UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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



For the quarterly period ended September 30, 2023



or



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

For the transition period to

Commission File Number 814-00098

EQUUS TOTAL RETURN, INC.

(Exact name of registrant as specified in its charter)



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



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



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



Securities registered pursuant to Section 12(b)
of the Act:



|Title of each class | Name of each exchange
    on which registered
|------------------- | ---------------------------------------------
|Common Stock        | New York Stock Exchange                      



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

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



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



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



If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.



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



There were 13,518,146 shares
of the registrant’s common stock, $.001 par value, outstanding, as of September 30, 2023.








Table of Contents




EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)

INDEX



|                                                                                              | Page
|--------------------------------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                                                 |     
|Item 1. Unaudited Condensed Financial Statements                                              | 3   
|Condensed Balance Sheets                                                                      | 3   
|Condensed Statements of Operations                                                            | 4   
|Condensed Statements of Changes in Net Assets                                                 | 5   
|Condensed Statements of Cash Flows                                                            | 6   
|Supplemental Information—Selected Per Share Data and Ratios                                   | 7   
|Schedules of Investments                                                                      | 8   
|Notes to Condensed Financial Statements                                                       | 12  
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 34  
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             | 41  
|Item 4. Controls and Procedures                                                               | 41  
|PART II. OTHER INFORMATION                                                                    |     
|Item 1. Legal Proceedings                                                                     | 42  
|Item 1A. Risk Factors                                                                         | 42  
|Item 6. Exhibits                                                                              | 43  
|SIGNATURE                                                                                     | 44  
|                                                                                              |     

























2


Table of Contents




EQUUS TOTAL RETURN, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

Part I. Financial Information

Item 1. Unaudited Condensed Financial Statements



|                                                                                                                                                                                 |  | September 30,
    2023 |         | December 31,
    2022
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---------------------
|                                                                                                                                                                                 |  |                        |         |                      
|(in thousands, except shares and per share amounts)                                                                                                                              |  |                        |         |                      
|Assets                                                                                                                                                                           |  |                        |         |                      
|Investments in portfolio securities at fair value:                                                                                                                               |  |                        |         |                      
|Control investments (cost at $10,511 and $8,111, respectively)                                                                                                                   |  | $                      | 33,050  |                      
|Total investments in portfolio securities at fair value                                                                                                                          |  |                        | 33,050  |                      
|Temporary cash investments                                                                                                                                                       |  |                        | 17,987  |                      
|Cash and cash equivalents                                                                                                                                                        |  |                        | 13,672  |                      
|Restricted cash                                                                                                                                                                  |  |                        | 180     |                      
|Accounts receivable from affiliates                                                                                                                                              |  |                        | 140     |                      
|Accrued interest                                                                                                                                                                 |  |                        | 40      |                      
|Other assets                                                                                                                                                                     |  |                        | 466     |                      
|Total assets                                                                                                                                                                     |  |                        | 65,535  |                      
|Liabilities and net assets                                                                                                                                                       |  |                        |         |                      
|Accounts payable                                                                                                                                                                 |  |                        | 113     |                      
|Accrued compensation                                                                                                                                                             |  |                        | 2       |                      
|Accounts payable to related parties                                                                                                                                              |  |                        | 305     |                      
|Borrowing under margin account                                                                                                                                                   |  |                        | 17,987  |                      
|Total liabilities                                                                                                                                                                |  |                        | 18,407  |                      
|                                                                                                                                                                                 |  |                        |         |                      
|Commitments and contingencies (See Note 2)                                                                                                                                       |  |                        |         |                      
|                                                                                                                                                                                 |  |                        |         |                      
|Net assets                                                                                                                                                                       |  |                        |         |                      
|Common stock, $.001 par value per share; 100,000,000 shares authorized and 13,518,146 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively |  |                        |         |                      
|                                                                                                                                                                                 |  |                        |         |                      
|Preferred stock, $.001 par value per share; 10,000,000 shares authorized as of September 30, 2023 and December 31, 2022 respectively                                             |  |                        |         |                      
|Common stock, par value                                                                                                                                                          |  | $                      | 13      |                      
|Capital in excess of par value                                                                                                                                                   |  |                        | 74,685  |                      
|Accumulated deficit                                                                                                                                                              |  |                        | (27,570 | )                    
|Total net assets                                                                                                                                                                 |  | $                      | 47,128  |                      
|Net asset value per share                                                                                                                                                        |  | $                      | 3.49    |                      







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



3


Table of Contents




EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)





|                                                                           |  | Three Months Ended September 30, |        | Nine Months ended September 30,
|-------------------------------------------------------------------------- |  | -------------------------------- | ------ | -------------------------------
|(in thousands, except per share amounts)                                   |  | 2023                             |        | 2022                           
|Investment income:                                                         |  |                                  |        |                                
|Control investments                                                        |  | $                                | 32     |                                
|Total interest and dividend income                                         |  |                                  | 32     |                                
|Interest from temporary cash investments                                   |  |                                  | 10     |                                
|Total investment income                                                    |  |                                  | 42     |                                
|                                                                           |  |                                  |        |                                
|Expenses:                                                                  |  |                                  |        |                                
|Compensation expense                                                       |  |                                  | 692    |                                
|Professional fees                                                          |  |                                  | 202    |                                
|Professional liability expenses                                            |  |                                  | 148    |                                
|Director fees and expenses                                                 |  |                                  | 75     |                                
|General and administrative expenses                                        |  |                                  | 31     |                                
|Mailing, printing and other expenses                                       |  |                                  | 13     |                                
|Taxes                                                                      |  |                                  | 3      |                                
|Interest expense                                                           |  |                                  | 12     |                                
|Total expenses                                                             |  |                                  | 1,176  |                                
|                                                                           |  |                                  |        |                                
|Net investment loss                                                        |  |                                  | (1,134 | )                              
|                                                                           |  |                                  |        |                                
|Net realized gain:                                                         |  |                                  |        |                                
|Temporary cash investments                                                 |  |                                  | 11     |                                
|Net realized gain                                                          |  |                                  | 11     |                                
|                                                                           |  |                                  |        |                                
|Net unrealized appreciation of portfolio securities:                       |  |                                  |        |                                
|Control investments                                                        |  |                                  | 8,200  |                                
|Net change in net unrealized appreciation of portfolio securities          |  |                                  | 8,200  |                                
|                                                                           |  |                                  |        |                                
|Net increase (decrease) in net assets resulting from operations            |  | $                                | 7,077  |                                
|                                                                           |  |                                  |        |                                
|Net increase (decrease) in net assets resulting from operations per share: |  |                                  |        |                                
|Basic and diluted                                                          |  | $                                | 0.52   |                                
|Weighted average shares outstanding:                                       |  |                                  |        |                                
|Basic and diluted                                                          |  |                                  | 13,518 |                                





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



4


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EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)



|                                                     |  | Common Stock     |        |          
|---------------------------------------------------- |  | ---------------- | ------ | ---------
|(in thousands)                                       |  | Number of Shares |        | Par Value
|                                                     |  |                  |        |          
|Balances as of January 1, 2022                       |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Net increase in net assets resulting from operations |  |                  | —      |          
|                                                     |  |                  |        |          
|Balances as of March 31, 2022                        |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Net decrease in net assets resulting from operations |  |                  | —      |          
|                                                     |  |                  |        |          
|Balances as of June 30, 2022                         |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Net decrease in net assets resulting from operations |  |                  | —      |          
|                                                     |  |                  |        |          
|Balances as of September 30, 2022                    |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Balances as of January 1, 2023                       |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Net decrease in net assets resulting from operations |  |                  | —      |          
|                                                     |  |                  |        |          
|Balances as of March 31, 2023                        |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Net increase in net assets resulting from operations |  |                  | —      |          
|                                                     |  |                  |        |          
|Balances as of June 30, 2023                         |  |                  | 13,518 |          
|                                                     |  |                  |        |          
|Net increase in net assets resulting from operations |  |                  | —      |          
|                                                     |  |                  |        |          
|Balances as of September 30, 2023                    |  |                  | 13,518 |          









