UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended
March 31, 2017

or

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

For the transition period to

Commission File Number 814-00098

EQUUS TOTAL RETURN, INC.

(Exact name of registrant as specified
in its charter)



|Delaware                                                               | 76-0345915                                  
|---------------------------------------------------------------------- | --------------------------------------------
|(State or other jurisdiction of
        incorporation or organization) | (I.R.S. Employer
        Identification No.)
|                                                                       |                                             
|700 Louisiana St., 48th
        Floor
        Houston, Texas           | 77002                                       
|(Address of principal executive offices)                               | (Zip Code)                                  





(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)



Registrant’s telephone
number, including area code: (713) 529-0900

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yesx
No ̈

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☐
No☐

Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.



|Large accelerated filer☐ | Accelerated filer☐ | Non-accelerated filer☒ | Smaller Reporting Company☐
|------------------------ | ------------------ | ---------------------- | --------------------------

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

There were 13,518,416 shares of
the registrant’s common stock, $.001 par value, outstanding, as of May 15, 2017.






Table of Contents




EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)



INDEX





|                                                                                              | PAGE
|--------------------------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                                                 |     
|Item 1. Financial Statements                                                                  | 3   
|Balance Sheets                                                                                | 3   
|Statements of Operations                                                                      | 4   
|Statements of Changes in Net Assets                                                           | 5   
|Statements of Cash Flows                                                                      | 6   
|Supplemental Information—Selected Per Share Data and Ratios                                   | 7   
|Schedules of Investments                                                                      | 8   
|Notes to Financial Statements                                                                 | 12  
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27  
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             | 32  
|Item 4. Controls and Procedures                                                               | 33  
|PART II. OTHER INFORMATION                                                                    |     
|Item 1. Legal Proceedings                                                                     | 33  
|Item 1A. Risk Factors                                                                         | 34  
|Item 6. Exhibits                                                                              | 35  
|SIGNATURE                                                                                     | 36  
|                                                                                              |     







































2


Table of Contents




EQUUS TOTAL RETURN, INC.

BALANCE SHEETS

(Unaudited)



Part I. Financial Information

Item 1. Financial Statements





|                                                                                           |  | March 31,2017 |         | December 31,
                                              2016
|------------------------------------------------------------------------------------------ |  | ------------- | ------- | ---------------------------------------------------------------
|(in thousands, except per share amounts)                                                   |  |               |         |                                                                
|Assets                                                                                     |  |               |         |                                                                
|Investments in portfolio securities at fair value:                                         |  |               |         |                                                                
|Control investments (cost at $10,050 and $10,050 respectively)                             |  | $             | 6,463   |                                                                
|Affiliate investments (cost at $350 and $350 respectively)                                 |  |               | 16,686  |                                                                
|Non-affiliate investments - related party (cost at $6,074 and $6,011 respectively)         |  |               | 4,279   |                                                                
|Non-affiliate investments (cost at $2,978 and $2,978 respectively)                         |  |               | 2,978   |                                                                
|Total investments in portfolio securities at fair value                                    |  |               | 30,406  |                                                                
|Temporary cash investments                                                                 |  |               | 34,999  |                                                                
|Cash and cash equivalents                                                                  |  |               | 10,463  |                                                                
|Restricted cash                                                                            |  |               | 350     |                                                                
|Accounts receivable                                                                        |  |               | 611     |                                                                
|Accrued interest receivable                                                                |  |               | 666     |                                                                
|Other assets                                                                               |  |               | 36      |                                                                
|Total assets                                                                               |  |               | 77,531  |                                                                
|Liabilities and net assets                                                                 |  |               |         |                                                                
|Accounts payable                                                                           |  |               | 1,039   |                                                                
|Accounts payable to related parties                                                        |  |               | 71      |                                                                
|Borrowing under margin account                                                             |  |               | 34,999  |                                                                
|Total liabilities                                                                          |  |               | 36,109  |                                                                
|                                                                                           |  |               |         |                                                                
|Commitments and contingencies (see note 2)                                                 |  |               |         |                                                                
|                                                                                           |  |               |         |                                                                
|Net assets                                                                                 |  | $             | 41,422  |                                                                
|                                                                                           |  |               |         |                                                                
|Net assets consist of:                                                                     |  |               |         |                                                                
|Common stock, par value                                                                    |  | $             | 13      |                                                                
|Capital in excess of par value                                                             |  |               | 54,696  |                                                                
|Undistributed net investment losses                                                        |  |               | (24,241 | )                                                              
|Unrealized appreciation of portfolio securities, net                                       |  |               | 12,749  |                                                                
|Unrealized depreciation of portfolio securities - related party                            |  |               | (1,795  | )                                                              
|Total net assets                                                                           |  | $             | 41,422  |                                                                
|Shares of common stock issued and outstanding, $.001 par value, 50,000 shares authorized   |  |               | 13,518  |                                                                
|Shares of preferred stock issued and outstanding, $.001 par value, 5,000 shares authorized |  |               | —       |                                                                
|Net asset value per share                                                                  |  | $             | 3.06    |                                                                

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

3


Table of Contents




EQUUS TOTAL RETURN, INC.

STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                  |  | Three Months Ended March 31,
|--------------------------------------------------------------------------------- |  | ----------------------------
|(in thousands, except per share amounts)                                          |  | 2017                        
|Investment income:                                                                |  |                             
|Interest and dividend income:                                                     |  |                             
|Non-affiliate investments - related party                                         |  | $                           
|Non-affiliate investments                                                         |  |                             
|Total interest and dividend income                                                |  |                             
|Interest from temporary cash investments                                          |  |                             
|Total investment income                                                           |  |                             
|                                                                                  |  |                             
|Expenses:                                                                         |  |                             
|Transaction costs                                                                 |  |                             
|Compensation expense                                                              |  |                             
|Professional fees                                                                 |  |                             
|Director fees and expenses                                                        |  |                             
|General and administrative expense                                                |  |                             
|Mailing, printing and other expenses                                              |  |                             
|Interest expense                                                                  |  |                             
|Total expenses                                                                    |  |                             
|                                                                                  |  |                             
|Net investment loss                                                               |  |                             
|                                                                                  |  |                             
|Net realized loss:                                                                |  |                             
|Control investments                                                               |  |                             
|Non-affiliate investments                                                         |  |                             
|Temporary cash investments                                                        |  |                             
|Net realized loss                                                                 |  |                             
|                                                                                  |  |                             
|Net unrealized appreciation of portfolio securities:                              |  |                             
|End of period                                                                     |  |                             
|Beginning of period                                                               |  |                             
|Net change in net unrealized appreciation of portfolio securities                 |  |                             
|                                                                                  |  |                             
|Net unrealized depreciation of portfolio securities - related party:              |  |                             
|End of period                                                                     |  |                             
|Beginning of period                                                               |  |                             
|Net change in net unrealized depreciation of portfolio securities - related party |  |                             
|                                                                                  |  |                             
|Net (decrease) increase in net assets resulting from operations                   |  | $                           
|                                                                                  |  |                             
|Net (decrease) increase in net assets resulting from operations per share:        |  |                             
|Basic and diluted                                                                 |  | $                           
|Weighted average shares outstanding:                                              |  |                             
|Basic and diluted                                                                 |  |                             



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

4


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EQUUS TOTAL RETURN, INC.

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)







|                                                                     |  | Three months ended March 31,
|-------------------------------------------------------------------- |  | ----------------------------
|(in thousands)                                                       |  | 2017                        
|Net (decrease) increase in net assets resulting from operations      |  | $                           
|Capital share transactions:                                          |  |                             
|Share-based incentive compensation                                   |  |                             
|Net increase in net assets resulting from capital share transactions |  |                             
|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.

5


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EQUUS TOTAL RETURN, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)





|                                                                                                                                   |  | Three months ended March 31,
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------
|(in thousands)                                                                                                                     |  |                             
|Reconciliation of (decrease) increase in net assets resulting from operations to net cash                                          |  |                             
|used in operating activities:                                                                                                      |  |                             
|Net (decrease) increase in net assets resulting from operations                                                                    |  | $                           
|Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash used in operating activities: |  |                             
|Net realized loss                                                                                                                  |  |                             
|Net change in unrealized appreciation of portfolio securities                                                                      |  |                             
|Net change in unrealized depreciation of portfolio securities - related party                                                      |  |                             
|Share-based incentive compensation                                                                                                 |  |                             
|Changes in operating assets and liabilities:                                                                                       |  |                             
|Purchase of portfolio securities                                                                                                   |  |                             
|Purchases of temporary cash investments, net                                                                                       |  |                             
|Change in restricted cash                                                                                                          |  |                             
|Decrease in accounts receivable from investments                                                                                   |  |                             
|Increase in accrued interest receivable                                                                                            |  |                             
|Decrease in accounts receivable and other                                                                                          |  |                             
|Increase in accounts payable and accrued liabilities                                                                               |  |                             
|Decrease in accounts payable to related parties                                                                                    |  |                             
|Net cash used in operating activities                                                                                              |  |                             
|Cash flows from financing activities:                                                                                              |  |                             
|Borrowings under margin account                                                                                                    |  |                             
|Repayments under margin account                                                                                                    |  |                             
|Net cash provided by (used in) financing activities                                                                                |  |                             
|Net decrease in cash and cash equivalents                                                                                          |  |                             
|Cash and cash equivalents at beginning of period                                                                                   |  |                             
|                                                                                                                                   |  |                             
|Cash and cash equivalents at end of period                                                                                         |  | $                           
|Non-cash operating and financing activities:                                                                                       |  |                             
|Accrued interest or dividends exchanged for portfolio securities                                                                   |  | $                           
|Accrued interest or dividends exchanged for portfolio securities - related party                                                   |  | $                           
|                                                                                                                                   |  |                             
|Supplemental disclosure of cash flow information:                                                                                  |  |                             
|Interest paid                                                                                                                      |  | $                           
|Income taxes paid                                                                                                                  |  | $                           



