UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended
June 30, 2014

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.)
|                                                                       |                                             
|Eight Greenway Plaza, Suite 930 Houston, Texas                         | 77046                                       
|(Address of principal executive offices)                               | (Zip Code)                                  

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. YesxNo ̈

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 filerx | Smaller Reporting Company ̈
|------------------------ | ------------------ | ---------------------- | --------------------------

Indicate
by check mark whether the registrant is a shell company. Yes ̈Nox

There were 12,673,646 shares of
the registrant’s common stock, $.001 par value, outstanding, as of August 14, 2014.

Table of Contents





EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)



INDEX



|                                                                                              | PAGE
|--------------------------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                                                 |     
|Item 1. Financial Statements                                                                  |     
|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 | 24  
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             | 29  
|Item 4. Controls and Procedures                                                               | 30  
|PART II. OTHER INFORMATION                                                                    |     
|Item 1. Legal Proceedings                                                                     | 30  
|Item 1A. Risk Factors                                                                         | 31  
|Item 6. Exhibits                                                                              | 33  
|SIGNATURE                                                                                     | 34  
|                                                                                              |     



Table of Contents2







EQUUS TOTAL RETURN, INC.

BALANCE SHEETS



Part I. Financial Information

Item 1. Financial Statements



|                                                                                           |  | June 30, 2014 |         | December 31, 2013
|------------------------------------------------------------------------------------------ |  | ------------- | ------- | -----------------
|                                                                                           |  | (Unaudited)   |         |                  
|(in thousands, except per share amounts)                                                   |  |               |         |                  
|Assets                                                                                     |  |               |         |                  
|Investments in portfolio securities at fair value:                                         |  |               |         |                  
|Control investments (cost at $15,928 and $15,789 respectively)                             |  | $             | 12,044  |                  
|Affiliate investments (cost at $350 and $350 respectively)                                 |  |               | 968     |                  
|Non-affiliate investments (cost at $6,896 and $1,321 respectively)                         |  |               | 7,202   |                  
|Total investments in portfolio securities at fair value                                    |  |               | 20,214  |                  
|Cash and cash equivalents                                                                  |  |               | 17,198  |                  
|Restricted cash and temporary cash investments                                             |  |               | —       |                  
|Accounts receivable from investments                                                       |  |               | 574     |                  
|Accrued interest receivable                                                                |  |               | 391     |                  
|Accounts receivable and other                                                              |  |               | 26      |                  
|Total assets                                                                               |  |               | 38,403  |                  
|Liabilities and net assets                                                                 |  |               |         |                  
|Accounts payable and accrued liabilities                                                   |  |               | 300     |                  
|Accounts payable to related parties                                                        |  |               | 62      |                  
|Borrowing under margin account                                                             |  |               | —       |                  
|Total liabilities                                                                          |  |               | 362     |                  
|                                                                                           |  |               |         |                  
|Commitments and contingencies                                                              |  |               |         |                  
|                                                                                           |  |               |         |                  
|Net assets                                                                                 |  | $             | 38,041  |                  
|                                                                                           |  |               |         |                  
|Net assets consist of:                                                                     |  |               |         |                  
|Common stock, par value                                                                    |  | $             | 13      |                  
|Capital in excess of par value                                                             |  |               | 56,049  |                  
|Undistributed
    net capital losses                                                       |  |               | (15,721 | )                
|Undistributed net capital gains                                                            |  |               | 660     |                  
|Unrealized depreciation of portfolio securities, net                                       |  |               | (2,960  | )                
|Total net assets                                                                           |  | $             | 38,041  |                  
|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                                                                  |  | $             | 3.00    |                  



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

Table of Contents3







EQUUS TOTAL RETURN, INC.

STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                           |  | Three months ended June 30, |        | Six months ended June 30,
|-------------------------------------------------------------------------- |  | --------------------------- | ------ | -------------------------
|(in thousands, except per share amounts)                                   |  | 2014                        |        | 2013                     
|Investment income:                                                         |  |                             |        |                          
|Interest income (loss), net:                                               |  |                             |        |                          
|Control investments                                                        |  | $                           | —      |                          
|Non-affiliate investments                                                  |  |                             | 64     |                          
|Total
    interest income (loss)                                           |  |                             | 64     |                          
|Interest from temporary cash investments                                   |  |                             | —      |                          
|Total
    investment income (loss)                                         |  |                             | 64     |                          
|                                                                           |  |                             |        |                          
|Expenses:                                                                  |  |                             |        |                          
|Professional fees                                                          |  |                             | 237    |                          
|Compensation expense                                                       |  |                             | 225    |                          
|General and administrative expense                                         |  |                             | 69     |                          
|Director fees and expenses                                                 |  |                             | 161    |                          
|Mailing, printing and other expenses                                       |  |                             | 77     |                          
|Taxes                                                                      |  |                             | 8      |                          
|Settlement expense                                                         |  |                             | —      |                          
|Total expenses                                                             |  |                             | 777    |                          
|                                                                           |  |                             |        |                          
|Net investment loss                                                        |  |                             | (713   | )                        
|                                                                           |  |                             |        |                          
|Net realized gain (loss):                                                  |  |                             |        |                          
|Non-affiliate investments                                                  |  |                             | 660    |                          
|Net realized gain (loss)                                                   |  |                             | 660    |                          
|                                                                           |  |                             |        |                          
|Net unrealized depreciation of portfolio securities:                       |  |                             |        |                          
|End of period                                                              |  |                             | (2,960 | )                        
|Beginning of period                                                        |  |                             | (4,024 | )                        
|Net change in unrealized depreciation of portfolio securities              |  |                             | 1,064  |                          
|                                                                           |  |                             |        |                          
|Net increase (decrease) in net assets resulting from operations            |  | $                           | 1,011  |                          
|                                                                           |  |                             |        |                          
|Net increase (decrease) in net assets resulting from operations per share: |  |                             |        |                          
|Basic and diluted                                                          |  | $                           | 0.09   |                          
|Weighted average number of shares outstanding
    during     period:       |  |                             |        |                          
|Basic and diluted                                                          |  |                             | 11,676 |                          

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

Table of Contents4







EQUUS TOTAL RETURN, INC.

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)



|                                                                |  | Six months ended June 30,
|--------------------------------------------------------------- |  | -------------------------
|(in thousands)                                                  |  | 2014                     
|Net increase (decrease) in net assets resulting from operations |  | $                        
|Shares issued for portfolio securities                          |  |                          
|Increase (decrease) 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.