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





5


Table of Contents




EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                        |  | Nine months ended September 30,
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------
|(in thousands)                                                                                                          |  | 2023                           
|Reconciliation of increase in net assets resulting from operations to net cash                                          |  |                                
|used in operating activities:                                                                                           |  |                                
|Net increase in net assets resulting from operations                                                                    |  | $                              
|Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: |  |                                
|Net realized gain:                                                                                                      |  |                                
|Temporary cash investments                                                                                              |  |                                
|Net change in unrealized appreciation of portfolio securities:                                                          |  |                                
|Control investments                                                                                                     |  |                                
|Purchase of portfolio securities                                                                                        |  |                                
|Purchase of temporary cash investments, net                                                                             |  |                                
|Changes in operating assets and liabilities:                                                                            |  |                                
|Accounts receivable from affiliates                                                                                     |  |                                
|Accrued interest and dividend receivable                                                                                |  |                                
|Other assets                                                                                                            |  |                                
|Accounts payable and accrued liabilities                                                                                |  |                                
|Accounts payable to related parties                                                                                     |  |                                
|Net cash used in operating activities                                                                                   |  |                                
|Cash flows from financing activities:                                                                                   |  |                                
|Borrowings under margin account                                                                                         |  |                                
|Repayments under margin account                                                                                         |  |                                
|Net cash provided by financing activities                                                                               |  |                                
|Net decrease in cash and cash equivalents                                                                               |  |                                
|Cash and cash equivalents and restricted cash at beginning of period                                                    |  |                                
|                                                                                                                        |  |                                
|Cash and cash equivalents and restricted cash at end of period                                                          |  | $                              
|Supplemental disclosure of cash flow information:                                                                       |  |                                
|Interest paid                                                                                                           |  | $                              
|Income taxes paid                                                                                                       |  | $                              







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





6


Table of Contents




EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED PER SHARE
DATA AND RATIOS

(Unaudited)





|                                                                                    |  | Nine months ended Sep 30,
|----------------------------------------------------------------------------------- |  | -------------------------
|                                                                                    |  | 2023                     
|                                                                                    |  |                          
|Investment income                                                                   |  | $                        
|Expenses                                                                            |  |                          
|                                                                                    |  |                          
|Net investment loss                                                                 |  |                          
|                                                                                    |  |                          
|Net change in unrealized appreciation of portfolio securities                       |  |                          
|Net increase in net assets                                                          |  |                          
|Net assets at beginning of period                                                   |  |                          
|Net assets at end of period, basic and diluted                                      |  | $                        
|Weighted average number of shares outstanding during period,                        |  |                          
|in thousands                                                                        |  |                          
|Market price per share:                                                             |  |                          
|Beginning of period                                                                 |  | $                        
|End of period                                                                       |  | $                        
|Selected information and ratios:                                                    |  |                          
|Ratio of expenses to average net assets                                             |  |                          
|Ratio of net investment loss to average net assets                                  |  |                          
|Ratio of net increase in net assets resulting from operations to average net assets |  |                          
|Return on net asset value                                                           |  |                          
|Total return on market price (1)                                                    |  |                          











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



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



7


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2023

(Unaudited)

(in thousands, except share data)











|Name and Location of                                                                                              |  |          |            | Date of Initial |        |            |                |           |        | Cost of                                                 |        | Fair    
|----------------------------------------------------------------------------------------------------------------- |  | -------- | ---------- | --------------- | ------ | ---------- | -------------- | --------- | ------ | ------------------------------------------------------- | ------ | --------
|Portfolio Company (1)                                                                                             |  | Industry |            | Investment      |        | Investment |                | Principal |        | Investment                                              |        | Value(2)
|                                                                                                                  |  |          |            |                 |        |            |                |          
|Control Investments:  Majority-owned (3):                                                                         |  |          |            |                 |        |            |                |          
|Equus Energy, LLC (4)
                                                                                Houston, TX |  |          | Energy     |                 |        |            | December 2011  |           |        | Member interest (100%)                                  |        |         
|Morgan E&P, LLC (4)
                                                                       Houston, TX            |  |          | Energy     |                 |        |            | April 2023     |           |        | Member interest
                                 (100%) |        |         
|                                                                                                                  |  |          |            |                 |        |            |                |           |        | 12% senior secured promissory note due 5/26 (5)         |        | $       
|                                                                                                                  |  |          |            |                 |        |            |                |           |        |                                                         |        |         
|Total Control Investments: Majority-owned (represents 64.8% of total investments at fair value)                   |  |          |            |                 | 10,511 |            |                |           | 33,050 |                                                        
|Temporary Cash Investments                                                                                        |  |          |            |                 |        |            |                |           |        |                                                         |        |         
|U.S. Treasury Bill                                                                                                |  |          | Government |                 |        |            | September 2023 |           |        | UST 0% 10/23                                            |        |         
|Total Temporary Cash Investments (represents 35.2% of total investments
    at fair value)                        |  |          |            |                 |        |            | 17,987         |           |        |                                                         | 17,987 |         
|Total Investments                                                                                                 |  |          |            |                 |        |            |                |           |        |                                                         |        |         







(1)Under Section 55(a) of the 1940 Act, qualifying assets must
represent at least 70% of the total assets at the time of acquisitions of any non-qualifying. As of September 30, 2023 none of the Fund’s
total assests were considered non-qualifying assets.



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



(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 such
company.

(4)Level
3 Portfolio Investment.

(5)Income
producing.



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





8


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

SEPTEMBER 30, 2023

(Unaudited)



Our portfolio securities
are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities Act”).
We typically negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including
registration rights and related costs.



As a business
development company (“BDC”), we may invest up to 30% of our assets in non-qualifying portfolio investments, as permitted
by the Investment Company Act of 1940 (the “1940 Act”). Specifically, we may invest up to 30% of our assets in entities
that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including companies located outside
of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly-traded entities
with a market capitalization exceeding $250 million. As of September 30, 2023, we had invested 50.4% of our assets in securities of
portfolio companies that constituted qualifying investments under the 1940 Act. As of September 30, 2023, none of our investments
are considered non-qualifying assets as all of our investments are in enterprises that are considered eligible portfolio companies
the 1940 Act. We provide significant managerial assistance to our portfolio companies that comprise 100% of the total value of the
investments in portfolio securities as of September 30, 2023.



We are classified as
a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our assets
that may be invested in the securities of a single user. The value of one segment called “Energy” includes our two remaining
portfolio companies and was 70.1% of our net asset value, 50.4% of our total assets and 100% of our investments in portfolio company securities
(at fair value) as of September 30, 2023. Changes in business or industry trends or in the financial condition, results of operations,
or the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock
to a greater extent than would be the case if we were a “diversified” company holding numerous investments.



Our investments in
portfolio securities consist of the following types of securities as of September 30, 2023 (in thousands):



|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as Percentage of Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | --------------------------------------
|                                      |  |      |        |            |  |                                       
|Limited liability company investments |  | $    | 8,111  |            |  | $                                     
|Secured and subordinated debt         |  |      | 2,400  |            |  |                                       
|                                      |  |      |        |            |  |                                       
|Total                                 |  | $    | 10,511 |            |  | $                                     







The following is a
summary by industry of the Fund’s investments in portfolio securities as of September 30, 2023
(in thousands):



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





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





9


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2022

(Unaudited)

(in thousands, except share data)





|Name and Location of                                                                                              |  |          |            | Date of Initial |       |            |               |           |        | Cost of                |       | Fair    
|----------------------------------------------------------------------------------------------------------------- |  | -------- | ---------- | --------------- | ----- | ---------- | ------------- | --------- | ------ | ---------------------- | ----- | --------
|Portfolio Company                                                                                                 |  | Industry |            | Investment      |       | Investment |               | Principal |        | Investment             |       | Value(1)
|                                                                                                                  |  |          |            |                 |       |            |               |          
|Control Investments:  Majority-owned (2):                                                                         |  |          |            |                 |       |            |               |          
|Equus Energy, LLC (3)
                                                                                Houston, TX |  |          | Energy     |                 |       |            | December 2011 |           |        | Member interest (100%) |       |         
|                                                                                                                  |  |          |            |                 |       |            |               |           |        |                        |       |         
|Total Control Investments: Majority-owned (represents 72.3% of total investments at fair value)                   |  |          |            |                 | 8,111 |            |               |           | 15,650 |                       
|Temporary Cash Investments                                                                                        |  |          |            |                 |       |            |               |           |        |                        |       |         
|U.S. Treasury Bill                                                                                                |  |          | Government |                 |       |            | December 2023 |           |        | UST 0% 1/23            |       |         
|Total Temporary Cash Investments (represents 27.7% of total investments
    at fair value)                        |  |          |            |                 |       |            | 5,998         |           |        |                        | 5,998 |         
|Total Investments                                                                                                 |  |          |            |                 |       |            |               |           |        |                        |       |         











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

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

(3)Level 3 Portfolio Investment.