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











6


Table of Contents




EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED
PER SHARE DATA AND RATIOS

(Unaudited)





|                                                                                               |  | Three months ended March 31,
|---------------------------------------------------------------------------------------------- |  | ----------------------------
|                                                                                               |  | 2017                        
|Investment income                                                                              |  | $                           
|                                                                                               |  |                             
|Expenses                                                                                       |  |                             
|                                                                                               |  |                             
|Net investment loss                                                                            |  |                             
|                                                                                               |  |                             
|Net change in unrealized appreciation                                                          |  |                             
|Net change in unrealized depreciation - related party                                          |  |                             
|Net (decrease) increase in net assets                                                          |  |                             
|Capital transactions:                                                                          |  |                             
|Share-based incentive compensation                                                             |  |                             
|Dilutive effect of shares issued                                                               |  |                             
|Decrease in net assets resulting from capital transactions                                     |  |                             
|Net (decrease) increase in net assets                                                          |  |                             
|Net assets at beginning of period                                                              |  |                             
|Net assets at end of period, basic and diluted                                                 |  | $                           
|Weighted average number of shares outstanding during period,                                   |  |                             
|in thousands                                                                                   |  |                             
|Market price per share:                                                                        |  |                             
|Beginning of period                                                                            |  | $                           
|End of period                                                                                  |  | $                           
|Selected information and ratios:                                                               |  |                             
|Ratio of expenses to average net assets                                                        |  |                             
|Ratio of net investment loss to average net assets                                             |  |                             
|Ratio of net increase (decrease) in net assets resulting from operations to average net assets |  |                             





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











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

7


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

MARCH 31, 2017

(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      | $ | 6,250   
|Equus Media Development Company, LLC
                                 Houston, TX                     | Media                          | January 2007    | Member interest (100%)                 |        |           |        | 3,000      |   | 213     
|Total Control Investments: Majority-owned (represents 9.9% of total investments at fair value)        |                                |                 | $                                      | 10,050 | $         | 6,463 
|Affiliate Investments (4):                                                                            |                                |                 |                                        |        |           |        |            |   |         
|PalletOne, Inc.
                                                                 Bartow, FL           | Shipping products and services | October 2001    | 350,000 shares of common stock (18.7%) |        |           | $      | 350        | $ | 16,686  
|Total Affiliate Investments (represents 25.5% of total investments at fair value)                     |                                |                 | $                                      | 350    | $         | 16,686
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                        |        |           |       
|MVC Capital, Inc.
                                    Purchase, NY                                    | Financial services             | May 2014        | 475,956 shares of common stock (1.7%)  |        |           | $      | 6,074      | $ | 4,279   
|Total Non-Affiliate Investments - Related Party (represents 6.5% of total investments at fair value)  |                                |                 | $                                      | 6,074  | $         | 4,279 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                        |        |           |       
|5TH Element Tracking, LLC
                                                                 Boston, MA | Business products and services | January 2015    | 14% promissory note due 3/17 (2)       | $      | 965       |        | 965        |   | 965     
|Biogenic Reagents, LLC
                                              Minneapolis, MN                  | Industrial products            | January 2016    | 16% promissory note due 6/16 (5)       | $      | 2,013     |        | 2,013      |   | 2,013   
|Total Non-Affiliate Investments (represents 4.6% of total investments at fair value)                  |                                |                 | $                                      | 2,978  | $         | 2,978 
|Total Investment in Portfolio Securities                                                              |                                |                 |                                        |        |           | $      | 19,452     | $ | 30,406  
|Temporary Cash Investments                                                                            |                                |                 |                                        |        |           |        |            |   |         
|U.S. Treasury Bill                                                                                    | Government                     | December 2016   | UST 0% 3/17                            | $      | 35,000    |        | 35,000     |   | 34,999  
|Total Temporary Cash Investments (represents 53.5% of total investments at fair value)                |                                |                 | $                                      | 35,000 | $         | 34,999
|Total Investments                                                                                     |                                |                 |                                        |        |           | $      | 54,452     | $ | 65,405  



|(1) | See Note 3 to the financial statements, Valuation of Investments.                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Income-producing.                                                                                                                                              
|(3) | Majority owned investments are generally defined under the 1940 Act as companies in which we own more than 50% of the voting securities of the company.        
|(4) | Affiliate investments are generally defined under the 1940 Act as companies in which we own at least 5% but not more than 25% voting securities of the company.
|(5) | Income impaired.                                                                                                                                               







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



8


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS –
(Continued)

MARCH 31, 2017

(Unaudited)



Except for our holding of shares of
MVC Capital, Inc. (“MVC”), substantially all of our portfolio securities are restricted from public sale without prior
registration under the Securities Act of 1933 (hereafter, the “Securities Act”) or other relevant regulatory authority.
We negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including
registration rights and related costs.



As a business development company (“BDC”)
regulated pursuant to the Investment Company Act of 1940 (“1940 Act”), we may invest up to 30% of our assets in non-qualifying
portfolio investments, as permitted by the 1940 Act. Specifically, we may invest up to 30% of our assets in entities that are not
considered “eligible portfolio companies” (as defined in the 1940 Act), including companies located outside of the
United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly-traded entities with
a market capitalization exceeding $250 million. As of March 31, 2017, we had invested 85.9% of our assets in securities of portfolio
companies that constituted qualifying investments under the 1940 Act. As of March 31, 2017, except for our shares of MVC, all of
our investments are in enterprises that are considered eligible portfolio companies under the 1940 Act. We provide significant
managerial assistance to portfolio companies that comprise 31.0% of the total value of the investments in portfolio securities
as of March 31, 2017.



Our investments in portfolio securities
consist of the following types of securities as of March 31, 2017 (in thousands):





|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as
                                                                                                                      Percentage
of
                                                                                Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Common stock                          |  | $    | 6,424  |            |  | $                                                                                                                                                                                                                                           
|Limited liability company investments |  |      | 10,050 |            |  |                                                                                                                                                                                                                                             
|Secured and subordinated debt         |  |      | 2,978  |            |  |                                                                                                                                                                                                                                             
|Total                                 |  | $    | 19,452 |            |  | $                                                                                                                                                                                                                                           







The following is a summary by industry
of the Fund’s investments in portfolio securities as of March 31, 2017 (in thousands):





|Industry                       |  | Fair Value |        | Fair Value as
                                                                                                                      Percentage of
                                                                                Net Assets
|------------------------------ |  | ---------- | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Shipping products and services |  | $          | 16,686 |                                                                                                                                                                                                                                             
|Energy                         |  |            | 6,250  |                                                                                                                                                                                                                                             
|Financial services             |  |            | 4,279  |                                                                                                                                                                                                                                             
|Industrial products            |  |            | 2,013  |                                                                                                                                                                                                                                             
|Business products and services |  |            | 965    |                                                                                                                                                                                                                                             
|Media                          |  |            | 213    |                                                                                                                                                                                                                                             
|Total                          |  | $          | 30,406 |                                                                                                                                                                                                                                             

















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

9


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2016

(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      | $ | 6,250   
|Equus Media Development Company, LLC
                                 Houston, TX                     | Media                          | January 2007    | Member interest (100%)                 |        |           |        | 3,000      |   | 212     
|Total Control Investments: Majority-owned (represents 10.8% of total investments at fair value)       |                                |                 | $                                      | 10,050 | $         | 6,462 
|Affiliate Investments (4):                                                                            |                                |                 |                                        |        |           |        |            |   |         
|PalletOne, Inc.
                                                                 Bartow, FL           | Shipping products and services | October 2001    | 350,000 shares of common stock (18.7%) |        |           | $      | 350        | $ | 16,200  
|Total Affiliate Investments (represents 27.2% of total investments at fair value)                     |                                |                 | $                                      | 350    | $         | 16,200
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                        |        |           |       
|MVC Capital, Inc.
                                    Purchase, NY                                    | Financial services             | May 2014        | 468,608 shares of common stock (1.7%)  |        |           | $      | 6,011      | $ | 4,021   
|Total Non-Affiliate Investments - Related Party (represents 6.7% of total investments at fair value)  |                                |                 | $                                      | 6,011  | $         | 4,021 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                        |        |           |       
|5TH Element Tracking, LLC
                                                                 Boston, MA | Business products and services | January 2015    | 14% promissory note due 3/17 (2)       | $      | 965       |        | 965        |   | 965     
|Biogenic Reagents, LLC
                                              Minneapolis, MN                  | Industrial products            | January 2016    | 16% promissory note due 6/16 (5)       | $      | 2,013     |        | 2,013      |   | 2,013   
|Total Non-Affiliate Investments (represents 5.0% of total investments at fair value)                  |                                |                 | $                                      | 2,978  | $         | 2,978 
|Total Investment in Portfolio Securities                                                              |                                |                 |                                        |        |           | $      | 19,389     | $ | 29,661  
|Temporary Cash Investments                                                                            |                                |                 |                                        |        |           |        |            |   |         
|U.S. Treasury Bill                                                                                    | Government                     | December 2016   | UST 0% 1/17                            | $      | 30,000    |        | 30,000     |   | 29,994  
|Total Temporary Cash Investments (represents 50.3% of total investments at fair value)                |                                |                 | $                                      | 30,000 | $         | 29,994
|Total Investments                                                                                     |                                |                 |                                        |        |           | $      | 49,389     | $ | 59,655  





|(1) | See Note 3 to the financial statements, Valuation of Investments.                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Income-producing.                                                                                                                                              
|(3) | Majority owned investments are generally defined under the 1940 Act as companies in which we own more than 50% of the voting securities of the company.        
|(4) | Affiliate investments are generally defined under the 1940 Act as companies in which we own at least 5% but not more than 25% voting securities of the company.
|(5) | Income impaired.                                                                                                                                               















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

10


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

DECEMBER 31, 2016

(Unaudited)



Except for our holding of shares of
MVC, substantially all of our portfolio securities are restricted from public sale without prior registration under the Securities
Act or other relevant regulatory authority. We negotiate certain aspects of the method and timing of the disposition of our investment
in each portfolio company, including registration rights and related costs.