Table of Contents5







EQUUS TOTAL RETURN, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                         |  | Six months ended June 30,
|-------------------------------------------------------------------------------------------------------- |  | -------------------------
|(in thousands)                                                                                           |  | 2014                     
|Cash flows from operating activities:                                                                    |  |                          
|Net increase (decrease) in net assets resulting from operations                                          |  | $                        
|Adjustments to reconcile net
    increase (decrease) in net assets resulting from operations to net cash |  |                          
|(used in) provided by operating activities:                                                              |  |                          
|Net realized (gain) loss                                                                                 |  |                          
|Net change in unrealized depreciation of portfolio securities                                            |  |                          
|Changes in operating assets and liabilities:                                                             |  |                          
|Purchase of portfolio securities                                                                         |  |                          
|Net proceeds from dispositions of portfolio securities                                                   |  |                          
|Principal payments received from portfolio securities                                                    |  |                          
|Sales of temporary cash investments, net                                                                 |  |                          
|Increase in accounts receivable from investments                                                         |  |                          
|Decrease in accounts receivable and other                                                                |  |                          
|Increase (decrease) in accrued interest receivable                                                       |  |                          
|Increase in accounts payable and accrued liabilities                                                     |  |                          
|Increase in accounts payable to related parties                                                          |  |                          
|Net cash (used in) provided by operating activities                                                      |  |                          
|Cash flows from financing activities:                                                                    |  |                          
|Repayments under margin account                                                                          |  |                          
|Net cash used in financing activities                                                                    |  |                          
|Net decrease increase 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                                         |  | $                        
|                                                                                                         |  |                          
|Supplemental disclosure of cash flow information:                                                        |  |                          
|Income taxes paid                                                                                        |  | $                        



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

Table of Contents6







EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED
PER SHARE DATA AND RATIOS

(Unaudited)



|                                                                                               |  | Six months ended June 30,
|---------------------------------------------------------------------------------------------- |  | -------------------------
|                                                                                               |  | 2014                     
|Investment income (loss)                                                                       |  | $                        
|Expenses                                                                                       |  |                          
|Net investment loss                                                                            |  |                          
|                                                                                               |  |                          
|Net realized gain (loss)                                                                       |  |                          
|Net change
    in unrealized depreciation of portfolio securities                              |  |                          
|Net increase (decrease) in net assets resulting from operations                                |  |                          
|Capital transactions:                                                                          |  |                          
|Shares issued for portfolio securities                                                         |  |                          
|Dilutive effect of shares issued                                                               |  |                          
|Decrease in net assets resulting from capital transactions                                     |  |                          
|Net 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 (basic and diluted)                                                           |  |                          
|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 (decrease) 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.

Table of Contents7







EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

JUNE 30, 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 (3):                                                                                                                                            |                                    |                   |                                                                          |        |           |        |             |  
|Equus
Energy, LLC
        Houston, TX                                                                                                                                                    | Energy                             | December
    2011 | Member
    interest (100%)                                               |        |           | $      | 7,050       | $ | 8,800   
|Equus
                                         Media Development Company, LLC
                                                      Houston,
                                         TX | Media                              | January 2007      | Member
    interest (100%)                                               |        |           |        | 3,000       |   | 216     
|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 (2)                       | $      | 3,028     |        | 3,028       |   | 3,028   
|                                                                                                                                                                                         |                                    |                   |                                                                          |        |           |        | 5,878       |   | 3,028   
|Total
    Control Investments: Majority-owned (represents 59.6% of total investments at fair value)                                                                                      |                                    |                   | $                                                                        | 15,928 | $         | 12,044
|Affiliate
    Investments (4):                                                                                                                                                           |                                    |                   |                                                                          |        |           |        |             |   |         
|PalletOne, Inc.
        Bartow, FL                                                                                                                                                       | Shipping
    products and services | October
    2001  | 350,000 shares of common
    stock (18.7%)                               |        |           | $      | 350         | $ | 968     
|Total
    Affiliate Investments (represents 4.8% of total investments at fair value)                                                                                                     |                                    |                   | $                                                                        | 350    | $         | 968   
|Non-Affiliate
    Investments (less than 5% owned):                                                                                                                                      |                                    |                   |                                                                          |        |           |       
|MVC Capital, Inc.
        Purchase, NY                                                                                                                                                   | Financial
    services             | May
    2014      | 395,839 shares of common
    stock (1.7%) (5)                            |        |           | $      | 5,584       | $ | 5,126   
|Orco Property Group
        Paris, France                                                                                                                                                | Real
    estate                    | April
    2011    | 10%
    promissory note due 2/18 (2)                                     | $      | 812       |        | 812         |   | 1,576   
|Security Monitor Holding,
        LLC
        Boston, MA                                                                                                                                 | Business
    products and services | November
    2013 | 14%
    promissory note due 6/14 (2)                                     |        | 500       |        | 500         |   | 500     
|Total
    Non-Affiliate Investments (represents 35.6% of total investments at fair value)                                                                                                |                                    |                   | $                                                                        | 6,896  | $         | 7,202 
|Total
    Investment in Portfolio Securities                                                                                                                                             |                                    |                   |                                                                          |        |           | $      | 23,174      | $ | 20,214  



|(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.

|(5) | 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 12 months of the date of the Agreement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







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

Table of Contents8







EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS –
(Continued)

JUNE 30, 2014

(Unaudited)



Except for our holding of notes
issued by Orco Property Group S.A. (“OPG”) and 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 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
June 30, 2014, except for our holdings in OPG and 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 64.4% of the total value of the investments in portfolio securities as of June 30, 2014.



Our investments in portfolio securities
consist of the following types of securities as of June 30, 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         |  |      | 4,340  |            |  |                                       
|Common stock                          |  |      | 5,934  |            |  |                                       
|Total                                 |  | $    | 23,174 |            |  | $                                     





Interest payments are being received
and/or accrued on notes with a fair value of $2.1 million, while accrued interest has been impaired on notes receivable included
in secured and subordinated debt with a fair value of $3.0 million.



The following is a summary by industry
of the Fund’s investments in portfolio securities as of June 30, 2014 (in thousands):



|Industry                       |  | Fair Value |        | Fair Value as
                                                                                                                              Percentage of
                                                                                                                              Net
Assets
|------------------------------ |  | ---------- | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Energy                         |  | $          | 8,800  |                                                                                                                                                                                                                                                                                                   
|Financial services             |  |            | 5,126  |                                                                                                                                                                                                                                                                                                   
|Business products and services |  |            | 3,528  |                                                                                                                                                                                                                                                                                                   
|Real estate                    |  |            | 1,576  |                                                                                                                                                                                                                                                                                                   
|Shipping products and services |  |            | 968    |                                                                                                                                                                                                                                                                                                   
|Media                          |  |            | 216    |                                                                                                                                                                                                                                                                                                   
|Total                          |  | $          | 20,214 |                                                                                                                                                                                                                                                                                                   