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





10


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EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

DECEMBER 31, 2022

(Unaudited)

(in thousands, except share data)



Our
portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities
Act”). We typically 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
an investment company classified as a business development company (“BDC”) under the Investment Company Act of 1940 (hereafter,
the “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 December 31, 2022, we had
invested 3 7.6% of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act. As of December
31, 2022, our investments are in enterprises that are considered eligible portfolio companies under the 1940 Act. We provide significant
managerial assistance to a portfolio company that comprises 100% of the total value of the investments in portfolio securities as of December
31, 2022.



We
are classified as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion
of our assets that may be invested in the securities of a single user. The value of one segment called ‘Energy’ includes one
portfolio company and was 44.4% of our net asset value, 37.6% of our total assets and 100% of our investments in portfolio company securities
(at fair value) as of December 31, 2022. Changes in business or industry trends or in the financial condition, results of operations,
or the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock
to a greater extent than would be the case if we were a “diversified” company holding numerous investments.



Our
investmentsin portfolio securities consistof the
following types of securities as of December 31, 2022(in thousands):



|Type of Securities                    |  | Cost |       | Fair Value |  | Fair Value as Percentage of Net Assets
|------------------------------------- |  | ---- | ----- | ---------- |  | --------------------------------------
|                                      |  |      |       |            |  |                                       
|Limited liability company investments |  | $    | 8,111 |            |  | $                                     
|                                      |  |      |       |            |  |                                       
|Total                                 |  | $    | 8,111 |            |  | $                                     





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



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





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





11


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EQUUS TOTAL RETURN, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2023

(Unaudited)



(1)       Description
of Business and Basis of Presentation



Description of Business—Equus
Total Return, Inc. (“we,” “us,” “our,” “Equus” the “Company” and the “Fund”),
a Delaware corporation, was formed by Equus Investments II, L.P. (the “Partnership”) on August 16, 1991. On July 1, 1992,
the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for
shares of common stock of the Fund. Our shares trade on the New York Stock Exchange (“NYSE”) under the symbol ‘EQS’.
On August 11, 2006, our shareholders approved the change of the Fund’s investment strategy to a total return investment objective.
This strategy seeks to provide the highest total return, consisting of capital appreciation and current income. In connection with this
strategic investment change, the shareholders also approved the change of name from Equus II Incorporated to Equus Total Return, Inc.
As of September 30, 2023, we had 100,000,000 shares of common stock and 10,000,000 shares of preferred stock authorized for issuance,
of which 13,518,146 shares of common stock and no shares of preferred stock were outstanding.



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



We elected to be treated
as a BDC under the Investment Company Act of 1940 Act (“1940 Act”), although our shareholders authorized us to withdraw this
election in previous years (which authorization has since expired) and will likely do so again in the future. 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 two wholly-owned taxable subsidiaries (“Taxable Subsidiary”)
which hold one or more of our portfolio investments listed on our Schedules of Investments. The purpose of these and other Taxable Subsidiaries
we may form 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, with the exception of Texas Margins Tax, which
is an entity level tax. The 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.





Impact of Economic
and Geopolitical Events on the Oil and Gas Sector— The substantial volatility in world markets has been prominent in the oil
and gas sector, with WTI oil prices reaching a multi-year high of $130.00 per barrel in March 2022, and gas prices also reaching a multi-year
high in mid-year, both due in part to increased demand, the reluctance of U.S. producers and OPEC nations to generate additional supply,
and the conflict in Ukraine. Beginning in the second and third quarters of 2022, oil and natural gas prices retreated substantially before
stabilizing during the second quarter of 2023 and rising again in the third quarter of 2023. The recent period of price stability and
subsequent increases has been a significant factor in increased consolidation activity in the Permian Basin and the Williston Basin where
Equus Energy and Morgan E&P, LLC, respectively, hold most of their development rights.



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. We believe that we have made all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation
of these interim financial statements.



The results of operations
for the three and nine months ended September 30, 2023 are not necessarily indicative of results that ultimately may be achieved for the
remainder of the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the financial statements
and notes thereto included in the Fund’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the
SEC.



(2)       Liquidity
and Financing Arrangements



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



Cash and Cash Equivalents—As
of September 30, 2023, we had cash and cash equivalents of $13.7 million. We had $33.1 million of our net assets of $47.1 million invested
in portfolio securities.



As of December 31, 2022, we had cash and
cash equivalents of $19.2 million. We had $15.7 million of our net assets of $35.2 million invested in portfolio securities.



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



Restricted Cash
and Temporary Cash Investments—As of September 30, 2023, we had $18.2 million of restricted cash and temporary cash investments,
including primarily the proceeds of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable
to a RIC. Of this amount, $18.0 million was invested in U.S. Treasury bills and $0.2 million represented a required 1% brokerage margin
deposit. These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin
loan. The U.S. Treasury bills matured on October 3, 2023, and we subsequently repaid this margin loan, plus interest.



As of December 31,
2022, we had $6.1 million of restricted cash and of temporary cash investments, including primarily the proceeds of a quarter-end margin
loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $6.0 million was invested in U.S.
Treasury bills and $0.1 million represented a required 1% brokerage margin deposit. These securities were held by a securities brokerage
firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured on January 4, 2023 and
we subsequently repaid this margin loan, plus interest.



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



Investment Commitments—Under
certain circumstances, we may be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient
funds to make follow-on investments, the portfolio company in need of the investment may be negatively impacted. Also, our equity interest
in the estimated fair value of the portfolio company could be reduced. We had no follow-on commitments as of December 31, 2022.



13


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We have committed to invest up to $10.0 million,
via a senior secured debt facility, into Morgan E&P, LLC, our wholly-owned subsidiary engaged in oil and gas development in the Williston
Basin region of North Dakota. As of September 30, 2023, Morgan had drawn approximately $2.4 million under this facility. See “Subsequent
Events” where we advanced an additional $3.9 million in under this facility.



RIC Borrowings,
Restricted Cash and Temporary Cash Investments—We may periodically borrow sufficient funds to maintain the Fund’s RIC
status by utilizing a margin account with a securities brokerage firm. We cannot assure you that any such arrangement will be available
in the future. If we are unable to borrow funds to make qualifying investments, we may no longer qualify as a RIC. We would then be subject
to corporate income tax on the Fund’s net investment income and realized capital gains, and distributions to stockholders would
be subject to income tax as ordinary dividends. If we remain a BDC and do not become an operating company as described in Note 6 –
Conversion to an Operating Company below, our failure to continue to qualify as a RIC could be materially adverse to us and our
stockholders.



As of September 30,
2023, we borrowed $18.0 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 $18.2 million.



As of December 31,
2022, we borrowed $6.1 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 $6.06 million.



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



Certain Risks and
Uncertainties—Market and economic volatility which has become endemic in the past few years, together with the economic dislocation
caused by the onset of the coronavirus, has constrained the availability of debt financing for small and medium-sized companies such as
Equus and its portfolio companies. Such debt financing generally has shorter maturities, higher interest rates and fees, and more restrictive
terms than debt facilities available in the past. In addition, during these years and continuing into the second quarter of 2023, the
price of our common stock remained well below our net asset value, thereby making it undesirable to issue additional shares of our common
stock below net asset value.



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



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(3)       Significant
Accounting Policies



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



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



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



| | 1. | Each portfolio company or investment is reviewed by our investment professionals;
| | -- | ---------------------------------------------------------------------------------



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



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



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



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



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

In estimating
the fair values of our equity interest in Equus Energy, we have given more emphasis to a market approach that examines developed and undeveloped
reserves and mineral acreage values, as well as a market approach that examines comparable industry transactions involving oil and gas
assets in proximity to the leasehold interests held by Equus Energy. In estimating the fair values of our equity interest in Morgan E&P,
LLC (“Morgan”), we have given more emphasis to a market approach that examines Morgan’s reserves and production multiples,
as well as an income approach that examines expected cash flows from the development of leasehold interests held by Morgan. Our management
received advice and assistance from a third-party valuation firm to support our determination of the fair value of these investments.