As a BDC, we may invest up to 30% of
our assets in non-qualifying portfolio investments, as permitted by the 1940 Act. Specifically, we may invest up to 30% of our
assets in entities that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including companies
located outside of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly-traded
entities with a market capitalization exceeding $250 million. As of December 31, 2016, we had invested 86.4% of our assets in securities
of portfolio companies that constituted qualifying investments under the 1940 Act. As of December 31, 2016, except for our shares
of MVC, all of our investments are in enterprises that are considered eligible portfolio companies under the 1940 Act. We provide
significant managerial assistance to portfolio companies that comprise 31.8% of the total value of the investments in portfolio
securities as of December 31, 2016.



Our investments in portfolio securities
consist of the following types of securities as of December 31, 2016 (in thousands):





|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as
                                                                                                                      Percentage of
                                                                                Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Common stock                          |  | $    | 6,361  |            |  | $                                                                                                                                                                                                                                           
|Limited liability company investments |  |      | 10,050 |            |  |                                                                                                                                                                                                                                             
|Secured and subordinated debt         |  |      | 2,978  |            |  |                                                                                                                                                                                                                                             
|Total                                 |  | $    | 19,389 |            |  | $                                                                                                                                                                                                                                           



The following is a summary by industry
of the Fund’s investments in portfolio securities as of December 31, 2016 (in thousands):





|Industry                       |  | Fair Value |        | Fair Value as
                                                                                                                      Percentage of
                                                                                Net Assets
|------------------------------ |  | ---------- | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Shipping products and services |  | $          | 16,200 |                                                                                                                                                                                                                                             
|Energy                         |  |            | 6,250  |                                                                                                                                                                                                                                             
|Financial services             |  |            | 4,021  |                                                                                                                                                                                                                                             
|Industrial products            |  |            | 2,013  |                                                                                                                                                                                                                                             
|Business products and services |  |            | 965    |                                                                                                                                                                                                                                             
|Media                          |  |            | 212    |                                                                                                                                                                                                                                             
|Total                          |  | $          | 29,661 |                                                                                                                                                                                                                                             







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



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EQUUS TOTAL RETURN, INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2017

(Unaudited)



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



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



On April 24, 2017, we entered into a
Stock Purchase Agreement and Plan of Merger (“Merger Agreement”) with ETR Merger Sub, Inc., a newly-formed wholly-owned
subsidiary of Equus, certain shareholders of U.S. Gas & Electric, Inc. (“USG&E”), and MVC as a selling shareholder
of USG&E and as representative of the selling USG&E shareholders. USG&E is a retail energy company with over 160 employees
that sells electricity and natural gas in deregulated utility markets to residential and commercial customers. As of January 31,
2017, USG&E had over 375,000 residential customer equivalents in 62 utility markets across the District of Columbia and 11
states. The transactions embodied in the Merger Agreement constitute a “Consolidation” as defined in our Plan of Reorganization
(“Plan of Reorganization”) within the meaning of Section 2(a)(33) of the Investment Company Act of 1940 (“1940
Act”) which we announced on May 15, 2014. Our intention of effecting a Consolidation through the Merger Agreement is to transform
Equus from an investment company into an operating company focused on the energy sector, with USG&E becoming a wholly-owned
subsidiary of Equus. The full text of the Merger Agreement is attached as an exhibit to our Current Report on Form 8-K filed on
April 24, 2017 (see Note 7 – Plan of Reorganization).



So long as we remain an investment company
and not an operating company, we will attempt to maximize the return to stockholders in the form of current investment income and
long-term capital gains by investing in the debt and equity securities of companies with a total enterprise value of between $5.0
million and $75.0 million, although we may engage in transactions with smaller or larger investee companies from time to time.
We seek to invest primarily in companies pursuing growth either through acquisition or organically, leveraged buyouts, management
buyouts and recapitalizations of existing businesses or special situations. Our income-producing investments consist principally
of debt securities including subordinate debt, debt convertible into common or preferred stock, or debt combined with warrants
and common and preferred stock. Debt and preferred equity financing may also be used to create long-term capital appreciation through
the exercise and sale of warrants received in connection with the financing. We seek to achieve capital appreciation by making
investments in equity and equity-oriented securities issued by privately-owned companies (or smaller public companies) in transactions
negotiated directly with such companies. Given market conditions over the past several years and the performance of our portfolio,
our Management and Board of Directors believe it prudent to continue to review alternatives to refine and further clarify the current
strategies.



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



12


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Basis of Presentation—In
accordance with Article 6 of Regulation S-X under the Securities Act and the Securities Exchange Act of 1934, as amended (“Exchange
Act”), we do not consolidate portfolio company investments, including those in which we have a controlling interest. Our
interim unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”), for interim financial information and in accordance with the requirements of reporting
on Form 10-Q and Article 10 of Regulation S-X, under the Exchange Act. Accordingly, they are unaudited and exclude some disclosures
required for annual financial statements. 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
months ended March 31, 2017 are not necessarily indicative of results that ultimately may be achieved for the remainder of the
year, particularly in view of our recent agreement to acquire USG&E as described in Note 7 – Plan of Reorganization
below. The interim unaudited financial statements and notes thereto should be read in conjunction with the financial statements
and notes thereto included in the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed
with the Securities and Exchange Commission (“SEC”).



| | (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 March 31, 2018. We are evaluating
the impact of current market conditions on our portfolio company valuations and their ability to provide current income. We have
followed valuation techniques in a consistent manner; however, we are cognizant of current market conditions that might affect
future valuations of portfolio securities. We believe that our operating cash flow and cash on hand will be sufficient to meet
operating requirements and, to the extent we remain a BDC, to finance routine follow-on investments, if any, through the next twelve
months.



Cash and Cash Equivalents—As
of March 31, 2017, we had cash and cash equivalents of $10.5 million. We had $30.4 million of our net assets of $41.4 million invested
in portfolio securities. We also had $35.4 million of restricted cash and temporary cash investments, including primarily the proceeds
of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable to a RIC to maintain our
pass-through tax treatment. Of this amount, $35.0 million was invested in U.S. Treasury bills and $0.4 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 April 2, 2017 and we subsequently repaid this margin loan, plus
interest, on April 5, 2017.



As of December 31, 2016, we had cash
and cash equivalents of $12.0 million. We had $30.0 million of our net assets of $42.7 million invested in portfolio securities.
We also had $30.3 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end
margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $30.0 million was
invested in U.S. Treasury bills and $0.3 million represented a required 1% brokerage margin deposit. These securities were held
by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills
were sold on January 3, 2017 and we subsequently repaid this margin loan. The margin interest was paid on February 3, 2017.



Dividends—So long as we
remain a BDC, 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—Under
certain circumstances, we may be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient
funds to make follow-on investments, the portfolio company in need of the investment may be negatively impacted. Also, our equity
interest in the estimated fair value of the portfolio company could be reduced.



As of March 31, 2017, we had no outstanding
commitments to our portfolio company investments.



RIC Borrowings, Restricted Cash and
Temporary Cash Investments—We may periodically borrow sufficient funds to maintain the Fund’s RIC status by utilizing
a margin account with a securities brokerage firm. 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. If we do not consummate our Consolidation with USG&E and become an operating
company as described in Note 7 – Plan of Reorganization below, our failure to continue to qualify as a RIC could be
materially adverse to us and our stockholders.

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As of March 31, 2017, we borrowed $35.0
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 $35.4 million.



As of December 31, 2016, we borrowed
$30.0 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 $30.3 million.



Certain Risks and Uncertainties—Market
and economic volatility which has become endemic in the past few years has resulted in a relatively limited amount of available
debt financing for small and medium-sized companies such as Equus and its portfolio companies. Such debt financing generally has
shorter maturities, higher interest rates and fees, and more restrictive terms than debt facilities available in the past. In addition,
during these years and continuing into the first three months of 2017, the price of our common stock remained well below our net
asset value, thereby making it undesirable to issue additional shares of our common stock below net asset value. Because of these
challenges, our near-term strategies shifted from originating debt and equity investments to preserving liquidity necessary to
meet our operational needs. Key initiatives that we have previously undertaken to provide necessary liquidity include monetizations,
the suspension of dividends and the internalization of management. Most recently, on April 24, 2017, we signed a definitive agreement
to acquire USG&E and emerge as an operating company as described in Note 7 – Plan of Reorganization below. Although
we cannot assure you that such initiatives will be sufficient, we believe we have sufficient liquidity to meet our operating requirements
for the remainder of 2017 and the first three months of 2018.