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

Table of Contents9







EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2013

(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       | $ | 8,000   
|Equus
                                                                                                                          Media Development Company, LLC
                                                                                                                          Houston, TX | Media                              | January
    2007    | Member
    interest (100%)                                               |        |           |        | 3,000       |   | 216     
|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 (2)                       | $      | 2,889     |        | 2,889       |   | 2,889   
|                                                                                                                                                                                                                                                                                                     |                                    |                     |                                                                          |        |           |        | 5,739       |   | 2,889   
|Total
    Control Investments: Majority-owned (represents 39.0% of total investments at fair value)                                                                                                                                                                                                  |                                    | $                   | 15,789                                                                   | $      | 11,105   
|Affiliate
    Investments (4):                                                                                                                                                                                                                                                                       |                                    |                     |                                                                          |        |           |        |             |   |         
|PalletOne, Inc.
        Bartow, FL                                                                                                                                                                                                                                                                   | Shipping
    products and services | October
    2001    | 350,000
    shares of common stock (18.7%)                               |        |           | $      | 350         | $ | 250     
|Total
    Affiliate Investments (represents 0.9% of total investments at fair value)                                                                                                                                                                                                                 |                                    |                     | $                                                                        | 350    | $         | 250   
|Non-Affiliate
    Investments (less than 5% owned):                                                                                                                                                                                                                                                  |                                    |                     |                                                                          |        |           |       
|Orco Property Group
        Paris, France                                                                                                                                                                                                                                                            | Real
    estate                    | April
    2011      | 73,666
    shares common stock                                           |        |           | $      | 125         | $ | 169     
|                                                                                                                                                                                                                                                                                                     |                                    |                     | 10% promissory
    note due 2/18 (2)                                     | $      | 696       |        | 696         |   | 1,480   
|                                                                                                                                                                                                                                                                                                     |                                    |                     |                                                                          |        |           |        | 821         |   | 1,649   
|Security Monitor Holdings,
        LLC
        Boston, MA                                                                                                                                                                                                                                            | Business products
    and services | November
    2013   | 14% promissory
    note due 5/14 (2)                                     |        | 500       |        | 500         |   | 500     
|Total
    Non-Affiliate Investments (represents 7.5% of total investments at fair value)                                                                                                                                                                                                             |                                    |                     | $                                                                        | 1,321  | $         | 2,149 
|Total
    Investment in Portfolio Securities                                                                                                                                                                                                                                                         |                                    |                     |                                                                          |        |           | $      | 17,460      |   | 13,504  
|Temporary
    Cash Investments                                                                                                                                                                                                                                                                       |                                    |                     |                                                                          |        |           |        |             |   |         
|U.S. Treasury
    Bill                                                                                                                                                                                                                                                                               | Government                         | December 2013       | U.S. Treasury
    Bill 0%     2/14                                       |        | 15,000    | $      | 15,000      | $ | 15,000  
|Total
    Temporary Cash Investments (represents 52.6% of total investments at fair value)                                                                                                                                                                                                           |                                    |                     | $                                                                        | 15,000 | $         | 15,000
|Total
    Investments                                                                                                                                                                                                                                                                                |                                    |                     |                                                                          |        |           | $      | 32,460      | $ | 28,504  



|(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.

Table of Contents10







EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS –
(Continued)

DECEMBER 31, 2013

(in thousands, except share data)



Except for our holding of notes and
ordinary shares of OPG, substantially all of our portfolio securities are restricted from public sale without prior registration
under the Securities Act of 1933 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 1940 Act. Specifically, we may invest up to 30% of our assets in entities
that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including companies located outside
of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly-traded entities
with a market capitalization exceeding $250 million. As of December 31, 2013, except for our holdings in OPG, 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 82.2% of the total value of the investments in portfolio securities as of December 31, 2013.



Our investments in portfolio securities
consist of the following types of securities as of December 31, 2013 (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         |  |      | 4,085  |            |  |                                       
|Common stock                          |  |      | 475    |            |  |                                       
|Total                                 |  | $    | 17,460 |            |  | $                                     



Interest payments are being received
and/or accrued on notes with a fair value of $2.0 million, while accrued interest has been impaired on notes receivable included
in secured and subordinated debt with a fair value of $2.9 million.



The following is a summary by industry
of our investments in portfolio securities as of December 31, 2013 (in thousands):



|Industry                       |  | Fair Value |        | Fair Value as Percentage of Net Assets
|------------------------------ |  | ---------- | ------ | --------------------------------------
|Energy                         |  | $          | 8,000  |                                       
|Business products and services |  |            | 3,389  |                                       
|Real estate                    |  |            | 1,649  |                                       
|Shipping products and services |  |            | 250    |                                       
|Media                          |  |            | 216    |                                       
|Total                          |  | $          | 13,504 |                                       













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

Table of Contents11







EQUUS TOTAL RETURN, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2014

(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 a change of the Fund’s investment strategy to
a total return investment objective. This new strategy seeks to provide the highest total return, consisting of capital appreciation
and current income. In connection with this strategic investment change, the shareholders also approved the change of name from
Equus II Incorporated to Equus Total Return, Inc.



We attempt to maximize the return to
stockholders in the form of current investment income and long-term capital gains by investing in the debt and equity securities
of companies with a total enterprise value of between $5.0 million and $75.0 million, although we may engage in transactions with
smaller or larger investee companies from time to time. We seek to invest primarily in companies pursuing growth either through
acquisition or organically, leveraged buyouts, management buyouts and recapitalizations of existing businesses or special situations.
Our income-producing investments consist principally of debt securities including subordinate debt, debt convertible into common
or preferred stock, or debt combined with warrants and common and preferred stock. Debt and preferred equity financing may also
be used to create long-term capital appreciation through the exercise and sale of warrants received in connection with the financing.
We seek to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned
companies in transactions negotiated directly with such companies. Given market conditions over the past several years and the
performance of our portfolio, our management and Board of Directors believe it is 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 Investment Company Act of 1940 (“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 investments. 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 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 three and six months ended June 30, 2014 are not necessarily indicative of results that ultimately may be achieved for
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 Form 10-K for the fiscal year ended December 31, 2013, as filed
with the Securities and Exchange Commission (“SEC”).



Table of Contents12







| | (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 June 30, 2015. 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 June 30, 2014, we had cash and cash equivalents of $17.2 million. We had $20.2 million of our net assets of $38.0 million invested
in portfolio securities.



As of December 31, 2013, we
had cash and cash equivalents of $19.1 million. We had $13.5 million of our net assets of $33.2 million invested in
portfolio securities. We also had $15.2 million of restricted cash and temporary cash investments, including primarily the
proceeds of a quarter-end margin loan that we incurred to maintain the percentage of qualifying investments 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 January 2, 2014 and we subsequently repaid this margin loan. The margin interest was paid on January 22, 2014.



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 June 30, 2014, 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.



We had no RIC borrowings or restricted
cash as of June 30, 2014.



As of December 31, 2013, 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 $15.2 million.
The U.S. Treasury bills were sold on January 2, 2014 and the total amount borrowed was repaid at that time. The margin interest
was paid on January 22, 2014.



Certain Risks and Uncertainties—
Economic conditions since 2008 and resulting market dislocations have resulted in a significant decline in the availability of
debt and equity for smaller and medium-sized enterprises. Generally, the limited amount of available debt financing 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 six months of 2014, the price of our common stock continued to fall 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 2014 operating requirements.





Table of Contents13







| | (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—Portfolio
investments are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination
of net assets. Valuations of portfolio securities are performed in accordance with accounting principles generally accepted in
the United States of America and the financial reporting policies of the SEC. The applicable methods prescribed by such principles
and policies are described below:



Publicly-traded portfolio securities—Investments
in companies whose securities are publicly traded are generally valued at their quoted market price at the close of business on
the valuation date.