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



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



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



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



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



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



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



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



Investments for which
prices are not observable are generally private investments in the debt and equity securities of operating companies. A primary valuation
method used to estimate the fair value of these Level 3 investments is the discounted cash flow method (although a liquidation analysis,
option theoretical, or other methodology may be used when more appropriate). The discounted cash flow approach to determine fair value
(or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various relevant
factors depending on investment type, including comparing the latest arm’s length or market transactions involving the subject security
to the selected benchmark credit spread, assumed growth rate (in cash flows), and capitalization rates/multiples (for determining terminal
values of underlying portfolio companies). The valuation based on the inputs determined to be the most reasonable and probable is used
as the fair value of the investment. In the case of our investments in Equus Energy and Morgan, we also examine acreage values in comparable
transactions and assess the impact upon the working interests held by these two portfolio companies. 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.



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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) earnings before interest, taxes, depreciation, and amortization (“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 to or from Level 3 for
the nine months ended September 30, 2023 and the year ended December 31, 2022.



As of September 30,
2023, investments measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant
input to the valuations:





|                                                 |   | Fair
    Value Measurements as of   September  30, 2023
|------------------------------------------------ | - | -------------------------------------------------------
|(in thousands)                                   |   | Total                                                  
|Assets                                           |   |                                                        
|Investments:                                     |   |                                                        
|Control investments                              | $ | 33,050                                                 
|Total investments                                |   | 33,050                                                 
|Temporary cash investments                       |   | 17,987                                                 
|Total investments and temporary cash investments | $ | 51,037                                                 









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As of December 31,
2022, investments measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant
input to the valuations:





|                                                 |   | Fair
    Value Measurements as of   December 31, 2022
|------------------------------------------------ | - | -----------------------------------------------------
|(in thousands)                                   |   | Total                                                
|Assets                                           |   |                                                      
|Investments:                                     |   |                                                      
|Control investments                              | $ | 15,650                                               
|Total investments                                |   | 15,650                                               
|Temporary cash investments                       |   | 5,998                                                
|Total investments and temporary cash investments | $ | 21,648                                               



The following table
provides a reconciliation of fair value changes during the nine months ended September 30, 2023 for all investments for which we determine
fair value using unobservable (Level 3) factors:



|                                    |  |                     |  | Fair value measurements using significant unobservable inputs (Level 3)
|----------------------------------- |  | ------------------- |  | -----------------------------------------------------------------------
|(in thousands)                      |  | Control Investments |  | Affiliate Investments                                                  
|Fair value as of January 1, 2023    |  |                     |  |                                                                        
|Change in unrealized appreciation   |  |                     |  |                                                                        
|Fair value as of March 31, 2023     |  |                     |  |                                                                        
|Change in unrealized appreciation   |  |                     |  |                                                                        
|Purchases of portfolio securities   |  |                     |  |                                                                        
|Fair value as of June 30, 2023      |  |                     |  |                                                                        
|Change in unrealized appreciation   |  |                     |  |                                                                        
|Purchases of portfolio securities   |  |                     |  |                                                                        
|Fair value as of September 30, 2023 |  |                     |  |                                                                        





The following table provides
a reconciliation of fair value changes during the nine months ended September 30, 2022 for all investments for which we determine fair
value using unobservable (Level 3) factors:





|                                    |  |                     |  | Fair value measurements using significant unobservable inputs
                                                                                (Level 3)
|----------------------------------- |  | ------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(in thousands)                      |  | Control Investments |  | Affiliate Investments                                                                                                                                  
|Fair value as of January 1, 2022    |  |                     |  |                                                                                                                                                        
|Change in unrealized appreciation   |  |                     |  |                                                                                                                                                        
|Fair value as of March 30, 2022     |  |                     |  |                                                                                                                                                        
|Change in unrealized appreciation   |  |                     |  |                                                                                                                                                        
|Fair value as of June 30, 2022      |  |                     |  |                                                                                                                                                        
|Change in unrealized appreciation   |  |                     |  |                                                                                                                                                        
|Fair value as of September 30, 2022 |  |                     |  |                                                                                                                                                        







Fair value measurements
can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue
or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in
market yields, discount rates, or an increase/(decrease) in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in
a corresponding increase/(decrease), respectively, in the fair value of certain of our investments. In the case of our holdings in Equus
Energy and Morgan, we also consider acreage value, proved reserve multiples, daily production multiples, and discount rates.



Finally, industry trends, market
forecasts, and comparable transactions in sectors in which we hold a Level 3 investment are also taken into account when assessing the
value of these investments.



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The following table summarizes
the significant non-observable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation
technique as of September 30, 2023 (fair value expressed in thousands; acreage range expressed in dollars and not rounded):



|                                      |  |                  |  |                                 |                           |                                    |         | Range    
|------------------------------------- |  | ---------------- |  | ------------------------------- | ------------------------- | ---------------------------------- | ------- | ---------
|(in thousands)                        |  | Fair Value       |  | Valuation Techniques            |                           | Unobservable Inputs                |         | Minimum  
|Limited liability company investments |  |                  |  |                                 |                           |                                    |         |          
|                                      |  |                  |  |                                 |                           | Acreage Value (per acre)           |         | $1,500   
|Equus Energy, LLC                     |  | $         15,650 |  | Guideline Transaction Method    |                           | Proved Reserve Multiple            |         | 4.2x     
|                                      |  |                  |  |                                 |                           | Daily Production Multiple          |         | 18,578.7x
|                                      |  |                  |  |                                 |                           | Discount Rate                      |         | 11.3%    
|                                      |  |                  |  |                                 |                           |                                    |         |          
|                                      |  |                  |  |                                 |                           |                                    |         |          
|                                      |  |                  |  | Guideline Public Company Method |                           | Proved Reserve Multiple            |         | 10,443x  
|                                      |  |                  |  |                                 | Daily Production Multiple |                                    | 46,190x |          
|Morgan E&P, LLC                       |  | 15,000           |  | Guideline Transaction Method    |                           | Proved Reserve Multiple            |         | 8,878x   
|                                      |  |                  |  |                                 | Daily Production Multiple |                                    | 32,565x |          
|                                      |  |                  |  | Discounted Cash Flow            |                           | Discount Rate                      |         | 11.4%    
|                                      |  |                  |  |                                 |                           |                                    |         |          
|                                      |  |                  |  |                                 |                           |                                    |         |          
|Senior debt                           |  |                  |  |                                 |                           |                                    |         |          
|Morgan E&P, LLC                       |  | 2,400            |  | Yield analysis                  |                           | Discount for lack of marketability |         | 12.0%    
|                                      |  |                  |  |                                 |                           |                                    |         |          
|                                      |  | $         33,050 |  |                                 |                           |                                    |         |          



The following table summarizes
the significant non-observable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation
technique as of December 31, 2022 (fair value expressed in thousands; acreage range expressed in dollars and not rounded):





|                                      |  |                  |  |                              |  |                           |  | Range    
|------------------------------------- |  | ---------------- |  | ---------------------------- |  | ------------------------- |  | ---------
|(in thousands)                        |  | Fair Value       |  | Valuation Techniques         |  | Unobservable Inputs       |  | Minimum  
|Limited liability company investments |  |                  |  |                              |  |                           |  |          
|                                      |  |                  |  |                              |  | Acreage Value (per acre)  |  | $1,500   
|Equus Energy, LLC                     |  | $         15,650 |  | Guideline Transaction Method |  | Proved Reserve Multiple   |  | 4.0x     
|                                      |  |                  |  |                              |  | Daily Production Multiple |  | 18,578.7x
|                                      |  |                  |  | Discounted Cash Flow         |  | Discount Rate             |  | 11.0%    









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Because of the inherent uncertainty
of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $33.1 million as of September
30, 2023 and $15.7 million as of December 31, 2022, respectively, our fair value determinations may materially differ from the values
that would have been used had a ready market existed for these securities.





We adjust our net asset
value for the changes in the value of our publicly held securities, if applicable, and material changes in the value of private securities,
generally determined on a quarterly basis or as announced in a press release, and report those amounts to Lipper Analytical Services,
Inc. Our net asset value appears in various publications, including Barron’s and The Wall Street Journal.



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



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



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



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



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



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



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Distributable Earnings—The
components that make up distributable earnings (accumulated undistributed deficit) on the Condensed Balance Sheet as of September
30, 2023 andDecember 31, 2022 are as follows:



|​                                 |  | September 30, 2023 |         | December 31, 2022
|---------------------------------------------------- |  | ------------------ | ------- | -----------------
|Accumulated undistributed net investment losses      |  | $                  | (50,561 | )                
|Unrealized appreciation of portfolio securities, net |  |                    | 22,539  |                  
|Accumulated undistributed net capital gains          |  |                    | 452     |                  
|Accumulated deficit                                  |  | $                  | (27,570 | )                







Taxes—So
long as we remain a BDC, we intend to comply with the requirements of the Internal Revenue Code necessary to qualify as a RIC and, as
such, will not be subject to federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed
to stockholders. We borrow money from time to time to maintain our tax status under the Internal Revenue Code as a RIC. See Note 1 for
discussion of Taxable Subsidiaries and see Note 2 for further discussion of the Fund’s RIC borrowings.