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



| | 1. | Each portfolio company or investment is reviewed by our investment professionals;                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | With respect to investments with a fair value exceeding $2.5 million that have been held for more than one year, we engage independent valuation firms to assist our investment professionals. These independent valuation firms conduct independent valuations and make their own independent assessments;                                             
| | 3. | Our Management produces a report that summarized each of our portfolio investments and recommends a fair value of each such investment as of the date of the report;                                                                                                                                                                                    
| | 4. | The Audit Committee of our Board reviews and discusses the preliminary valuation of our portfolio investments as recommended by Management in their report and any reports or recommendations of the independent valuation firms, and then approves and recommends the fair values of our investments so determined to our Board for final approval; and
| | 5. | The Board discusses valuations and determines the fair value of each portfolio investment in good faith based on the input of our Management, the respective independent valuation firm, as applicable, and the Audit Committee.                                                                                                                        



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



14


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



In applying these methodologies, additional
factors that we consider in fair value pricing our investments may include, as we deem relevant: security covenants, call protection
provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to
make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer
companies; the principal market; and enterprise values, among other factors. Also, any failure by a portfolio company to achieve
its business plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant
and rapid change in its value.



Our general intent is to hold our loans
to maturity when appraising our privately held debt investments. As such, we believe that the fair value will not exceed the cost
of the investment. However, in addition to the previously described analysis involving allocation of value to the debt instrument,
we perform a yield analysis assuming a hypothetical current sale of the security to determine if a debt security has been impaired. The
yield analysis considers changes in interest rates and changes in leverage levels of the portfolio company as compared to the market
interest rates and leverage levels. Assuming the credit quality of the portfolio company remains stable, the Fund will use the
value determined by the yield analysis as the fair value for that security if less than the cost of the investment.



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



Fair Value Measurement—Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels
of the fair value hierarchy are described below:



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



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



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



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



15


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



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



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



We assess the levels of the investments
at each measurement date, and transfers between levels are recognized on the subsequent measurement date closest in time to the
actual date of the event or change in circumstances that caused the transfer. There were no transfers among Level 1, 2 and 3 for
the quarter ended March 31, 2017 and the year ended December 31, 2016.



As of March 31, 2017, investments measured
at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input to the valuations:





|                                                 |  |       |        | Fair Value Measurements as of March 31, 2017                                                                                                  
|------------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for Identical Assets
                                                                                (Level 1)
|Assets                                           |  |       |        |                                                                                                                                               
|Investments:                                     |  |       |        |                                                                                                                                               
|Control investments                              |  | $     | 6,463  |                                                                                                                                               
|Affiliate investments                            |  |       | 16,686 |                                                                                                                                               
|Non-affiliate investments - related party        |  |       | 4,279  |                                                                                                                                               
|Non-affiliate investments                        |  |       | 2,978  |                                                                                                                                               
|Total investments                                |  |       | 30,406 |                                                                                                                                               
|Temporary cash investments                       |  |       | 34,999 |                                                                                                                                               
|Total investments and temporary cash investments |  | $     | 65,405 |                                                                                                                                               





16


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As of December 31, 2016, 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, 2016                                                                                               
|------------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted Prices in Active Markets for Identical Assets
                                                                                (Level 1)
|Assets                                           |  |       |        |                                                                                                                                               
|Investments:                                     |  |       |        |                                                                                                                                               
|Control investments                              |  | $     | 6,462  |                                                                                                                                               
|Affiliate investments                            |  |       | 16,200 |                                                                                                                                               
|Non-affiliate investments - related party        |  |       | 4,021  |                                                                                                                                               
|Non-affiliate investments                        |  |       | 2,978  |                                                                                                                                               
|Total investments                                |  |       | 29,661 |                                                                                                                                               
|Temporary cash investments                       |  |       | 29,994 |                                                                                                                                               
|Total investments and temporary cash investments |  | $     | 59,655 |                                                                                                                                               





The following table provides a reconciliation
of fair value changes during the three months ended March 31, 2017 for all investments for which we determine fair value using
unobservable (Level 3) factors:





|                                                 |  | Fair value measurements using significant unobservable inputs (Level 3)
|------------------------------------------------ |  | -----------------------------------------------------------------------
|(in thousands)                                   |  | Control Investments                                                    
|Fair value as of December 31, 2016               |  | $                                                                      
|Change in unrealized appreciation (depreciation) |  |                                                                        
|Purchases of portfolio securities                |  |                                                                        
|Fair value as of March 31, 2017                  |  | $                                                                      





The following table provides a reconciliation
of fair value changes during the three months ended March 31, 2016 for all investments for which we determine fair value using
unobservable (Level 3) factors:





|                                                 |  | Fair value measurements using significant unobservable inputs (Level 3)
|------------------------------------------------ |  | -----------------------------------------------------------------------
|(in thousands)                                   |  | Control Investments                                                    
|Fair value as of December 31, 2015               |  | $                                                                      
|Change in unrealized appreciation (depreciation) |  |                                                                        
|Purchases of portfolio securities                |  |                                                                        
|Fair value as of March 31, 2016                  |  | $                                                                      





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



17


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The following table summarizes the significant
non-observable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique
as of March 31, 2017:





|                                      |  |            |        |                      |  |                                                                                                                           |  | Range                                                                                           
|------------------------------------- |  | ---------- | ------ | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(in thousands)                        |  | Fair Value |        | Valuation Techniques |  | Unobservable Inputs                                                                                                       |  | Minimum                                                                                         
|Secured and subordinated debt         |  | $          | 2,978  |                      |  | Yield analysis                                                                                                            |  | Discount for lack of marketability                                                              
|Common stock                          |  |            | 16,686 |                      |  | Income/Market approach                                                                                                    |  | EBITDA Multiple/Discount for lack of marketability/Control premium                              
|Limited liability company investments |  |            | 6,463  |                      |  | Asset Approach
                                                        Discounted cash flow; Guideline transaction method |  | Recovery rate
                                                        Reserve adjustment factors
|                                      |  | $          | 26,127 |                      |  |                                                                                                                           |  |                                                                                                 





Because of the inherent uncertainty
of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $26.1 million and
$25.6 million as of March 31, 2017 and December 31, 2016, respectively, our fair value determinations may materially differ from
the values that would have been used had a ready market existed for these securities. As of March 31, 2017, one of our portfolio
investments, 475,956 common shares of MVC, was publicly listed on the New York Stock Exchange (“NYSE”). As
of December 31, 2016, one of our portfolio investments, 468,608 common shares of MVC, was publicly listed on the NYSE.



We adjust our net asset value for the
changes in the value of our publicly held securities, if applicable, and material changes in the value of private securities, generally
determined on a quarterly basis or as announced in a press release, and report those amounts to Lipper Analytical Services, Inc.
Our net asset value appears in various publications, including Barron’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 the Fund owns more than 25% of the voting securities or maintains greater than 50% of the board representation. Under
the 1940 Act, “Affiliate Investments” are defined as those non-control investments in companies in which we own between
5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliate Investments” are defined as investments that
are neither Control Investments nor Affiliate Investments.



As of March 31, 2017, we had no outstanding
commitments to our portfolio company investments; however, under certain circumstances, we may be called on to make follow-on investments
in certain portfolio companies. If we do not have sufficient funds to make follow-on investments, the portfolio company in need
of the investment may be negatively impacted. Also, our equity interest in the estimated fair value of the portfolio company could
be reduced. Follow-on investments may include capital infusions which are expenditures made directly to the portfolio company to
ensure that operations are completed, thereby allowing the portfolio company to generate cash flows to service their debt.



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

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



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



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



All corporations organized in the State
of Delaware are required to file an Annual Report and to pay a franchise tax. As a result, we paid Delaware Franchise tax in the
amount of $0.02 million for the year ended December 31, 2016.



Texas margin tax applies to legal entities
conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a
tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result,
we did not owe state income tax for the year ended December 31, 2016.



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



Share Exchange with MVC—On
May 14, 2014, we announced that the Fund intended to effect a reorganization pursuant to Section 2(a)(33) of the 1940 Act (“Plan
of Reorganization”). As a first step to consummating the Plan or 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 BDC traded on the NYSE that provides long-term debt and equity investment capital to fund growth, acquisitions
and recapitalizations of companies in a variety of industries. The Share Exchange was calculated based on the Fund’s and
MVC’s respective net asset value per share. At the time of the Share Exchange, the number of MVC shares received by Equus
represented approximately 1.73% of MVC’s total outstanding shares of common stock. As of March 31, 2017, we valued our 475,956
MVC shares at $4.3 million. As of December 31, 2016, we valued our 468,608 MVC shares at $4.0 million. The value of our MVC
shares was based on MVC’s closing trading price on the NYSE as of such dates. Due to the ownership relationship between
the Company and MVC, the investment and amounts due to and from MVC have been identified and disclosed as “related party(ies)”
in our Financial Statements.



Agreement to Acquire USG&E—On
April 24, 2017, we entered into a Stock Purchase Agreement and Plan of Merger (“Merger Agreement”) with ETR Merger
Sub, Inc., a newly-formed wholly-owned subsidiary of Equus, certain shareholders of USG&E, and MVC as a selling shareholder
of USG&E and as representative of the selling USG&E shareholders. The transactions embodied in the Merger Agreement constitute
a “Consolidation” as defined in our Plan of Reorganization. Our intention of effecting a Consolidation through the
Merger Agreement is to transform Equus from an investment company into an operating company focused on the energy sector with USG&E
becoming a wholly-owned subsidiary of Equus as a result. MVC, which currently holds 32.9% of our common stock, also holds approximately
76.4% of the capital stock of USG&E. As a result of the Consolidation, MVC will hold approximately 63.7% of our voting stock
and will be entitled to appoint or remove our directors, subject to a requirement, in connection with the Merger Agreement, that
the four directors nominated for reelection at our 2017 annual meeting of stockholders remain in their positions for a period of
ten months following the closing of the first stage of the two-stage transaction that will accomplish the Consolidation with USG&E
(see Note 7 – Plan of Reorganization below).