Privately-held portfolio securities—The
fair value of investments for which no market exists is determined on the basis of procedures established in good faith by our
Board of Directors. As a general principle, the current “fair value” of an investment would be the amount we might
reasonably expect to receive for it upon its current sale, in an orderly manner. Appraisal valuations are necessarily subjective
and the estimated values arrived at by the Fund may differ materially from amounts actually received upon the disposition of portfolio
securities.



Thinly Traded and Over-the-Counter
Securities—Generally, we value securities that are traded in the over-the-counter market or on a stock exchange at the
average of the prevailing bid and ask prices on the date of the relevant period end. However, we may apply a discount to the market
value of restricted or thinly traded public securities to reflect the impact that these restrictions have on the value of these
securities. We review factors, including the trading volume, total securities outstanding and our percentage ownership of securities
to determine whether the trading levels are active (Level 1) or inactive (Level 2) or unobservable (Level 3). These securities
represented 14.0% and 11.0% of our investments in portfolio securities as of June 30, 2014 and December 31, 2013, respectively.
We utilized independent pricing services with certain of our fair value estimates. To corroborate “bid/ask” quotes
from independent pricing services, we perform a market-yield approach to validate prices obtained or obtain other evidence.



During the first twelve months
after an investment is made, the original investment value is utilized to determine the fair value unless significant
developments have occurred during this twelve month period which would indicate a material effect on the portfolio company
(such as results of operations,  changes in general market conditions, or a default by the issuer). After the twelve month period,
or if material events have occurred within the twelve month period, 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 an asset
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.



Market approach—The market
approach typically employed by our 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 it deems 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
we deem appropriate to equity valuations where applicable.

Table of Contents14







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 which 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 operations, we may base a portfolio company’s fair value upon the company’s estimated liquidation value.
Fair valuations are necessarily subjective, and management’s estimate of fair value may differ materially from amounts actually
received upon the disposition of its portfolio securities. Also, any failure by a portfolio company to achieve its business plan
or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid change
in its value.



Our general intent is to hold our loans
to maturity when appraising our privately held debt investments. As such, we believe that the fair value will not exceed the cost
of the investment. However, in addition to the previously described analysis involving allocation of value to the debt instrument,
we perform a yield analysis to determine if a debt security has been impaired.



The Audit Committee of the Board of
Directors may engage independent, third-party valuation firms to conduct independent appraisals and review management’s preliminary
valuations of each privately-held investment in order to make their own independent assessment. Any third-party valuation data
would be considered as one of many factors in a fair value determination. The Audit Committee then would recommend the fair values
for all privately-held securities based on all relevant factors to the Board of Directors for final approval.



Because
of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values,
amounting to $15.1 million and $13.3 million as of June 30, 2014 and December 31, 2013, respectively, our fair value
determinations may materially differ from the values that would have been used had a ready market existed for the securities.
As of June 30, 2014, one of our portfolio investments, 395,839 common shares of MVC was publicly listed on the NYSE and our
holding of €1,200,790 [$1.5 million] in 6-year notes of OPG was publicly listed on the Luxembourg Stock Exchange. As of
December 31, 2013, the 73,666 ordinary shares of OPG were publicly listed on the NYSE Euronext Paris Exchange, and our
holding of €1,200,790 [$1.5 million] in 6-year OPG Notes was  listed on the Luxembourg Stock Exchange. 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. However, during the six months ended June 30, 2014 and the year ended December 31,
2013,  there had been no significant trading activity in the OPG Notes.



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 reports those amounts to Lipper Analytical Services, Inc.
Our net asset value appears in various publications, including Barron’sand The Wall Street Journal.



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



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



We classify our investments in accordance
with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies
in which we own more than 25% of the voting securities or maintain greater than 50% representation on the portfolio company’s
governing board. 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.





Table of Contents15







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 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 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.



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 record it as interest income.
To maintain our status as a RIC, we may be required to 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.



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 & Temporary Cash Investments” used for purposes of complying with RIC requirements from cash equivalents.
See Note 2 for further discussion of the Fund’s RIC borrowings.



Income Taxes—We intend
to comply with the requirements of the Internal Revenue Code necessary for us to qualify as a RIC. So long as we comply with these
requirements, we generally will not be subject to corporate-level federal income taxes on otherwise taxable income (including net
realized capital gains) distributed to stockholders. Therefore, we did not record a provision for federal income taxes in our financial
statements. We borrow money from time to time to maintain our tax status under the Internal Revenue Code as a RIC. See Note 2 for
further discussion of our 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 $0.01 million for the year ended December 31, 2013.



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 Texas state income tax for the year ended December 31, 2013.



Fair Value Measurement—Fair
value is defined as 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. We have categorized all investments recorded at fair value based upon the
level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, directly related to the amount
of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:



Level 1—Inputs are unadjusted,
quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value
generally are equities listed in active markets.



Level 2—Inputs (other than quoted
prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement
date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category
are warrants held in a public company.



Level 3—Inputs reflect our best
estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that
require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value
and included in this category are debt, warrants and/or other equity investments held in a private company. As previously described,
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.



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.



Table of Contents16







As of June 30, 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 (unaudited):



|                          |  | Fair Value Measurements as
    of June 30, 2014
|------------------------- |  | -----------------------------------------------
|(in thousands)            |  | Total                                          
|Assets                    |  |                                                
|Investments:              |  |                                                
|Control investments       |  | $                                              
|Affiliate investments     |  |                                                
|Non-affiliate investments |  |                                                
|Total investments         |  | $                                              







As of December 31, 2013, 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, 2013
|------------------------------------------------ |  | -----------------------------------------------
|(in thousands)                                   |  | Total                                          
|Assets                                           |  |                                                
|Investments:                                     |  |                                                
|Control investments                              |  | $                                              
|Affiliate investments                            |  |                                                
|Non-affiliate investments                        |  |                                                
|Total investments                                |  |                                                
|Temporary cash investments                       |  |                                                
|Total investments and temporary cash investments |  | $                                              



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



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





Table of Contents17







The following table provides a reconciliation
of fair value changes during the six months ended June 30, 2013 for all investments for which we determine fair value using unobservable
(Level 3) factors (unaudited):



|                                                 |  | Fair value measurements
    using significant unobservable inputs (Level 3)
|------------------------------------------------ |  | ---------------------------------------------------------------------------
|(in thousands)                                   |  | Control Investments                                                        
|Fair value as of December 31, 2012               |  | $                                                                          
|Realized losses                                  |  |                                                                            
|Change in unrealized appreciation (depreciation) |  |                                                                            
|Purchases of portfolio securities                |  |                                                                            
|Proceeds from sales/dispositions                 |  |                                                                            
|Fair value as of June 30, 2013 (unaudited)       |  | $                                                                          