Texas margin tax applies
to legal entities conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by
applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result,
we have no provision for margin tax expense for the three months ended September 30, 2023, and we expect no in state income tax for the
year ended December 31, 2022.



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



The following table
provides a reconciliation of cash and cash equivalents and restricted cash as reported within the consolidated balance sheet that sums
to the total of the same amounts shown in the consolidated statement of cash flows as of September 30, 2023 and December 31, 2022:



|                                                               |  | September 30, 2023 |        | December 31, 2022
|-------------------------------------------------------------- |  | ------------------ | ------ | -----------------
|Cash and cash equivalents at end of period                     |  | $                  | 13,672 |                  
|Restricted cash at end of period                               |  |                    | 180    |                  
|Cash and cash equivalents and restricted cash at end of period |  | $                  | 13,852 |                  





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





Accounting Standards Not
Yet Adopted— In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) - Fair Value Measurement of
Equity Securities Subject to Contractual Sale Restrictions”, which was issued to (1) clarify the guidance in Topic 820, Fair Value
Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity
security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject
to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim
and annual periods beginning after December 15, 2023. The Fund is currently evaluating the impact of the new standard on the Company's
consolidated financial statements and related disclosures.



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

Except as noted below,
as compensation for services to the Fund, each Independent Director receives an annual fee of $40,000 paid quarterly in arrears, a fee
of $2,000 for each meeting of the Board of Directors or committee thereof attended in person, a fee of $1,000 for participation in each
telephonic meeting of the Board or committee thereof, and reimbursement of all out-of-pocket expenses relating to attendance at such meetings.
The chair of each of our standing committees (audit, compensation, and nominating and governance) also receives an annual fee of $50,000,
payable quarterly in arrears. We may also pay other one-time or recurring fees to members of our Board of Directors in special circumstances.
None of our interested directors receive annual fees for their service on the Board of Directors.



In respect of services
provided to the Fund by members of the Board not in connection with their roles and duties as directors, the Fund pays a rate of $300
per hour for such services.



(5)       Portfolio
Securities

During the nine months ended September 30,
2023, we made a $2.4 million debt investment in Morgan E&P, LLC (“Morgan”) and also invested $1.00 in the equity of Morgan.
In May 2023, we entered into an agreement with Morgan to provide it up to $10.0 million in senior debt financing, subject to a schedule
of disbursements and draws that we determine. Morgan utilized $500,000 of this facility to acquire its initial 4,747.52 net acres, in
the Bakken/Three Forks formation in the Williston Basin of North Dakota as described in Note 9 - Morgan E&P, LLC below. During the
third quarter of 2023, Morgan also acquired an additional 1,100 net acres in this region. As of September 30, 2023, Morgan had drawn $2.4
million under this facility. During the nine months ended September 30, 2023, we recorded a change in fair value of the equity of Morgan
of $15.0 million.  The increase was principally due to a significant increase in Morgan’s acreage rights and associated reserves,
an increase in oil and gas prices, and our expectation of Morgan generating operating cash flow from recent drilling activity in the near
future in the Bakken shale region where it holds leasehold acreage rights.

During the
nine months ended September 30, 2023, WTI prices increased from $80.26 per barrel at December 31, 2022 to $90.79 at the end of the third
quarter 2023. Gas prices decreased from $4.48 at December 31, 2022 to $2.68 at the end of the third quarter of 2023. Despite the decrease
in gas prices during the period, due to increases in crude prices and stable prices for mineral acreage transactions in the principal
region where Equus Energy, LLC, holds its leasehold interests, we recorded no change in the fair value of this investment.

During the
nine months ended September 30, 2022, with respect to our holding in Equus Energy, LLC, we recorded an increase in the fair value of this
investment by $2.5 million. Such change in fair value was principally due to increases in mineral acreage prices and a substantial increase
in short-and long-term prices for crude oil and natural gas.

(6)       Conversion
to an Operating Company

Authorization to
Withdraw BDC Election—In 2022, holders of a majority of the outstanding common stock of the Fund approved our cessation as a
BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective
as of a date designated by the Board and our Chief Executive Officer. Although this authorization has since expired, we expect to receive
a further authorization from our shareholders later in 2023 or 2024 as a consequence of our expressed intent to transform Equus into an
operating company. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal unless
and until Equus has entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized
to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting
shares to enter into any such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities
that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time
period or at all, and, although we expect that our shareholders will grant a further authorization, we do not expect to cause the Fund
to withdraw its election to be classified as BDC prior to December 31, 2023. Moreover, we cannot assure you that the terms of any such
transformative transaction would be acceptable to us.



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



(7)       2016
Equity Incentive Plan

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



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



Equus Energy, LLC (“Equus
Energy”) was formed in November 2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector,
with particular emphasis on income-producing oil & gas properties. In December 2011, we contributed $250,000 to the capital of Equus
Energy. On December 27, 2012, we invested an additional $6.8 million in Equus Energy for the purpose of additional working capital and
to fund the purchase of $6.6 million in working interests presently consisting of 136 producing and non- producing oil and gas wells.
On September 30, 2020, the Fund provided an additional $0.6 million in capital to Equus Energy for the purpose of additional working capital.
On June 30, 2021, the Fund provided an additional $0.35 million in capital to Equus Energy for the purpose of additional working capital.
On December 31, 2022, the Fund provided an additional $0.15 million in capital to Equus Energy for the purpose of additional working capital.
The working interests include associated development rights of approximately 21,320 acres situated on 9 separate properties in Texas and
Oklahoma. The working interests range from a de minimus amount to 50% of the leasehold that includes these wells.



The wells are operated
by a number of operators, including Burk Royalty, which has operating responsibility for all of Equus Energy’s 22 producing well
interests located in the Conger Field, a productive oil and gas field on the edge of the Permian Basin that has experienced successful
gas and hydrocarbon extraction in multiple formations. Equus Energy, which holds a 50% working interest in each of these Conger Field
wells, is seeking to effect a recompletion program of existing Conger Field wells to the Wolfcamp formation, a zone containing oil as
well as gas and natural gas liquids. Part of Equus Energy’s acreage rights described above also includes a 50% working interest
in possible new drilling to the base of the Canyon formation (appx. 8,500 feet) on 2,400 acres in the Conger Field. Also included in the
interests acquired by Equus Energy are working interests of 7.5% and 2.5% in the Burnell and North Pettus Units, respectively, which collectively
comprise approximately 13,000 acres located in the area known as the “Eagle Ford Shale” play.



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The substantial volatility
in world markets has been prominent in the oil and gas sector, with WTI oil prices reaching a multi-year high of $130.00 per barrel in
March 2022, and gas prices also reaching a multi-year high in mid-year, both due in part to increased demand, the reluctance of U.S. producers
and OPEC nations to generate additional supply, and the conflict in Ukraine. Beginning in the second and third quarters of 2022, oil and
natural gas prices retreated substantially before stabilizing in the second quarter of 2023 and subsequently rising again in the third
quarter of 2023. Recent oil price stability and subsequent price increases have been significant factors in increased consolidation activity
in the Permian Basin where Equus Energy holds most of its development rights. Given such price volatility, the U.S. Energy Information
Administration has modified its 2023 oil and gas price forecasts accordingly, with an August 2023 estimate of $87.00 per barrel for Brent
crude by the end of 2023, and $2.62 per MMBTU for gas prices by the end of the year.



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



Going-Concern—The
accompanying unaudited condensed consolidated financial statements of Equus Energy have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. As
such, the unaudited condensed consolidated financial statements do not include adjustments relating to the recoverability and classification
of assets and their carrying amount, or the amount and classification of liabilities that may result should Equus Energy be unable to
continue as a going concern. However, the Fund has agreed to and will continue to provide financial support to Equus Energy
for at least one year and one day past the date of this report and the Fund has the ability and intent to provide the financial
support. As such, in connection with continued support from the Fund, management concluded this plan alleviates the substantial
doubt that was raised about the ability of Equus Energy to continue as a going concern for at least twelve months from the date the financial
statements were issued.