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.

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In November 2011, Equus Energy, LLC
(“Equus Energy”), a wholly-owned subsidiary of the Fund, entered into a consulting agreement with Global Energy Associates,
LLC (“Global Energy”) to provide consulting services for energy related investments. Henry W. Hankinson, Director of
the Fund, is a managing partner and co-founder of Global Energy. Payments to Global Energy totaled $18,750 for each of the three
months ended March 31, 2017 and 2016.



In respect of services provided to the
Fund by members of the Board not in connection with their roles and duties as directors, the Fund pays a fixed amount at a rate
of $250 per hour for services rendered. During the three months ended March 31, 2017 and 2016, we paid Kenneth I. Denos, P.C.,
a professional corporation owned by Kenneth I. Denos, a director of the Fund, $165,750 and $104,813 respectively, for services
provided to the Fund.



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



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



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



During the three months ended March
31, 2017, we received dividends in the form of additional shares of $0.1 million relating to our shareholding in MVC.



During the three months ended March
31, 2017, we recorded a net change in unrealized appreciation of $0.7 million, to a net unrealized appreciation of $11.0 million.
Such change in unrealized appreciation resulted primarily from the following changes:



| | (i)  | Increase in the fair value of our shareholding in MVC of $0.2 million due to the receipt of a dividend payment in the form of additional shares of MVC;                                      
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $0.5 million due to an overall improvement in comparable industry sectors, as well as continued revenue and earnings growth;



On January 29, 2016, we invested $2.0
million in Biogenic Reagents, LLC (“Biogenic”) in the form of a senior secured promissory note maturing May 31, 2016
and bearing cash and PIK interest at the combined rate of 16% per annum. Biogenic is a developer and producer of high value carbon
products from renewable biomass, headquartered in Minneapolis. The company has developed and commercialized a low-cost platform
technology to make carbon products such as activated carbon for use in purification of air, water, food and pharmaceuticals and
agricultural carbon to improve crop production.



On March 2, 2016, we extended the maturity
of the 5th Element Tracking, LLC promissory note to July, 2016 and received fees in the form of a PIK and cash totaling
$0.05 million.



During the three months ended March
31, 2016, we received dividends in the form of additional shares of $0.1 million relating to our shareholding in MVC.



During the three months ended March
31, 2016, we recorded a net change in unrealized appreciation of $1.0 million, to a net unrealized appreciation of $3.3 million.
Such change in unrealized appreciation resulted primarily from the following changes:



| | (i)   | Increase in the fair value of our shareholding in MVC of $0.1 million due to the receipt of a dividend payment in the form of additional shares of MVC;                                                                                                                 
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  | Increase in fair value of our shareholding in PalletOne, Inc. of $2.0 million due to an overall improvement in comparable industry sectors, as well as continued revenue and earnings growth;                                                                           
| | (iii) | Decrease in the fair value of our holdings in Equus Energy, LLC of $1.0 million, principally due to a combination of lower production without a corresponding increase in proved reserves and continued lower short- and long-term prices for crude oil and natural gas.



| | (7) | Plan of Reorganization
| | --- | ----------------------



Share Exchange with MVC—On
May 14, 2014, we announced that the Fund intended to effect a Plan of Reorganization. As a first step to consummating the Plan
of Reorganization, we executed a Share Exchange with MVC, wherein we sold to MVC 2,112,000 newly-issued shares of our common stock
in exchange for 395,839 newly-issued shares of MVC. We also announced that, pursuant to the Plan of Reorganization, our intention
was for Equus to pursue a Consolidation with MVC or one of its portfolio companies.



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Authorization to Withdraw BDC Election—As
a consequence of our Plan of Reorganization, on January 6, 2017, holders of a majority of the outstanding common stock of the Fund
approved our cessation as a BDC under the 1940 Act and authorized our Board of Directors (sometimes referred to hereinafter as
the “Board”) to cause the Fund’s withdrawal of its election to be classified as a BDC, each effective as of a
date designated by the Board and our Chief Executive Officer, but in no event later than July 31, 2017. Notwithstanding this authorization
to withdraw our BDC election, we will not submit any such withdrawal unless and until we are reasonably confident that such Consolidation
will be completed.



Agreement to Acquire USG&E—On
April 24, 2017, as the final step in the Plan of Reorganization and our intention to effect a Consolidation thereunder, we entered
into the Merger Agreement with ETR Merger Sub, Inc., a newly-formed wholly-owned subsidiary of Equus (“Merger Sub”),
certain shareholders of USG&E, and MVC as a selling shareholder of USG&E and as representative of the selling USG&E
shareholders. A portfolio investment of MVC since 2007, USG&E is a retail energy company with over 160 employees that sells
electricity and natural gas in deregulated utility markets to residential and commercial customers. As of January 31, 2017, USG&E
had over 375,000 residential customer equivalents in 62 utility markets across the District of Columbia and 11 states. The Consolidation,
if effected, will result in USG&E becoming a wholly-owned subsidiary of Equus, and the operations of USG&E becoming the
predominant operations of the consolidated companies.



The Merger Agreement provides for a
two-stage transaction to accomplish the Consolidation:



| | · | The first stage of the Consolidation (referred to
in the Merger Agreement as the “Acquisition”) involves the acquisition by Equus, from certain USG&E shareholders,
inclusive of MVC, of 90.3% of the common and preferred stock of USG&E. Upon completion of the Acquisition, Equus will change
its corporate name from Equus Total Return, Inc. to “USG&E, Inc.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The second stage of the Consolidation (referred to
in the Merger Agreement as the “Merger”) consists of a short-form merger of Merger Sub and USG&E, whereupon Merger
Sub will merge with and into USG&E and the remaining shareholders of USG&E will have the right to receive a pro-rata amount
of the common and preferred shares of Equus described below. USG&E will survive the merger as a wholly-owned subsidiary of
the Company and the separate corporate existence of Merger Sub will cease.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The aggregate consideration to be tendered
by the Company to the stockholders of USG&E as part of the Consolidation consists of 32,606,539 shares of newly-issued common
stock of the Company and $40 million of newly-issued 7.5% Series A Convertible Preferred Stock of the Company. The closing of the
Acquisition is subject to a number of conditions, including compliance with applicable waiting periods under federal antitrust
and energy regulations, as well as theExchange Act. The closing of the Acquisition is also subject to SEC clearance of an Information
Statement filed by Equus with respect to the Consolidation and various actions undertaken by the Board and Equus shareholders in
connection therewith. Additional information concerning the proposed Consolidation and a more thorough description thereof can
be obtained from our filings with the SEC via the SEC’s website at www.sec.gov or on the Company’s website at
www.equuscap.com.



| | (8) | 2016 Equity Incentive Plan
| | --- | --------------------------



On
June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”). On January
10, 2017, the SEC issued an order approving the Incentive Plan and certain awards intended to be made thereunder. The Incentive
Plan is intended to promote the interests of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates
to acquire or increase their equity interest in the Fund and to provide a means whereby they may develop a proprietary interest
in the development and financial success of the Fund, to encourage them to remain with and devote their best efforts to the business
of the Fund, thereby advancing the interests of the Fund and its stockholders. The Incentive Plan is also intended to enhance
the ability of the Fund and its affiliates to attract and retain the services of individuals who are essential for the growth
and profitability of the Fund. The Incentive Plan permits the award of restricted stock as well as common stock purchase options.
The maximum number of shares of common stock that are subject to awards granted under the Incentive Plan is 2,434,728 shares.
The term of the Incentive Plan will expire on June 13, 2026. On March 17, 2017, we granted awards of restricted stock under the
Plan to certain of our directors and executive officers in the aggregate amount of 844,500 shares. The awards are each subject
to a vesting requirement over a 3-year period unless the recipient thereof is terminated or removed from their position as a director
or executive officer without “cause”, or as a result of constructive termination, as such terms are defined in the
respective award agreements entered into by each of the recipients and the Fund. We account for share-based compensation using
the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards,
we measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize the
fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting
term. For the three months ended March 31, 2017, we recorded compensation expense of $0.5 million in connection with these awards.

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| | (9) | Equus Energy, LLC
| | --- | -----------------



Equus Energy was formed in November
2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector, with particular emphasis on
income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus Energy. On December
27, 2012, we invested an additional $6.8 million in Equus Energy for the purpose of additional working capital and to fund the
purchase of $6.6 million in working interests, which presently comprise 110 producing and non-producing oil and gas wells. The
working interests include associated development rights of approximately 20,900 acres situated on 12 separate properties in Texas
and Oklahoma. The working interests range from a de minimus amount to 50% of the leasehold that includes these wells.



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



Revenue and Income. During the
three months ended March 31, 2017, Equus Energy’s revenue, operating revenue less direct operating expenses, and net loss
were $0.2 million, $0.1 million, and ($0.1) million, respectively, as compared to revenue, operating revenue less direct operating
expenses, and net loss were $0.1 million, ($0.2) million, and ($0.4) million, respectively, for the three months ended March 31,
2016.



Capital Expenditures. There
were no capital expenditures for the three months ended March 31, 2017. During the three months ended March 31, 2016, Equus Energy
invested $0.003 million in capital expenditures for small repairs and improvements. The operators of the various working interest
communicated their intent to wait until later in 2017, commensurate with an anticipated gradual rise in the price of crude oil,
to commence new drilling and recompletion projects.