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



The following table summarizes the significant
observable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique as
of June 30, 2014 (unaudited):



|                                      |  |   |            |  |  |                        |  |                                                                    |  |  | Range   |  
|------------------------------------- |  | - | ---------- |  |  | ---------------------- |  | ------------------------------------------------------------------ |  |  | ------- | -
|(in thousands)                        |  |   | Fair Value |  |  | Valuation Techniques   |  | Unobservable Inputs                                                |  |  | Minimum |  
|Secured and subordinated debt         |  | $ | 5,104      |  |  | Yield analysis         |  | Market interest rate                                               |  |  | 2.5     | %
|                                      |  |   |            |  |  | Yield analysis         |  | Discount for lack of marketability                                 |  |  | 2.5     | %
|                                      |  |   |            |  |  | Yield analysis         |  | Discount for lack of marketability                                 |  |  | 7.2     | %
|                                      |  |   |            |  |  | Yield analysis         |  | Control premium                                                    |  |  | 12      | %
|                                      |  |   |            |  |  | New transaction        |  | Discount                                                           |  |  | 0       | %
|                                      |  |   |            |  |  |                        |  |                                                                    |  |  |         |  
|Common stock                          |  |   | 968        |  |  | Income/market approach |  | Market multiple/discount for lack of marketability/control premium |  |  | 0       | %
|                                      |  |   |            |  |  |                        |  |                                                                    |  |  |         |  
|                                      |  |   |            |  |  | Asset approach         |  | Recovery rate                                                      |  |  | 0       | %
|Limited liability company investments |  |   | 9,016      |  |  | Income/market approach |  | Reserve adjustment factors                                         |  |  | 75      | %
|                                      |  |   |            |  |  |                        |  |                                                                    |  |  |         |  
|                                      |  | $ | 15,088     |  |  |                        |  |                                                                    |  |  |         |  

Table of Contents18







| | (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 $37,500 for each of the six months ended June 30, 2014 and 2013.



In respect of services provided to
the Fund by members of the Board not in connection with their roles and duties as directors, the Fund pays a rate of $250 per
hour for services rendered.



| | (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 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.



During the six months
ended June, 2014, we capitalized legal and consulting expenses of $0.1 million relating to 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 below).

During the six months
ended June, 2014, we realized net capital gains of $0.7 million related to our Share Exchange with MVC (see Plan of Reorganization below).

Net unrealized depreciation on investments
decreased $1.0 million during the six months ended June 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 $0.8 million due to an
                                                                                                    increase in comparable transactions for mineral leases, continued improved economic conditions, industry outlook, pricing
                                                                                                    assumptions, 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 $0.4 million due to a
                                                                                                      difference                                                                                                       between our
                                                                                                      cost                                                                                                       basis
                                                                                                      in the MVC shares and the closing trading price of the MVC shares on June 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.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the six months ended June 30,
2013, we capitalized legal and consulting expenses of $0.2 million relating to Spectrum Management, LLC. We also received a semi-annual
interest payment of $0.03 million and a 5.75% partial principal repayment of $0.01 million in respect of our €1.2 million
[$1.5 million] in OPG notes.



During the six months ended June 30,
2013, we realized capital losses of $1.8 million due to the asset sale of The Bradshaw Group to PartsNow! LLC. The structure and
pricing of the transaction was such that only the Class A preferred shareholders received any proceeds. There were no proceeds
to the other equity classes, including the Classes B, D, and E preferred stock and warrants owned by the Fund. The Fund invested
in Bradshaw in May 2000 and the Fund’s investment has been valued at $0 since 2002.



Table of Contents19







Net unrealized depreciation on investments
decreased to $16.0 million during the six months ended June 30, 2013, from a net unrealized depreciation of $17.2 million. 
Such decrease in unrealized depreciation is largely due to the following changes:



| | (i) | Decrease in fair value of our holding in Equus Energy, LLC of $0.1 million due to operating expenses.
| | --- | -----------------------------------------------------------------------------------------------------





| | (ii) | Decrease in fair value of our holdings in Spectrum Management, LLC of $0.3 million due to a decline
in operating performance and $0.2 million in capitalized legal and consulting expenses.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Transfer of unrealized loss to realized loss of our holding in The Bradshaw Group (“Bradshaw”)
of $1.8 million upon the asset sale of the investment.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | (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. The number of MVC shares received by Equus represents approximately 1.73% of MVC’s
total outstanding shares of common stock.





Our shares were issued at
the EQS closing stock price on May 14, 2014. The investment in MVC was recorded at MVC’s closing stock price on the same
date. This transaction resulted in a realized gain of $0.7 million.



Pursuant to the terms of
a Share Exchange Agreement, dated May 14, 2014, entered into by Equus and MVC which memorialized the 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.



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



Equus Energy, LLC (“Equus Energy”)
was formed in November 2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector, with
particular emphasis on income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus
Energy. On December 27, 2012, we invested an additional $6.8 million in Equus Energy for the purpose of additional working capital
and to fund the purchase of $6.6 million in working interests in 132 producing and non-producing oil and gas wells. The working
interests include associated development rights of approximately 21,620 acres situated on 13 separate properties in Texas and Oklahoma.
The working interests range from a de minimus amount to 50% of the leasehold that includes these wells.



The wells are operated by a number
of experienced operators, including Chevron USA, Inc., which has operating responsibility for all of Equus Energy’s 40 producing
well interests located in the Conger Field, a productive oil and gas field on the edge of the Permian Basin that has experienced
successful gas and hydrocarbon extraction in multiple formations. Equus Energy, which holds a 50% working interest in each of these
Conger Field wells, is working with Chevron in a recompletion program of existing Conger Field wells to the Wolfcamp formation,
a zone containing oil as well as gas and natural gas liquids. Two recompletions in the Conger Field have been effected since the
closing date of the acquisition of the working interests and a third recompletion is planned during the third quarter of 2014,
with additional recompletions anticipated for the remainder of 2014 and beyond. Part of Equus Energy’s acreage rights described
above also includes a 50% working interest in possible new drilling to the base of the Canyon formation (appx. 8,500 feet) on 2,400
acres in the Conger Field. Also included in the interests acquired by Equus Energy are working interests of 7.5% and 2.5% in the
Burnell and North Pettus Units, respectively, which collectively comprise approximately 13,000 acres located in the area known
as the “Eagle Ford Shale” play.



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
on the values of the underlying assets held by EQS Energy Holdings, Inc. a wholly-owned subsidiary of Equus Energy, net of associated
liabilities.



