Spectrum Management. We also received
a semi-annual interest payment of $0.04 million in cash and $0.1 million in the form of PIK’d interest in respect of our
€1.2 million [$1.5 million] in OPG notes. On May 14, 2014, we sold to MVC 2,112,000 shares of the Fund’s common stock
in exchange for 395,839 shares of MVC (see Plan of Reorganization – Share Exchange with MVC Capital above).



Subsequent Events



Management performed an evaluation of
the Fund’s activity through the date the financial statements were issued, noting that there were no subsequent events.



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, in addition to our investment in the OPG notes, 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.



We are classified as a
“non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our
assets that may be invested in the securities of a single user. The value of one segment called “Energy” includes
one portfolio company, Equus Energy, LLC, and was 19.9% of the net asset value and 38.3% of our investments in portfolio
company securities (at fair value) as of September 30, 2015. The value of one segment called “Shipping products and
services” includes one portfolio company, PalletOne, Inc, and was 19.9% of the net asset value and 38.3% of our
investments in portfolio company securities (at fair value) as of September 30, 2015. 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.



Item 4. Controls
and Procedures



The Fund maintains disclosure controls
and other procedures that are designed to ensure that information required to be disclosed by the Fund in the reports that it files
or submits 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 the Fund’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

30


Table of Contents






The Fund’s management, with the
participation of the 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, 2015. Based on their evaluation, the Fund’s 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 the Fund’s internal control over financial reporting during the quarter ended September
30, 2015, that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial
reporting.



Part II. Other Information



Item
1. Legal Proceedings



Champion Window Arbitration Settlement—In
January 2006, we sold our 31.5% ownership interest in Champion Window, Inc. (“Champion”), a portfolio company of the
Fund, to Atrium Companies Inc. (“Atrium”) pursuant to a Stock Purchase Agreement (“SPA”) dated December
22, 2005. The SPA contained certain limited rights of indemnification for Atrium in connection with its purchase of such ownership
interest.



More than five years after the closing
of the sale of our Champion interest, Atrium filed suit in Texas state court, which was subsequently consolidated into an Arbitration
Action, against two former officers of Champion, Equus, and another former Champion shareholder. The suit alleged breaches of fiduciary
duty against Champion’s former officers for hiring undocumented workers that were discovered as a result of an investigation
by the U.S. Immigration and Customs Enforcement agency (“ICE”) into Atrium’s hiring practices. The suit also
sought indemnification under the SPA from these officers, Equus, and another former Champion shareholder, for a payment of $2.0
million made to ICE in settlement of the investigation and associated legal costs, as well as for claimed lost profits as a result
of the investigation.



On February 4, 2015, without admitting
to any liability on the part of Equus, we entered into a settlement agreement with Atrium and its associated companies. Pursuant
to the settlement agreement and in view of the estimated costs of protracted litigation and the associated disruption to the operations
of the Fund, we agreed to pay $500,000, in complete settlement of the lawsuit, as being in the best interests of the Fund and its
shareholders. This amount was accrued as of December 31, 2014. The settlement payment was made on February 6, 2015. Atrium filed
a motion to dismiss the lawsuit with prejudice on February 4, 2015.



Indemnification Settlement—Effective
June 13, 2013, the Fund entered into a settlement agreement with Sam Douglass, a former director and executive officer of the Fund,
in respect of a claim for indemnification pursuant to the General Corporation Law of Delaware and an indemnification agreement
entered into by the Fund with Mr. Douglass on May 3, 2001. The settlement agreement provides for the reimbursement to Mr. Douglass
of actual expenses incurred, excluding any fines or penalties, in connection with an enforcement action initiated by the Securities
and Exchange Commission against Mr. Douglass in 2009. The settlement payment of $125,000 was made on June 24, 2013.



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



There have been no material changes
in the Fund’s risk factors from the disclosure set forth in the Annual Report on Form 10-K for the year ended December 31,
2014.



Readers should carefully consider these
risks and all other information contained in the annual report on Form 10-K, including the Fund’s financial statements and
the related notes thereto. The risks and uncertainties described below are not the only ones facing the Fund.



Additional risks and uncertainties not
presently known to the Fund, or not presently deemed material by the Fund, may also impair its operations and performance.

31


Table of Contents




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(c) 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(b) 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.]
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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
| | -- | ----------------------------------------



32


Table of Contents




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.



Date: November 12, 2015

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













































































33