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

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Below is summarized consolidated financial
information for Equus Energy as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016,
respectively:



EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Balance
Sheets





|                                                           |  | March 31, |        | December 31,
|---------------------------------------------------------- |  | --------- | ------ | ------------
|(in thousands)                                             |  | 2017      |        | 2016        
|Assets                                                     |  |           |        |             
|Current assets:                                            |  |           |        |             
|Cash and cash equivalents                                  |  | $         | 235    |             
|Accounts receivable                                        |  |           | 104    |             
|Other current assets                                       |  |           | 42     |             
|Total current assets                                       |  |           | 381    |             
|Oil and gas properties                                     |  |           | 8,055  |             
|Less: accumulated depletion, depreciation and amortization |  |           | (7,241 | )           
|Net oil and gas properties                                 |  |           | 814    |             
|Total assets                                               |  | $         | 1,195  |             
|                                                           |  |           |        |             
|Liabilities and member's equity                            |  |           |        |             
|Current liabilities:                                       |  |           |        |             
|Accounts payable and other                                 |  | $         | 35     |             
|Due to affiliate                                           |  |           | 611    |             
|Total current liabilities                                  |  |           | 646    |             
|Asset retirement obligations                               |  |           | 185    |             
|Total liabilities                                          |  |           | 831    |             
|                                                           |  |           |        |             
|Total member's equity                                      |  |           | 364    |             
|                                                           |  |           |        |             
|Total liabilities and member's equity                      |  | $         | 1,195  |             





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 operations because the allocation of certain expenses
would be arbitrary and would not be indicative of what such costs would have been had Equus Energy been operated as a stand-alone
entity. The statements of operations presented are not indicative of the financial condition or results of operations of Equus Energy
on a go forward basis due to changes in the business and the omission of various operating expenses.

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EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements
of Operations





|                                                    |  | Three months ended March 31
|--------------------------------------------------- |  | ---------------------------
|(in thousands)                                      |  | 2017                       
|Operating revenue                                   |  | $                          
|Operating expenses                                  |  |                            
|Direct operating expenses                           |  |                            
|General and administrative                          |  |                            
|Depletion, depreciation, amortization and accretion |  |                            
|Total operating expenses                            |  |                            
|Operating loss before income tax expense            |  |                            
|Net loss                                            |  | $                          





EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements
of Cash Flows





|                                                 |  | Three months ended March 31,
|------------------------------------------------ |  | ----------------------------
|(in thousands)                                   |  | 2017                        
|Cash flows from operating activities:            |  |                             
|                                                 |  |                             
|Net loss                                         |  | $                           
|Adjustments to reconcile net loss to             |  |                             
|net cash used in operating activities:           |  |                             
|Depletion, depreciation and amortization         |  |                             
|Changes in operating assets and liabilities:     |  |                             
|Accounts receivable                              |  |                             
|Prepaid expenses and other current assets        |  |                             
|Accounts payable and other                       |  |                             
|Net cash used in operating activities            |  |                             
|                                                 |  |                             
|Cash flows from investing activities:            |  |                             
|Investment in oil & gas properties               |  |                             
|Net cash used in investing activities            |  |                             
|Net decrease in cash                             |  |                             
|Cash and cash equivalents at beginning of period |  |                             
|Cash and cash equivalents at end of period       |  | $                           









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Critical Accounting Policies for
Equus Energy—Equus Energy and its wholly-owned subsidiary EQS Energy Holdings, Inc. (collectively, “the Company”)
follow the Full Cost Method of Accounting for oil and gas properties. Under the full cost method, all costs associated with
property acquisition, exploration, and development activities are capitalized. Capitalized costs include lease acquisitions, geological
and geophysical work, delay rentals, costs of drilling, completing and equipping successful and unsuccessful oil and gas wells
and related costs. Gains or losses are normally not recognized on the sale or other disposition of oil and gas properties. Gains
or losses are normally reflected as an adjustment to the full cost pool.



The capitalized costs of oil
and gas properties, plus estimated future development costs relating to proved reserves and estimated cost of dismantlement and
abandonment, net of salvage value, are amortized on a unit-of-production method over the estimated productive life of the proved
oil and gas reserves. Unevaluated oil and gas properties are excluded from this calculation.  Depletion, depreciation, amortization
and accretion expense for the Company’s oil and gas properties totaled $0.1 million and $0.06 million for the three months
ended March 31, 2017 and March 31, 2016, respectively.

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



| | (a) | As of March 31, 2017, the present value of estimated future net revenue from the projected production of proved oil and gas reserves, calculated at the simple arithmetic average, first-day-of-the-month prices during the twelve-month period before the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) and a discount factor of 10%;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | The cost of investments in unproved and unevaluated properties excluded from the costs being amortized; and                                                                                                                                                                                                                                                                                              
| | (c) | The lower of cost or estimated fair value of unproved properties included in the costs being amortized.                                                                                                                                                                                                                                                                                                  



When it is determined that oil and gas
property costs exceed the ceiling limitation, an impairment charge is recorded to reduce its carrying value to the ceiling limitation. 
The Company did not recognize an impairment loss on its oil and gas properties during the three months ended March 31, 2017 and
March 31, 2016, respectively.



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



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



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



Income Taxes—A limited
liability company is not subject to the payment of federal income taxes as components of its income and expenses flow through directly
to the members. However, the Company is subject to certain state income taxes. Texas margin tax applies to legal entities conducting
business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a tax rate to
a base that considers both revenue and expenses and therefore has the characteristics of an income tax. Taxable Subsidiaries may
generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect any such
income tax expense on our Statements of Operations.  As of March 31, 2017 and March 31, 2016, the Company recorded $0 in federal
income taxes.



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.



| | (10) | Recent Accounting Pronouncements
| | ---- | --------------------------------



In January 2016, the FASB issued ASU
2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  Among other things, this ASU requires
that pubic business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 
ASU  2016-01 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017.  Our adoption of ASU  2016-01 is not anticipated to have a material effect on our financial statements.

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



In March 2016, the FASB issued ASU
2016-09, Compensation-Stock Compensation (Topic 718) —Improvements to Employee Share-Based Payment Accounting,
which is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment
awards to their employees. ASU 2016-09 primarily simplifies the accounting for and classification of, income taxes related to
share-based payment awards, including the impact of income taxes withheld on the classification of awards as equity or liabilities
and the classification of income taxes on the statement of cash flows. ASU 2016-09 also permits an entity to elect a forfeiture
rate assumption based on the estimated number of awards expected to vest or to account for forfeitures when they occur. ASU 2016-09
is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. We have adopted ASU 2016-09 as of January 1, 2017. The provisions
of ASU 2019-06 should be adopted on a modified retrospective, retrospective or prospective basis, depending on the provision.
We recently adopted an incentive plan for management and issued awards during the quarter ended March 31, 2017. Our
adoption of ASU 2016-09 did not have a material effect on our financial statements.



In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326) —Measurement of Credit Losses on Financial Instruments, which amends
the financial instruments impairment guidance so that an entity is required to measure expected credit losses for financial assets
based on historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking
information to estimate credit losses. ASU 2016-13 also amends the guidance in FASB ASC Subtopic 325-40, Investments-Other, Beneficial
Interests in Securitized Financial Assets, related to the subsequent measurement of accretable yield recognized as interest income
over the life of a beneficial interest in securitized financial assets under the effective yield method. ASU 2016-13 is effective
for public business entities that meet the U.S. GAAP definition of an SEC filer, for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2016-13 on our financial
statements.



In August 2016, the FASB issued ASU
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the
Emerging Issues Task Force), which addresses the diversity in practice in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows under ASC 230, Statement of Cash Flows, and other topics. ASU 2016-15 provides guidance
on eight specific cash flow issues including the statement of cash flows treatment of beneficial interests in securitized financial
transactions as well as the treatment of debt prepayment and extinguishment costs. ASU 2016-15 also provides guidance on the predominance
principle to clarify when cash receipts and cash payments should be separated into more than one class of cash flows. ASU 2016-15
is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact
of ASU 2016-15 on our statements of cash flows.



| | (11) | Subsequent Events
| | ---- | -----------------



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



On April 3, 2017, we sold U.S. Treasury
Bills for $35.0 million and repaid our margin loan.



On April 24, 2017, we entered into the
Merger Agreement (see Note 7 – Plan of Reorganization).