Table of Contents20







Below is summarized consolidated financial information for Equus Energy as of June 30, 2014 and December 31,
2013 and for the three and  six months ended June, 2014 and 2013, respectively, (in thousands).



|EQUUS
    ENERGY LLC                                          
|--------------------------------------------------------------
|BALANCE
    SHEETS                                            
|(Unaudited)                                                   
|                                                              
|Assets                                                        
|Current
    assets:                                           
|Cash
    and cash equivalents                                 
|Accounts
    receivable                                       
|Prepaid expenses                                              
|Total
    current assets                                      
|Oil
    and gas properties                                    
|Less:
    accumulated depletion, depreciation and amortization
|Net
    oil and gas properties                                
|Other
    non-current investment                              
|Total
    assets                                              
|Liabilities
    and members' capital                          
|Current
    liabilities:                                      
|Accounts
    payable and other                                
|Due
    to affiliate                                          
|Total
    current liabilities                                 
|Asset
    retirement obligations                              
|Total
    liabilities                                         
|Members'
    capital                                          
|Total
    members' capital                                    
|Total
    liabilities and members' capital                    





Table of Contents21







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 revenue 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.



|EQUUS
    ENERGY, LLC                                  
|-------------------------------------------------------
|STATEMENTS
    OF OPERATIONS                           
|(Unaudited)                                            
|                                                       
|                                                       
|                                                       
|                                                       
|Operating
    revenue                                  
|                                                       
|Operating
    expenses                                 
|Direct
    operating expenses                          
|Depletion,
    depreciation, amortization and accretion
|General
    and administrative                         
|Total
    operating expenses                           
|                                                       
|Operating
    income (loss) before income tax expense  
|Income
    tax                                         
|Net
    income (loss)                                  



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 $0.3 million and $0.2 million
for the three months ended June 30, 2014 and 2013, respectively and $0.5 million for the six months ended June 30, 2014 and
2013, respectively.



Table of Contents22







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



| | (a) | As of June 30, 2014, 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 their oil and gas properties during the six months ended June
30, 2014 and 2013.



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
is recognized for oil and natural gas sales under the sales method of accounting. Under this method, revenue is recognized on production
as it is taken and delivered to its purchasers. The volumes sold may be more or less than the volumes entitled to, based on the
owner’s net leasehold interest. These differences result from production imbalances, which are not significant, and are reflected
as adjustments to proven reserves and future cash flows in the unaudited summarized oil and gas information included herein.



Accounting Policy on Depletion
- 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.

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.



| | (8) | 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.



Table of Contents23







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



Equus Total Return, Inc. (“we,”
“us,” “our,” “Equus,” the “Company,” and the “Fund”), a Delaware
corporation, was formed by Equus Investments II, L.P. (the “Partnership”) on August 16, 1991. On July 1, 1992, the
Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for
shares of common stock of the Fund. Our shares trade on the New York Stock Exchange under the symbol EQS. On August 11, 2006, our
shareholders approved the change of the Fund’s investment strategy to a total return investment objective. This new strategy
seeks to provide the highest total return, consisting of capital appreciation and current income. In connection with this strategic
investment change, the shareholders also approved the change of name from Equus II Incorporated to Equus Total Return, Inc.



We attempt to maximize the return to
stockholders in the form of current investment income and long-term capital gains by investing in the debt and equity securities
of companies with a total enterprise value of between $5.0 million and $75.0 million, although we may engage in transactions with
smaller or larger investee companies from time to time. We seek to invest primarily in companies pursuing growth either through
acquisition or organically, leveraged buyouts, management buyouts and recapitalizations of existing businesses or special situations.
Our income-producing investments consist principally of debt securities including subordinate debt, debt convertible into common
or preferred stock, or debt combined with warrants and common and preferred stock. Debt and preferred equity financing may also
be used to create long-term capital appreciation through the exercise and sale of warrants received in connection with the financing.
We seek to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned
companies in transactions negotiated directly with such companies. Given market conditions over the past several years and the
performance of our portfolio, our management and Board of Directors believe it is 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 Investment Company Act of 1940 Act (“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 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 June 30, 2014.



Pursuant to the terms of
a Share Exchange Agreement, dated May 14, 2014, entered into by Equus and MVC which memorialized the 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.





Table of Contents24







Critical Accounting Policies



Our financial statements are based on
the selection and application of significant accounting policies, which require management to make significant estimates and assumptions.
We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operations.



Valuation of Investments—
Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation included in the
determination of net assets. Valuations of portfolio securities are performed in accordance with accounting principles generally
accepted in the United States of America and the financial reporting policies of the SEC. The applicable methods prescribed by
such principles and policies are described below:



Publicly-traded portfolio securities—Investments
in companies whose securities are publicly traded are generally valued at their quoted market price at the close of business on
the valuation date.



Privately-held portfolio securities—The
fair value of investments for which no market exists is determined on the basis of procedures established in good faith by our
Board of Directors. As a general principle, the current “fair value” of an investment would be the amount we might
reasonably expect to receive for it upon its current sale, in an orderly manner. Appraisal valuations are necessarily subjective
and the estimated values arrived at by the Fund may differ materially from amounts actually received upon the disposition of portfolio
securities.



Thinly Traded and Over-the-Counter
Securities—Generally, we value securities that are traded in the over-the-counter market or on a stock exchange at the
average of the prevailing bid and ask prices on the date of the relevant period end. However, we may apply a discount to the market
value of restricted or thinly traded public securities to reflect the impact that these restrictions have on the value of these
securities. We review factors, including the trading volume, total securities outstanding and our percentage ownership of securities
to determine whether the trading levels are active (Level 1) or inactive (Level 2) or unobservable (Level 3). These types of securities
represented 14.0% and 11.0% of our investments in portfolio securities as of June 30, 2014 and December 31, 2013, respectively.
We utilized independent pricing services with certain of our fair value estimates. To corroborate “bid/ask” quotes
from independent pricing services, we perform a market-yield approach to validate prices obtained or obtain other evidence.



During the first twelve months after
an investment is made, the original investment amount is utilized to determine the fair value unless significant developments have
occurred during this twelve month period which would indicate a material effect on the portfolio company (such as results of operations
or changes in general market conditions). After the twelve month period, or if material events have occurred within the twelve
month period, Fund management considers 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, our management considers three different
valuation approaches: a market approach, an income approach, and an asset 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. Fund
management allocates value to these securities based on their relative priorities. For equity securities such as warrants, the
Fund may also incorporate alternative methodologies including the Black-Scholes Option Pricing Model.



Market approach—The market
approach typically employed by our 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 we deem 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
we deem appropriate to equity valuations where applicable.





Table of Contents25







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 which 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 operations, we may base a portfolio company’s fair value upon the company’s estimated liquidation value.
Fair valuations are necessarily subjective, and management’s estimate of fair value may differ materially from amounts actually
received upon the disposition of its portfolio securities. Also, any failure by a portfolio company to achieve its business plan
or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid change
in its value.



Our general intent is to hold our loans
to maturity when appraising our privately held debt investments. As such, we believe that the fair value will not exceed the cost
of the investment. However, in addition to the previously described analysis involving allocation of value to the debt instrument,
we perform a yield analysis to determine if a debt security has been impaired.



The Audit Committee of the Board of
Directors may engage independent, third-party valuation firms to conduct independent appraisals and review management’s preliminary
valuations of each privately-held investment in order to make their own independent assessment. Any third-party valuation data
would be considered as one of many factors in a fair value determination. The Audit Committee then would recommend the fair values
for all privately-held securities based on all relevant factors to the Board of Directors for final approval.