Revenue and Income—During
the three months ended September 30, 2023, Equus Energy’s revenue, operating revenue less direct operating expenses, and net loss
were $0.1 million, $0.04 million, and ($0.03) million, respectively, as compared revenue, operating revenue less direct operating expenses,
and net loss were $0.3 million, $0.2 million, and ($0.1) million, respectively, for the three months ended September 30, 2022.



During the nine
months ended September 30, 2023, Equus Energy’s revenue, operating revenue less direct operating expenses, and net gain were
$0.5 million, $0.05 million, and $0.01 million, respectively, as compared to revenue, operating revenue less direct operating expenses, and
net loss which were $0.9 million, $0.7 million, and ($0.09) million, respectively, for the three months ended September 30,
2022.



Capital Expenditures—During
the nine months ended September 30, 2023and September 30, 2022, Equus Energy’s investment,
respectively, in capital expenditures for small repairs and improvements was not significant.



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



Below is summarized
unaudited condensed consolidated financial information for Equus Energy as of September 30, 2023 and December 31, 2022 and for the three
and nine months ended September 30, 2023 and 2022, respectively (in thousands):



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EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Balance Sheets



|                                                           |   | September 30, |        | December 31,
|---------------------------------------------------------- | - | ------------- | ------ | ------------
|                                                           |   | 2023          |        | 2022        
|                                                           |   |               |        |             
|                                                           |   |               |        |             
|Assets                                                     |   |               |        |             
|Current assets:                                            |   |               |        |             
|Cash and cash equivalents                                  |   | $             | 50     |             
|Accounts receivable                                        |   |               | 154    |             
|Other current assets                                       |   |               | 3      |             
|Total current assets                                       |   |               | 207    |             
|Oil and gas properties                                     |   |               | 8,158  |             
|Less: accumulated depletion, depreciation and amortization |   |               | (8,096 | )           
|Net oil and gas properties                                 |   |               | 62     |             
|Total assets                                               | $ | 269           |        |             
|                                                           |   |               |        |             
|Liabilities and member's deficit                           |   |               |        |             
|Current liabilities:                                       |   |               |        |             
|Accounts payable and other                                 |   | $             | 110    |             
|Due to affiliate                                           |   | $             | 127    |             
|Total current liabilities                                  |   | $             | 237    |             
|Asset retirement obligations                               |   |               | 218    |             
|Total liabilities                                          |   | 455           |        |             
|                                                           |   |               |        |             
|Total member's deficit                                     |   |               | (186   | )           
|                                                           |   |               |        |             
|Total liabilities and member's deficit                     | $ | 269           |        |             





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





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EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements of
Operations



|                                                    |  |  |  | Three months ended
                                                                                September 30, |  | Nine months ended September 30,
|--------------------------------------------------- |  |  |  | ---------------------------------------------------------------------------------------------------------------- |  | -------------------------------
|                                                    |  |  |  | 2023                                                                                                             |  | 2022                           
|                                                    |  |  |  |                                                                                                                  |  |                                
|                                                    |  |  |  |                                                                                                                  |  |                                
|Operating revenue                                   |  |  |  |                                                                                                                  |  | $                              
|Operating expenses                                  |  |  |  |                                                                                                                  |  |                                
|Direct operating expenses                           |  |  |  |                                                                                                                  |  |                                
|General and administrative                          |  |  |  |                                                                                                                  |  |                                
|Depletion, depreciation, amortization and accretion |  |  |  |                                                                                                                  |  |                                
|Other income                                        |  |  |  |                                                                                                                  |  |                                
|Total operating (income) expenses                   |  |  |  |                                                                                                                  |  |                                
|Net income (loss)                                   |  |  |  |                                                                                                                  |  |                                









EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements of
Cash Flows



|                                                     |  | Nine months ended September 30,
|---------------------------------------------------- |  | -------------------------------
|                                                     |  | 2023                           
|                                                     |  |                                
|Cash flows from operating activities:                |  |                                
|                                                     |  |                                
|Net gain (loss)                                      |  | $                              
|Adjustments to reconcile net loss to                 |  |                                
|net cash provided by (used in) operating activities: |  |                                
|Depletion, depreciation and amortization             |  |                                
|Accretion expense                                    |  |                                
|Changes in operating assets and liabilites:          |  |                                
|Accounts receivable                                  |  |                                
|Prepaid expenses and other current assets            |  |                                
|Accounts payable and other                           |  |                                
|Due to Parent                                        |  |                                
|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

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



The capitalized costs
of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated cost of dismantlement and
abandonment, net of salvage value, are amortized on a unit-of-production method over the estimated productive life of the proved oil and
gas reserves. Unevaluated oil and gas properties are excluded from this calculation. Depletion, depreciation, amortization and accretion
expense for the Company’s oil and gas properties totaled $3 thousand and $2 thousand for the nine months ended September 30, 2023
and 2022, respectively.



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



| | (a) | As of September 30, 2023, the present value of estimated future net revenue from the projected production of proved oil and gas reserves, calculated at the simple arithmetic average, first-day-of-the-month prices during the twelve-month period before the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) and a discount factor of 10%;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



When it is determined
that oil and gas property costs exceed the ceiling limitation, an impairment charge is recorded to reduce its carrying value to the ceiling
limitation. The Company recognized an impairment loss on its oil and gas properties during the three and nine months ended September 30,
2023 and 2022 of $0, respectively.



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





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



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



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



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



Performance Obligations



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



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



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



Principal vs. Agent



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





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



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



Income Taxes—A
limited liability company is not subject to the payment of federal income taxes as components of its income and expenses flow through
directly to the members. However, the Company is subject to certain state income taxes. Texas margin tax applies to legal entities conducting
business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a tax rate to a base
that considers both revenue and expenses and therefore has the characteristics of an income tax. Taxable Subsidiaries may generate income
tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect any such income tax expense on
our Statements of Operations. The Company had no federal income tax expense for the nine months ending September 30, 2023 and September
30, 2022, respectively.



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



(9)       Morgan
E&P, LLC

Morgan E&P, LLC (“Morgan”)
was organized by the Fund on April 3, 2023 as a Delaware limited liability company and a wholly-owned subsidiary of the Fund. On May 22,
2023, Morgan completed the acquisition of 4,747.52 net acres, in the Bakken/Three Forks formation in the Williston Basin of North Dakota,
and acquired approximately 1,100 additional acres on September 26, 2023. The acreage and associated mineral rights were acquired from
Pro Energy I LLC (“Pro Energy”), a company whose principals have decades of oil and gas experience and who have themselves
drilled over 1,800 horizontal wells in the Williston Basin over a 10-year period.



Under the terms of the Purchase
and Sale Agreement entered into by Morgan and Pro Energy, Morgan is required to drill and complete a minimum of six wells within 18 months
of receiving the first drilling permits. The average cost of drilling a new horizontal well is approximately $8.2 million. Morgan will
receive an average net revenue interest (“NRI”) of 80% in the production of any wells drilled, and after operating expenses
are deducted from the NRI, Pro Energy shall receive a carried interest for 20% of these net cash flows.



In May 2023, we entered into an agreement with Morgan
to provide it up to $10.0 million in senior debt financing, subject to a schedule of disbursements and draws that we determine. As of
September 30, 2023, Morgan had drawn $2.4 million under this facility. See “Subsequent Events” where we advanced an additional
$3.9 million  under this facility.





Going-Concern—The
accompanying unaudited condensed consolidated financial statements of Morgan have been prepared on a going concern basis, which
contemplates the near-term sale of quantities of oil and gas, realization of assets and the satisfaction of liabilitiesand
other commitments in the normal course of business. As such, the unaudited condensed consolidated financial statements do not
include adjustments relating to the recoverability and classification of assets and their carrying amount, or the amount and
classification of liabilities that may result should Morgan be unable to continue as a going concern. However, because the Fund has
extended a $10.0 million in senior debt financing as noted above, Fund management concluded this arrangement alleviates doubts about
the ability of Morgan Energy to continue as a going concern for at least twelve months from the date the financial statements were
issued.





We do not consolidate the financial
results of Morgan with the financial results of the Fund and, accordingly, only the value of our investment in Morgan is included on our
balance sheets. Our investment in Morgan is valued in accordance with our normal valuation procedures and is based in part on a reserve
report prepared for Morgan by Cawley, Gillespie, & 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 Morgan. A valuation of Morgan was performed by a third-party valuation firm, who recommended a value range of Morgan consistent with
the fair value determined by our Management (See Schedule of Investments).