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



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



The information contained in this section
should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Quarterly
Report and in conjunction with the financial statements and notes thereto in the Fund’s Form 10-K for the year ended December
31, 2016, as filed with the SEC. In addition, some of the statements in this report constitute forward-looking statements. The
matters discussed in this Quarterly Report, as well as in future oral and written statements by management of Equus, that are forward-looking
statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual
results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements
relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such
as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“could,” “intends,” “target,” “projects,” “believes,” “estimates,”
“predicts,” “potential” or “continue” or the negative of these terms or other similar words.
Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, and
the availability of additional capital. In light of these and other uncertainties, the inclusion of a forward-looking statement
in this Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking
statements contained in this Quarterly Report include statements as to:



| | · | our future operating results;                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | our business prospects and the prospects of our existing
and prospective portfolio companies;                                                                                        
| | · | the return or impact of current and future investments;                                                                                                                              
| | · | our contractual arrangements and other relationships
with third parties;                                                                                                             
| | · | the dependence of our future success on the general
economy and its impact on the industries in which we invest;                                                                     
| | · | the financial condition and ability of our existing
and prospective portfolio companies to achieve their objectives;                                                                 
| | · | our expected financings and investments;                                                                                                                                             
| | · | our regulatory structure and tax treatment;                                                                                                                                          
| | · | our ability to qualify and operate as a BDC and a
RIC, including the impact of changes in laws or regulations governing our operations, or the operations of our portfolio companies;
| | · | the adequacy of our cash resources and working capital;                                                                                                                              
| | · | the timing of cash flows, if any, from the operations
of our portfolio companies;                                                                                                    
| | · | the impact of fluctuations in interest rates on our
business;                                                                                                                        
| | · | the valuation of our investments in portfolio companies,
particularly those having no liquid trading market;                                                                         
| | · | our ability to recover unrealized losses; and                                                                                                                                        
| | · | market conditions and our ability to access additional
capital, if deemed necessary.                                                                                                 

There are a number of important
risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements.
For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this Quarterly
Report, please see the discussion in Part II, “Item 1A. Risk Factors”, and in Part I, “Item 1A. Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. You should not place undue reliance on these forward-looking
statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements
are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after
the date this Quarterly Report is filed with the SEC.



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



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



Plan of Reorganization



Share Exchange with MVC—On
May 14, 2014, we announced that the Fund intended to effect a Plan of Reorganization. As a first step to consummating the Plan
of Reorganization, we executed a Share Exchange with MVC, wherein we sold to MVC 2,112,000 newly-issued shares of our common stock
in exchange for 395,839 newly-issued shares of MVC. We also announced that, pursuant to the Plan of Reorganization, our intention
was for Equus to pursue a Consolidation with MVC or one of its portfolio companies.



Authorization to Withdraw BDC Election—As a consequence of our Plan of Reorganization, on January 6, 2017, holders of a majority of the outstanding common stock
of the Fund approved our cessation as a BDC under the 1940 Act and authorized our Board of Directors (sometimes referred to hereinafter
as the “Board”) to cause the Fund’s withdrawal of its election to be classified as a BDC, each effective as of
a date designated by the Board and our Chief Executive Officer, but in no event later than July 31, 2017. Notwithstanding this
authorization to withdraw our BDC election, we will not submit any such withdrawal unless and until we are reasonably confident
that such Consolidation will be completed.



Agreement to Acquire USG&E—On
April 24, 2017, as the final step in the Plan of Reorganization and our intention to effect a Consolidation thereunder, we entered
into the Merger Agreement with ETR Merger Sub, Inc., a newly-formed wholly-owned subsidiary of Equus (“Merger Sub”),
certain shareholders of USG&E, and MVC as a selling shareholder of USG&E and as representative of the selling USG&E
shareholders. A portfolio investment of MVC since 2007, USG&E is a retail energy company with over 160 employees that sells
electricity and natural gas in deregulated utility markets to residential and commercial customers. As of January 31, 2017, USG&E
had over 375,000 residential customer equivalents in 62 utility markets across the District of Columbia and 11 states. The Consolidation,
if effected, will result in USG&E becoming a wholly-owned subsidiary of Equus, and the operations of USG&E becoming the
predominant operations of the consolidated companies.



The Merger Agreement provides for a
two-stage transaction to accomplish the Consolidation:



| | · | The first stage of the Consolidation (referred to
in the Merger Agreement as the “Acquisition”) involves the acquisition by Equus, from certain USG&E shareholders,
inclusive of MVC, of 90.3% of the common and preferred stock of USG&E. Upon completion of the Acquisition, Equus will change
its corporate name from Equus Total Return, Inc. to “USG&E, Inc.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The second stage of the Consolidation (referred to
in the Merger Agreement as the “Merger”) consists of a short-form merger of Merger Sub and USG&E, whereupon Merger
Sub will merge with and into USG&E and the remaining shareholders of USG&E will have the right to receive a pro-rata amount
of the common and preferred shares of Equus described below. USG&E will survive the merger as a wholly-owned subsidiary of
the Company and the separate corporate existence of Merger Sub will cease.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The aggregate consideration
to be tendered by the Company to the stockholders of USG&E as part of the Consolidation consists of 32,606,539 shares of newly-issued
common stock of the Company and $40 million of newly-issued 7.5% Series A Convertible Preferred Stock of the Company. The closing
of the Acquisition is subject to a number of conditions, including compliance with applicable waiting periods under federal antitrust
and energy regulations, as well as the Exchange Act. The closing of the Acquisition is also subject to SEC clearance of an Information
Statement filed by Equus with respect to the Consolidation and various actions undertaken by the Board and Equus shareholders in
connection therewith. Additional information concerning the proposed Consolidation and a more thorough description thereof can
be obtained from our filings with the SEC via the SEC’s website at www.sec.gov or on the Company’s website at
www.equuscap.com.



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2016 Equity Incentive Plan



On June 13, 2016, our shareholders
approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”). On January 10, 2017, the SEC issued an
order approving the Incentive Plan and certain awards intended to be made thereunder. The Incentive Plan is intended to promote
the interests of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates to acquire or increase
their equity interest in the Fund and to provide a means whereby they may develop a proprietary interest in the development and
financial success of the Fund, to encourage them to remain with and devote their best efforts to the business of the Fund, thereby
advancing the interests of the Fund and its stockholders. The Incentive Plan is also intended to enhance the ability of the Fund
and its affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the
Fund. The Incentive Plan permits the award of restricted stock as well as common stock purchase options. The maximum number of
shares of common stock that are subject to awards granted under the Incentive Plan is 2,434,728 shares. The term of the Incentive
Plan will expire on June 13, 2026. On March 17, 2017, we granted awards of restricted stock under the Plan to certain of our directors
and executive officers in the aggregate amount of 844,500 shares. The awards are each subject to a vesting requirement over a 3-year
period unless the recipient thereof is terminated or removed from their position as a director or executive officer without “cause”,
or as a result of constructive termination, as such terms are defined in the respective award agreements entered into by each of
the recipients and the Fund. For the three months ended March 31, 2017, we recorded compensation expense of $0.5 million in connection
with these awards.



Critical Accounting Policies



See the Fund’s Critical Accounting
Policies from the disclosure set forth in the Annual Report on Form 10-K for the year ended December 31, 2016.



Recent Accounting Pronouncements



In January 2016, the FASB issued ASU
2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  Among other things, this ASU requires
that pubic business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 
ASU 2016-01 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017.  Our adoption of ASU 2016-01 is not anticipated to have a material effect on our financial statements.



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



In March 2016, the FASB issued ASU
2016-09, Compensation-Stock Compensation (Topic 718) —Improvements to Employee Share-Based Payment Accounting,
which is intended to improve the accounting for share-based payments and affects all organizations that issue share-based payment
awards to their employees. ASU 2016-09 primarily simplifies the accounting for and classification of, income taxes related to
share-based payment awards, including the impact of income taxes withheld on the classification of awards as equity or liabilities
and the classification of income taxes on the statement of cash flows. ASU 2016-09 also permits an entity to elect a forfeiture
rate assumption based on the estimated number of awards expected to vest or to account for forfeitures when they occur. ASU 2016-09
is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. We have adopted ASU 2016-09 as of January 1, 2017. The provisions
of ASU 2019-06 should be adopted on a modified retrospective, retrospective or prospective basis, depending on the provision.
We recently adopted an incentive plan for management and issued awards during the quarter ended March 31, 2017. Our adoption
of ASU 2016-09 did not have a material effect on our financial statements.



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In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326) —Measurement of Credit Losses on Financial Instruments, which amends
the financial instruments impairment guidance so that an entity is required to measure expected credit losses for financial assets
based on historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking
information to estimate credit losses. ASU 2016-13 also amends the guidance in FASB ASC Subtopic 325-40, Investments-Other, Beneficial
Interests in Securitized Financial Assets, related to the subsequent measurement of accretable yield recognized as interest income
over the life of a beneficial interest in securitized financial assets under the effective yield method. ASU 2016-13 is effective
for public business entities that meet the U.S. GAAP definition of an SEC filer, for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2016-13 on our financial
statements.



In August 2016, the FASB issued ASU
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the
Emerging Issues Task Force), which addresses the diversity in practice in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows under ASC 230, Statement of Cash Flows, and other topics. ASU 2016-15 provides guidance
on eight specific cash flow issues including the statement of cash flows treatment of beneficial interests in securitized financial
transactions as well as the treatment of debt prepayment and extinguishment costs. ASU 2016-15 also provides guidance on the predominance
principle to clarify when cash receipts and cash payments should be separated into more than one class of cash flows. ASU 2016-15
is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact
of ASU 2016-15 on our statements of cash flows.



Current Market Conditions



Despite relatively low unemployment
rates, the U.S. economy expanded at an annualized rate of 0.7% during the first quarter of 2017, following an annualized increase
of 1.2% during the fourth quarter of 2016. The decreased growth during the first quarter, the slowest since the first quarter of
2014, was principally attributed to a mild winter resulting in weak consumer spending during the quarter but is expected to be
temporary, given a labor market near full employment and strong U.S. consumer confidence. Business investment increased 9.1% during
the quarter, principally due to rising oil and gas drilling activity due to modest price recoveries in WTI and Brent crude benchmarks.
In a survey of 60 economists, the Wall Street Journal has predicted GDP growth of 2.8% for the second quarter of 2017 as
compared to a projected increase of 2.3% for the same period by the Conference Board Leading Economic Index. The International
Monetary Fund projects an annual increase of 2.3% of US GDP for all of 2017. (Sources: CNBC, BDO USA, LLP, Wall Street Journal,
Conference Board Leading Economic Index, International Monetary Fund)



Market conditions for business transactions
during 2016, including mergers and acquisitions and private equity investments, improved to their highest level ($4.3 trillion)
since prior to the 2008 financial crisis, as corporations have been deleveraging and are holding significant amounts of cash and
many have focused on acquisitions as part of future growth plans. Nevertheless, mergers and acquisition activity was markedly slower
in the first quarter of 2017 ($53 billion) as compared to the fourth quarter of 2016 ($89 billion), as the number of deals decreased
while the size of such deals increased. Private equity funds increased their assets under management during 2016 to a projected
$862 billion, a 14% increase from 2015 and a level not seen since 2008, as private equity firms as a group enjoyed more success
during the year in attracting investment capital. First quarter 2017 results are not yet available. (Sources: Forbes, Financial
News, and Beneshlaw Private Equity Summary Report-February 2017).