Because
of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values,
amounting to $15.1 million and $13.3 million as of June 30, 2014 and December 31, 2013, respectively, our fair value
determinations may materially differ from the values that would have been used had a ready market existed for the securities.
As of June 30, 2014, one of our portfolio investments, 395,839 common shares of MVC was publicly listed on the NYSE and our
holding of €1,200,790 [$1.5 million] in 6-year Orco Property Group, S.A. (“OPG”) Notes was publicly listed
on the Luxembourg Stock Exchange. As of December 31, 2013,  the 73,666 ordinary shares of
OPG were publicly listed on the NYSE Euronext Paris Exchange, and our holding of €1,200,790 [$1.5 million] in 6-year OPG Notes was listed on the Luxembourg Stock Exchange. 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. However,
during the six months ended June 30, 2014 and year the ended December 31, 2013,  there had been no significant
trading activity in the OPG Notes.



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 reports those amounts to Lipper Analytical Services,
Inc. Our net asset value appears in various publications, including Barron’s and The Wall Street Journal.



Federal Income Taxes



On May 15, 2014, we announced that we
had adopted a Plan of Reorganization, which may involve the transformation of the Fund into an operating company, which will likely
result in the loss of our status as a RIC for Federal income tax purposes. However, if we do not effect a transformation of the
Fund into an operating company, we intend to comply with the requirements of the Internal Revenue Code necessary for us to qualify
as a RIC. So long as we comply with these requirements, we generally will not be subject to corporate-level federal income taxes
on otherwise taxable income (including net realized capital gains) distributed to stockholders. Therefore, we did not record a
provision for federal income taxes in our financial statements. As of December 31, 2013, we had a capital loss carry-forward of
$32.5 million which may be used to offset future capital gains. We may borrow money from time to time to maintain our status as
a RIC under the Internal Revenue Code. See Note 2 for further discussion of our RIC borrowings. See also “Subsequent Events”
and “Risk Factors” below.





Table of Contents26







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 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 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.



Payment in Kind Interest



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 record it as interest income. To maintain the Fund’s status as a RIC, we  may be
required to pay out to our 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.



Current Market Conditions



Overall economic conditions in the United
States have improved, albeit marginally. However, the economic recovery has been hampered by slower growth and persistent high
unemployment levels. The U.S. Bureau of Economic Analysis reported a decrease of 2.1% in real GDP during the first quarter of 2014
and an increase of 4.0% for the second quarter of 2014. The U.S. Congressional Budget Office is forecasting continued growth in
2014 (3.1%), with a projected unemployment rate exceeding 6.0% until 2017. The U.S. housing market has also largely recovered from
its nadir of 2009. Nevertheless, future economic expansion and business investment is threatened by perceptions of higher taxes
and healthcare costs, as well as the high levels of government deficit spending.



Market conditions for business transactions
including mergers and acquisitions and private equity investments improved significantly in 2013 compared with previous years,
and has continued through the first half of 2014, as corporations have been deleveraging and are holding significant amounts of
cash and many have begun to focus on acquisitions as part of future growth plans. Private equity firms as a group enjoyed more
success in 2013 in monetizing their investments through sales and public listings, and are looking to continue this trend throughout
2014.



During the second quarter of 2014, our
net asset value decreased to $3.00 per share from $3.09 per share. As of June 30, 2014, the closing price of our common stock closed
was $2.48, which is a discount of approximately 17.4% to our net asset value.



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 during this turbulent economic period 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.



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.





Table of Contents27







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 gain (loss) was
$0.7 million and ($1.4) million for the three months ended June 30, 2014 and 2013, respectively and $1.2 million and
$2.1 million for the six months ended June 30, 2014 and, 2013, respectively. The decrease in net investment loss generated at
June 30, 2014 compared to June 30, 2013 is due primarily to increase in total investment income and a decrease in settlement
expense.



Total investment income (loss)
from portfolio securities was $0.06 million and $0.01 million for the three months ended June 30, 2014 and 2013,
respectively, and $0.3 million and ($0.1) million for the six months ended June 30, 2014 and 2013, respectively. The
increase was primarily due to the increase in income producing investments, along with the impairment of accrued interest
receivable of Spectrum Management, LLC at June 30, 2013.



Excluding the $0.5 million in settlement expense
that was incurred at June 30, 2013, total expenses were relatively unchanged  for the three months and six months ended June 30,
2014 and June 30, 2013, respectively.



Realized Gains and Losses on Sales of Portfolio Securities



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.



During the six months ended
June, 2014, we capitalized legal and consulting expenses of $0.1 million relating to 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 below).

During the six months
ended June, 2014, we realized net capital gains of $0.7 million related to our Share Exchange with MVC (see Plan of Reorganization below).



During the six months ended June 30,
2013, we realized capital losses of $1.8 million due to the asset sale of The Bradshaw Group (“Bradshaw”) to PartsNow!
LLC. The structure and pricing of the transaction was such that only the Class A preferred shareholders received any proceeds.
There were no proceeds to the other equity classes, including the Classes B, D, and E preferred stock and warrants owned by the
Fund. The Fund invested in Bradshaw in May 2000 and the Fund’s investment has been valued at $0 since 2002.



Changes in Unrealized Appreciation/Depreciation of Portfolio
Securities



Net unrealized depreciation on investments
decreased $1.0 million during the six months ended June 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 $0.8 million due to an
                                                                                                    increase in comparable transactions for mineral leases, continued improved economic conditions, industry outlook, pricing
                                                                                                    assumptions, as                                                                                                     well as
                                                                                                    additional                                                                                                     proved
                                                                                                    reserves                                                                                                           from new
                                                                                                    drilling and                                                                                                     recompletion
                                                                                                    activities.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------











Table of Contents28









| | (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 $0.4 million due to a
                                                                                                      difference                                                                                                       between our
                                                                                                      cost                                                                                                       basis
                                                                                                      in the MVC shares and the closing trading price of the MVC shares on June 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.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net unrealized depreciation on investments
decreased to $16.0 million during the six months ended June 30, 2013, from a net unrealized depreciation of $17.2 million. 
Such decrease in unrealized depreciation is largely due to the following changes:



| | (i) | Decrease in fair value of our holding in Equus Energy, LLC of $0.1 million due to operating expenses.
| | --- | -----------------------------------------------------------------------------------------------------



| | (ii) | Decrease in fair value of our holdings in Spectrum Management, LLC of $0.3 million due to a decline
in operating performance and $0.2 million in capitalized legal and consulting expenses.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Transfer of unrealized loss to realized loss of our holding in The Bradshaw Group (“Bradshaw”)
of $1.8 million upon the asset sale of the investment.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------



Dividends



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



Portfolio Securities



During the six months ended June
30, 2013, we capitalized legal and consulting expenses of $0.2 million relating to Spectrum Management, LLC. We also received
a semi-annual interest payment of $0.03 million and a 5.75% partial principal repayment of $0.01 million 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 above).



During the six months ended June 30,
2013, we capitalized legal and consulting expenses of $0.2 million relating to Spectrum Management. We also received a semi-annual
interest payment of $0.03 million and a 5.75% partial principal repayment of $9,000 in respect of our €1.2 million [$1.5 million]
in OPG notes.



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 OPG shares and 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 also consists 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.