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Below is summarized
unaudited condensed consolidated financial information for Morgan E&P, LLC as of September 30, 2023 and for the three months ended
September 30, 2023 and the period from inception (April 3, 2023) through September 30, 2023, respectively, (in thousands):



MORGAN E&P, LLC

Unaudited Condensed Consolidated Balance Sheet



|                                       |  | September 30,
|-------------------------------------- |  | -------------
|                                       |  | 2023         
|                                       |  |              
|Assets                                 |  |              
|Current assets:                        |  |              
|Cash and cash equivalents              |  | $            
|Other current assets                   |  |              
|Total current assets                   |  |              
|Oil and gas properties                 |  |              
|Other non-current assets:              |  |              
|Fixed assets                           |  |              
|Total other non-current assets, net    |  |              
|                                       |  |              
|Total assets                           |  | $            
|                                       |  |              
|Liabilities and member's deficit       |  |              
|Current liabilities:                   |  |              
|Accounts payable                       |  | $            
|Accrued interest payable - affiliate   |  |              
|Due to parent                          |  |              
|Total current liabilities              |  |              
|                                       |  |              
|Non-current liabilities:               |  |              
|Notes payable - affiliate              |  |              
|Asset retirement obligations           |  |              
|Total non-current liabilities          |  |              
|Total liabilities                      |  |              
|                                       |  |              
|Total member's deficit                 |  |              
|                                       |  |              
|Total liabilities and member's deficit |  | $            







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MORGAN E&P, LLC

Unaudited Condensed Consolidated Statement of
Operations



|                           |  | Three months ended September 30, 2023 |      | From inception (April 3, 2023) through
    September 30, 2023
|-------------------------- |  | ------------------------------------- | ---- | -------------------------------------------------------------
|                           |  |                                       |      |                                                              
|                           |  |                                       |      |                                                              
|Operating revenue          |  | $                                     | —    |                                                              
|                           |  |                                       |      |                                                              
|Other expense              |  |                                       |      |                                                              
|General and administrative |  |                                       | 355  |                                                              
|Interest expense           |  |                                       | 32   |                                                              
|Total other expense        |  |                                       | 387  |                                                              
|Net loss                   |  | $                                     | (387 | )                                                            









MORGAN E&P, LLC

Unaudited Condensed Consolidated Statement of
Cash Flows





|                                                 |  | From inception (April 3, 2023) through
|------------------------------------------------ |  | --------------------------------------
|                                                 |  | September 30, 2023                    
|                                                 |  |                                       
|Cash flows from operating activities:            |  |                                       
|Net loss                                         |  | $                                     
|Prepaid expenses and other current assets        |  |                                       
|Accounts payable and other                       |  |                                       
|Accrued interest payable - affiliate             |  |                                       
|Due to parent                                    |  |                                       
|Net cash used in operating activities            |  |                                       
|                                                 |  |                                       
|Cash flows from investing activities:            |  |                                       
|Investment in oil & gas properties               |  |                                       
|Additions to other plant, property and equipment |  |                                       
|Net cash used in investing activities            |  |                                       
|Cash flows from financing activities:            |  |                                       
|Note payable - affiliate                         |  |                                       
|Net cash provided by investing activities        |  |                                       
|Net increase in cash                             |  |                                       
|Cash and cash equivalents at beginning of period |  |                                       
|Cash and cash equivalents at end of period       |  | $                                     











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Critical Accounting Policies for Morgan



Acquisitions—Morgan
evaluates each acquisition of oil and gas properties to determine whether each should be accounted for as an acquisition of assets or
business in accordance with Accounting Standards Update No. 2017-01: Business Combinations (Topic 805) Clarifying the Definition of a
Business (“ASU 2017-01”).



Asset acquisitions are recorded
at the cost of acquiring the property. The results of operations of the oil and gas properties acquired in the Company’s acquisitions
have been included in the consolidated financial statements since the closing dates of the respective acquisitions. A business combination
may result in the recognition of a bargain purchase gain or goodwill based on the measurement of the fair value of the assets and liabilities
acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments.
The initial accounting for business combinations may not be complete and adjustments to provisional amounts, or recognition of additional
assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about
the facts and circumstances that existed as of the acquisition dates.



Oil & Gas Properties—The
method of accounting for oil and natural gas properties determines what costs are capitalized and how these costs are ultimately matched
with revenue and expenses. Morgan uses the full cost method of accounting for oil and natural gas properties. Under the full cost method,
all direct costs and certain indirect costs associated with the acquisition, exploration, and development of oil and natural gas properties
are capitalized.



Oil and gas properties include
costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unproved
properties and include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and exploration
costs. The Company excludes these costs until the project is evaluated and proved reserves are established or impairment is determined.
Excluded costs are reviewed at least annually to determine if impairment has occurred. The amount of any evaluated or impaired oil and
natural gas properties is transferred to capitalized costs being amortized. For the period from inception (April 3, 2023) through September
30, 2023, the Company did not transfer any costs to the full cost pool.



Oil and natural gas properties
are depleted using the units-of-production method. The depletion expense is significantly affected by the unamortized historical and future
development costs and the estimated proved oil and natural gas reserves. Estimation of proved oil and natural gas reserves relies on professional
judgment and the use of factors that cannot be precisely determined. Holding all other factors constant, if proved oil and natural gas
reserves were revised upward or downward, earnings would increase or decrease, respectively. Subsequent proved reserve estimates that
are materially different from those reported would change the depletion expense recognized during the future reporting period. Proceeds
from the sales or disposition of oil and natural gas of proved and unproved properties are accounted for as a reduction of capitalized
costs with no gain or loss recognized, unless such reduction would significantly alter the relationship between capitalized costs and
proved reserves, in which case the gain or loss is recognized in the statement of income. In general, a significant alteration occurs
when the deferral of gains or losses will result in an amortization rate materially different from the amortization rate calculated upon
recognition of gains or losses. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.



Under the full cost accounting
rules, total capitalized costs are limited to a ceiling equal to the present value of future net revenue, discounted at 10% per annum,
plus the lower of cost or fair value of unevaluated properties less income tax effects (the “ceiling limitation”). Future
net revenue used to calculate the ceiling do not include cash outflows associated with settling asset retirement obligations. Morgan performs
an annual ceiling test to evaluate whether the net book value of the full cost pool exceeds the ceiling limitation. If capitalized costs
(net of accumulated depreciation, depletion, and amortization) are greater than the discounted future net revenue or ceiling limitation,
a write-down or impairment of the full cost pool is required. A write-down of the carrying value of the full cost pool is a non-cash charge
that reduces earnings and impacts members’ equity in the period of occurrence and typically results in lower depreciation, depletion,
and amortization expense in future periods. Once incurred, a write-down is not reversible at a later date. The risk that Morgan will be
required to write-down the carrying value of oil and natural gas properties increases during a period when oil or gas prices are depressed.
In addition, a write-down may occur if estimates of proved reserves are substantially reduced or estimates of future development costs
increase significantly.





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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, Morgan may be subject to certain state income taxes, inasmuch as it maintains a registered office in Texas.
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. Morgan had no federal income tax expense since inception.





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 Morgan’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 Morgan’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. If the obligation is settled for other than the carrying amount of the liability,
the Company will record the difference to the full cost pool.



Environmental Matters



We do not believe the existence
of current environmental laws or interpretations thereof will materially hinder or adversely affect Morgan’s business operations;
however, there can be no assurances of future effects on Morgan of new laws or interpretations thereof.



Environmental Contingencies



Morgan’s activities are
subject to local, state, and federal laws and regulations governing environmental quality and pollution control in the United States.
The exploration, drilling and production from wells, natural gas facilities, including the operation and construction of pipelines, plants
and other facilities for transporting, processing, treating, or storing natural gas and other products, are subject to stringent environmental
regulation by state and federal authorities, including the Environmental Protection Agency (“EPA”). Such regulation can increase
the cost of planning, designing, installing, and operating such facilities.



Subsequent Events of Morgan



On November 9, 2023, Morgan sold
certain wellbore rights to two of its new wells and each of their associated 1,280-acre drilling and spacing units (DSUs) to a third party
in exchange for $5,000,000 in cash.







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



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



On October 3, 2023,
our holding in $18.0 million in U.S. Treasury Bills matured and we repaid our margin loan.



During October and
November 2023, we advanced Morgan an additional $3.9 million under its existing credit facility with the Fund.