During the three months ended March
31, 2017, our net asset value decreased from $3.37 per share to $3.06 per share, a decrease of 9.2%. As of March 31, 2017, our
common stock is trading at a 18.6% discount to our net asset value as compared to 40.4% as of December 31, 2016.



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



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Liquidity and Capital Resources



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



Because of the nature and size of the
portfolio investments, we may periodically borrow funds to make qualifying investments to maintain our tax status as a RIC. We
often borrow such funds by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement
will be available in the future. If the Fund is unable to borrow funds to make qualifying investments, it may no longer qualify
as a RIC. The Fund would then be subject to corporate income tax on its net investment income and realized capital gains, and distributions
to stockholders would be subject to income tax as ordinary dividends.



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



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



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



Results of Operations



Investment Income and Expense



Net investment loss increased to $2.5
million from $0.7 million for the three months ended March 31, 2017 and 2016, respectively. The increase in net investment loss
generated at March 31, 2017 compared to March 31, 2016 is due primarily to transaction costs related to the Plan of Reorganization
of $1.3 million and charges related to awards made pursuant to the Fund’s 2016 Equity Incentive Plan of $0.5 million.



Investment income was $0.2 million for
the three months ended March 31, 2017 and $0.1 million for the three months ended March 31, 2016. The increase in investment income
was primarily due to the increase in income from the MVC share dividend received during the three months ended March 31, 2017.



Excluding transaction costs of $1.3
million and equity incentive plan costs of $0.5 million, total expenses for the three months ended March 31, 2017 as compared to
March 31, 2016 were unchanged at $0.9 million.



Realized
Gains and Losses on Sales of Portfolio Securities



During the three months ended March
31, 2017, we realized a loss of $3.0 thousand from the sale of temporary cash investments.



During the three months ended March
31, 2016, we realized a loss of $2.0 thousand from the sale of temporary cash investments.



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Changes in Unrealized Appreciation/Depreciation
of Portfolio Securities



During the three months ended March
31, 2017, we recorded a net change in unrealized appreciation of $0.7 million, to a net unrealized appreciation of $11.0 million.
Such change in unrealized appreciation resulted primarily from the following changes:



| | (i)  | Increase in the fair value of our shareholding in MVC of $0.2 million due to the receipt of a dividend payment in the form of additional shares of MVC;                                      
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) | Increase in fair value of our shareholding in PalletOne, Inc. of $0.5 million due to an overall improvement in comparable industry sectors, as well as continued revenue and earnings growth;



During the three months ended March
31, 2016, we recorded a net change in unrealized appreciation of $1.0 million, to a net unrealized appreciation of $3.3 million.
Such change in unrealized appreciation resulted primarily from the following changes:







| | (i)   | Increase in the fair value of our shareholding in MVC of $0.1 million due to the receipt of a dividend payment in the form of additional shares of MVC;                                                                                                                 
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  | Increase in fair value of our shareholding in PalletOne, Inc. of $2.0 million due to an overall improvement in comparable industry sectors, as well as continued revenue and earnings growth;                                                                           
| | (iii) | Decrease in the fair value of our holdings in Equus Energy, LLC of $1.0 million, principally due to a combination of lower production without a corresponding increase in proved reserves and continued lower short- and long-term prices for crude oil and natural gas.





Dividends



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



Portfolio Securities



During the three months ended March
31, 2017, we received dividends in the form of additional shares of $0.1 million relating to our shareholding in MVC.



On March 2, 2016, we extended the maturity
of the 5th Element Tracking, LLC promissory note to July 2016 and received fees in the form of a PIK and cash totaling
$0.05 million.



During the three months ended March
31, 2016, we received dividends in the form of additional shares of $0.1 million relating to our shareholding in MVC.



Subsequent Events



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



On April 3, 2017, we sold U.S. Treasury
Bills for $35.0 million and repaid our margin loan.



On April 24, 2017, we entered into the
Merger Agreement (see Plan of Reorganization above).



Item 3. Quantitative and Qualitative Disclosure about
Market Risk



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



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



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



We are classified as a “non-diversified”
investment company under the 1940 Act, which means we are not limited in the proportion of our assets that may be invested in the
securities of a single user. The value of one segment called “Shipping products and services” includes one portfolio
company, PalletOne, Inc., and was 40.3% of the net asset value and 50.9% of our investments in portfolio company securities (at
fair value) as of March 31, 2017. 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 March 31, 2017. 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 March 31,
2017, 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



Shareholder Complaint—On
November 16, 2016, Samuel Zalmanoff filed a lawsuit against the Fund and members of the Board of Directors in the Court of Chancery
in the State of Delaware. The lawsuit was filed in connection with the Fund’s 2016 Equity Incentive Plan (“Incentive
Plan”) which was adopted by the Board of Directors on April 15, 2016, approved by the Equus shareholders on June 13, 2016,
and approved, with certain standard exceptions, by the Securities and Exchange Commission on January 10, 2017. Mr. Zalmanoff’s
complaint, which purports to be on behalf of all non-affiliate Equus shareholders entitled to vote for the Incentive Plan, alleges
a breach by the Board of Directors of its fiduciary duties of disclosure in connection with the Incentive Plan, and seeks an order
from the court: (i) enjoining implementation of the Incentive Plan, (ii) requiring the Fund to revise its disclosures relating
to the Incentive Plan, and (iii) for an award of costs, attorneys’ fees, and expenses. We believe this lawsuit is without
merit and intend to vigorously dispute the claims made therein. Accordingly, on January 9, 2017, we filed a Motion to Dismiss the
complaint, which was followed on January 27, 2017 with a supporting brief and other corroborative items. Mr. Zalmanoff filed a
response to this motion on March 13, 2017, and we filed a Reply Brief to this response on April 14, 2017. Oral argument with respect
to our Motion to Dismiss is scheduled for July 24, 2017.



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.



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Item 1A. Risk Factors



In connection with our agreement to
effect a Consolidation with USG&E, we have identified a number of risks associated with the transactions undertaken in connection
therewith, as well as with the underlying business of USG&E. These risks are set forth in the Fund’s Information Statement
on Schedule 14C, which was filed in its preliminary form on May 4, 2017 and is hereby incorporated by reference. These risks should
be considered in addition to various risk factors identified by us in our Annual Report on Form 10-K for the year ended December
31, 2016.



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.





















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Item 6. Exhibits



| | 3.  | Articles of Incorporation and by-laws                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Restated Certificate of Incorporation of the Fund, as amended. [Incorporated by reference to Exhibit 3(a) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007]                                                                                       
| | (b) | Certificate of Merger dated June 30, 1993, between the Fund and Equus Investments Incorporated [Incorporated by reference to Exhibit 3(c) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007]                                                       
| | (c) | Amended and Restated Bylaws of the Fund. [Incorporated by reference to Exhibit 3(b) to Registrant’s Current Report on Form 8-K filed on June 30, 2014.]                                                                                                                          
| | 10. | Material Contracts.                                                                                                                                                                                                                                                              
| | (a) | Safekeeping Agreement between the Fund and Amegy Bank dated August 16, 2008. [Incorporated by reference to Exhibit 10(c) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008.]                                                                       
| | (b) | Form of Indemnification Agreement between the Fund and its directors and certain officers. [Incorporated by reference to Exhibit 10(d) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011.]                                                         
| | (c) | Form of Release Agreement between the Fund and certain of its officers and former officers. [Incorporated by reference to Exhibit 10(h) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.]                                                        
| | (d) | Code of Ethics of the Fund (Rule 17j-1) [Incorporated by reference to Exhibit 10(f) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.]                                                                                                            
| | (e) | Share Exchange Agreement between the Fund and MVC Capital, Inc., dated May 14, 2014. [Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on May 15, 2014.]                                                                                           
| | (f) | 2016 Equity Incentive Plan, adopted June 13, 2016 [Incorporated by reference to Exhibit 1 to Registrant’s Definitive Proxy Statement filed on May 5, 2016.]                                                                                                                      
| | (g) | Stock
Purchase Agreement and Plan of Merger, dated April 24, 2017, among Equus Total Return, Inc., ETR Merger Sub, Inc., and certain
shareholders of U.S. Gas & Electric, Inc. [Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on
April 25, 2017.]
| | 31. | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                          
| | 1.  | Certification by Chief Executive Officer                                                                                                                                                                                                                                         
| | 2.  | Certification by Chief Financial Officer                                                                                                                                                                                                                                         
| | 32. | Section 1350 Certifications                                                                                                                                                                                                                                                      
| | 1.  | Certification by Chief Executive Officer                                                                                                                                                                                                                                         
| | 2.  | Certification by Chief Financial Officer                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                  



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SIGNATURE



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



Date: May 15, 2017



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













































































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