Table of Contents29







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 and was 23.1%
of the net asset value and 43.5% of our investments in portfolio company securities (at fair value) as of June 30, 2014. 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.



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 June 30, 2014. 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 June 30,
2014, 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 Claim—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 the District Court of Harris County, Texas against two former officers
of Atrium’s subsidiary, Champion, alleging, amongst other matters, that the former officers breached their fiduciary duties
to Champion by hiring undocumented workers. This action was commenced primarily as a result of an investigation by the U.S. Immigration
and Customs Enforcement agency (“ICE”) into Atrium’s hiring practices. On March 12, 2012, to protect its interests,
we filed a Petition in Intervention in the State Court Action seeking a declaration from the Court that Equus did not owe any obligation
to indemnify Atrium or Champion for any penalties, costs or fees associated with the investigation by ICE.



On March 16, 2012, Atrium and Champion
filed a claim with the American Arbitration Association in Dallas, Texas, against Equus and a number of the other sellers under
the SPA. In September 2013, all of Atrium and Champion’s claims including claims against its former officers described above,
were also consolidated in the Arbitration Action.



In the Arbitration Action, Atrium and
Champion seek damages arising from Equus’ and the other sellers’ indemnity obligations set forth in the SPA. Atrium
claims it is entitled to indemnification under the SPA for costs it has incurred in responding to an ongoing investigation by ICE.
Atrium entered into a Non-Prosecution Agreement with ICE. It appears that one condition of the Non-Prosecution Agreement required
Atrium to pay ICE $2,000,000. Atrium and Champion asserted two counts of breach of contract against Equus, both arising out of
the alleged obligation to indemnify Atrium and Champion pursuant to certain provisions of the SPA. Atrium and Champion also asserted
claims for fraudulent inducement against two former officers and directors of Champion. Through the arbitration, Atrium and Champion
seek to recover an unspecified amount in the form of alleged “losses, damages, assessments, penalties, interest, reasonable
attorneys’ and accountants’ fees, settlement costs, and other costs and expenses arising directly or indirectly out
of or incident to,” the alleged breach of the indemnity provisions in the SPA. As a consequence of their fraudulent inducement
claim against the two former officers and directors, Atrium and Champion alternatively seek equitable rescission of the SPA and
exemplary damages from the two former officers and directors.



Atrium and Champion recently disclosed
damages in the range of $5.8 to $6.0 million. The claimed damages include a $2.0 million fine paid to ICE, fees and costs incurred
in responding to ICE’s investigation, and additional labor charges allegedly incurred by Atrium and Champion to comply with
federal law in their hiring practices.





Table of Contents30







We filed an answer to Atrium and Champion’s
claims on December 6, 2013. In our answer, we denied that we owed any indemnity obligations to Atrium or Champion and further denied
that the Fund is in any way liable to Atrium or Champion. To the extent Atrium and Champion are able to establish a right to an
indemnity, we will further contest the amount of the claimed indemnity, inasmuch as we believe (among other defenses) that the
indemnity obligation can only exist, if at all, with respect to damages arising as a direct and proximate result of employees who
were hired prior to the closing date of the 2006 sale of Champion and remained in continuous employment after the 2006 sale, and
not to any employee who may have been hired in the six years after the sale.



While we believe the Atrium claim is
without merit and we intend to continue to vigorously dispute the claim, there is a reasonable possibility of an adverse ruling
which may require the Fund to indemnify Atrium. If Equus is required to indemnify Atrium and Champion, we estimate that such indemnity
obligation could vary from $2.0 million to $3.0 million. Pursuant to the SPA, the indemnification obligation of Equus and the other
sellers is several and not joint, and any such indemnity, however uncertain, would likely be reduced proportionately to our percentage
ownership in Champion at the time of sale, which was 31.5% of Champion’s shares outstanding.



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.



Lawsuit Settlement—On August
12, 2012, Paula Douglass filed a lawsuit against the Fund and members of the Board of Directors in the District Court of Harris
County, Texas. Ms. Douglass’ complaint alleged various causes of action, including minority shareholder oppression, dilution,
and breach of fiduciary duty, and sought unspecified damages and attorney’s fees. Effective June 13, 2013, the Fund entered
into a settlement agreement with Ms. Douglass, Sam Douglass, as well as certain trusts controlled by them. 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,
the Board of Directors approved a payment of $402,254, in complete settlement of the lawsuit, as being in the best interests of
the Fund and its shareholders. The settlement payment was made on July 30, 2013. Ms. Douglass filed a motion to dismiss the lawsuit
with prejudice on August 8, 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

In addition to the various risks identified
in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 31, 2014, are the following:



If we reorganize as an operating
company, we will likely not continue to qualify as a RIC under the Code.



On May 15, 2014, we announced that we
had adopted a Plan of Reorganization (also referred to hereinafter as the “Plan”) within the meaning of Section 2(a)(33)
of the 1940 Act. The Plan contemplates the possible merger of the Fund with and into another BDC, or the restructuring of the Fund
as an operating company no longer subject to the 1940 Act. If we were to reorganize as an operating company, we may lose our status
as a RIC. If we fail to qualify as a RIC, we will be subject to corporate income tax, which would substantially reduce the amount
of income we might otherwise distribute to our shareholders. See “Plan of Reorganization” on page above.



If we reorganize as an operating
company, we will not continue to operate as a BDC.



We have elected to be classified as
a BDC under the 1940 Act. In connection with our announcement on May 15, 2014 to effect a Plan of Reorganization, if we effect
a reorganization of the Fund into an operating company, we will seek to terminate our BDC classification. If we were to terminate
our election to be classified as a BDC and were still determined by the Securities and Exchange Commission to constitute an “investment
company,” we would be subject to significantly greater regulatory requirements and constraints than under which we presently
operate, the result of which would have a material adverse effect on our results and financial condition.







Table of Contents31







If we reorganize as an operating
company, we may not be able to utilize our capital losses.



As of March 31, 2014, we have incurred
cumulative capital losses of $32.5 million, of which $15.6 million will begin expiring after 2017, with the remainder carried
over indefinitely. Pursuant to the Plan of Reorganization announced on May 15, 2014, we may reorganize as an operating company.
If we reorganize as an operating company, we may lose our ability to offset future income against our cumulative capital losses,
including capital losses that would otherwise continue past 2017. If we reorganized as an operating company and were unable to
offset future income against these capital losses, the result could have a material adverse effect on our future operating results
and our financial condition.



Other than the foregoing, there have
been no material changes to the Fund’s risk factors from the disclosure set forth in the Annual Report on Form 10-K for
the year ended December 31, 2013.



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.











Table of Contents32







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.
| | --- | -------------------



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



| | (d) | 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.]
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | 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.]
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) | 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.]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | 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
| | -- | ----------------------------------------



Table of Contents33







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.



| |  | EQUUS TOTAL RETURN, INC.
| |  | ------------------------
| |  |                         

Date: August 14, 2014

|                       
|-----------------------
|/s/ John A. Hardy      
|John A. Hardy          
|Chief Executive Officer



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