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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, 2022,
as filed with the SEC. In addition, some of the statements in this report constitute forward-looking statements. The matters discussed
in this Quarterly Report, as well as in future oral and written statements by management of Equus, that are forward-looking statements
are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ
materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future
events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “could,”
“intends,” “target,” “projects,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of these terms or other similar words. Important assumptions include
our ability to originate new investments, achieve certain margins and levels of profitability, and the availability of additional capital.
In light of these and other uncertainties, the inclusion of a forward-looking statement in this Quarterly Report should not be regarded
as a representation by us that our plans or objectives will be achieved. The forward- looking statements contained in this Quarterly Report
include statements as to:



| | • | our future operating results;                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | our business prospects and the prospects of our existing and prospective portfolio companies;                                                                                        
| | • | the return or impact of current and future investments;                                                                                                                              
| | • | our contractual arrangements and other relationships with third parties;                                                                                                             
| | • | the dependence of our future success on the general economy and its impact on the industries in which we invest;                                                                     
| | • | the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;                                                                 
| | • | our expected financings and investments;                                                                                                                                             
| | • | our regulatory structure and tax treatment;                                                                                                                                          
| | • | our ability to qualify and operate as a BDC and a RIC, including the impact of changes in laws or regulations governing our operations, or the operations of our portfolio companies;
| | • | the adequacy of our cash resources and working capital;                                                                                                                              
| | • | the timing of cash flows, if any, from the operations of our portfolio companies;                                                                                                    
| | • | the impact of fluctuations in interest rates on our business;                                                                                                                        
| | • | the valuation of our investments in portfolio companies, particularly those having no liquid trading market;                                                                         
| | • | our ability to recover unrealized losses;                                                                                                                                            
| | • | market conditions and our ability to access additional capital, if deemed necessary;                                                                                                 
| | • | changes in interest rates and overall investment activity;                                                                                                                           
| | • | developments in the global economy and resulting demand and supply for oil and natural gas;                                                                                          
| | • | natural or man-made disasters and other external events that may disrupt our operations; and                                                                                         
| | • | continued volatility of oil and natural gas prices.                                                                                                                                  





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There are a number of important
risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements.
For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this Quarterly
Report, please see the discussion in Part II, “Item 1A. Risk Factors”, and in Part I, “Item 1A. Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“10-K”). In particular, you should carefully
consider the risks we have described in the 10-K and elsewhere in this Quarterly Report concerning our efforts to transform Equus into
an operating company, as well as the coronavirus pandemic and the economic impact of the coronavirus on the Fund and our sole remaining
portfolio company, as well as on oil and gas markets generally. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We
undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date this Quarterly
Report is filed with the SEC.



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

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



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Conversion to an Operating Company



Authorization to Withdraw
BDC Election. In 2022, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the
1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified as a BDC, effective as of a date
designated by the Board and our Chief Executive Officer. Although this authorization has since expired, we expect to receive a further
authorization from our shareholders later in 2023 or 2024 as a consequence of our expressed intent to transform Equus into an operating
company. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal unless and until
Equus has entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized to withdraw
our election as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter
into any such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities that
could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period
or at all, and, although we expect that our shareholders will grant a further authorization, we do not expect to cause the Fund to withdraw
its election to be classified as BDC prior to December 31, 2023. Moreover, we cannot assure you that the terms of any such transformative
transaction would be acceptable to us.



Reduction in Asset Coverage Ratio

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



2016 Equity Incentive Plan



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



Critical Accounting Policies



See the Fund’s
Critical Accounting Policies from the disclosure set forth in the Fund’s Annual Report on Form 10-K for the year ended December
31, 2022.



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Current Market Conditions



Impact of Economic
and Geopolitical Events on the Oil and Gas Sector. The substantial volatility in world markets has been prominent in the oil and gas
sector, with WTI oil prices reaching a multi-year high of $130.00 per barrel in March 2022, and gas prices also reaching a multi-year
high in mid-year, both due in part to increased demand, the reluctance of U.S. producers and OPEC nations to generate additional supply,
and the conflict in Ukraine. Beginning in the second and third quarters of 2022, oil and natural gas prices retreated substantially before
stabilizing in the second quarter of 2023 and resuming their increase in the third quarter of 2023. During the three months ended September
30, 2023, oil prices increased from $70.64 to $90.79 and gas prices increased from $2.48 to $2.68. Recent oil price stability has been
a significant factor in increased consolidation activity in the Permian Basin where Equus Energy holds most of its development rights,
as well as in the Williston Basin region in North Dakota where Morgan E&P, LLC holds its development rights. The U.S. Energy Information
Administration has modified its 2023 oil and gas price forecasts accordingly, with an August 2023 estimate of $87.00 per barrel for Brent
crude by the end of 2023, and $2.62 per MMBTU for gas prices by the end of the year.



Operators of the leasehold
interests held by Equus Energy have not yet undertaken significant capital expenditures, which could have a material adverse effect upon
the operations and long-term financial condition of Equus Energy. To conserve existing cash resources or create additional cash resources
during the next year, Equus Energy intends to either: (i) attempt to secure equity or debt financing from one or more institutional sources,
which sources may include the Fund, a commercial lender, or other investors, (ii) request that its operators shut-in additional wells,
(iii) sell certain of its oil and gas holdings, or (iv) undertake a combination of the foregoing. However, we cannot assure you that Equus
Energy will be able to implement these plans successfully, or that such plans will generate sufficient liquidity to fund the operating
expenses of Equus Energy over the next twelve-months.



Morgan has undertaken
significant capital expenditures for oil and gas development during the third quarter of 2023 and is expected to continue to do so during
the fourth quarter of 2023. Morgan may secure capital for this purpose from Equus, from one or more institutional and private sources,
or a combination of the foregoing.



The U.S. Economy.
U.S. GDP increased at an annualized rate of 4.9% in the third quarter of 2023, above consensus estimates of 4.3% for the period. This
followed an increase of 2.1% on an annualized basis for the second quarter of 2023. The principal drivers of the increase during the third
quarter of 2023 were increased consumer spending, as well as consumption of housing and utilities, health care, financial services and
insurance. After decreasing 9.3% during the second quarter of 2023, exports increased 6.2% during the third quarter of 2023. The Conference
Board is still projecting a mild recession for the U.S. economy in 2024, with overall GDP growth of 2.2% for all of 2023 and 0.8% growth
for all of 2024. (Sources: Bureau of Economic Analysis; The Conference Board).



Employment and
Housing. At September 30, 2023, the U.S. unemployment rate has stood at 3.8%, largely unchanged since the first quarter of 2022 and
substantially below the high of 14.5% in April 2020 when economic uncertainty associated with Covid-19 was at its peak. With signs of
a recession in 2024, economists are projecting a rate of 4.0% to 4.5% during the coming year. Most of the recent employment gains in the
first nine months of 2023 were due to gains in nonfarm payrolls, the leisure and hospitality industry, professional and business services,
retail trade, transportation, and warehousing (Sources: Bureau of Labor Statistics; Trading Economics).



Consumer Prices.
Consumer prices, which had largely been held in check during the pandemic, began to rise steadily in 2021 and into 2022, reaching an annualized
rate of 9.1% during 2022, before retreating to an overall rate of 8.0% for the year. In October 2023, the Bureau of Labor Statistics reported
an annualized inflation rate of 3.7%, an increase from the trailing twelve month rate of 2.6% at the end of the second quarter of 2023.
Energy prices remained a principal driver of inflation, but even the core inflation rate, which excludes energy and food prices, was 4.3%.
Largely as a result of Fed monetary responses and a slowing of economic growth, most commentators are forecasting a decrease in the rate
of inflation throughout the remainder of 2023 and into 2024. (Sources: Bureau of Economic Analysis; Kiplinger; Bureau of Labor Statistics;
Trading Economics).



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Interest Rates.
Principally as a response to rising prices, the Federal Reserve began a series of federal funds rate increases in May 2022 which continued
for ten consecutive meetings of the Federal Open Market Committee until July 2023, which set the rate at 5.5%, the highest in 22 years.
No further increases are expected for the remainder of 2023, but the effect of such rate increases and inflationary pressures has been
substantially increased borrowing costs, particularly for homebuyers and small businesses, as well as heightened recession risks. Moreover,
credit providers have also begun to require higher collateralization rates, with shorter maturities and higher fees than in the recent
past. (Source: Forbes; The Wall Street Journal).



Mergers and Acquisitions.
Despite inflationary pressures and Fed tightening, global merger and acquisition activity in the first nine months of 2023 began to recover
from its 2022 year-end slowdown, which was largely as a result of increased costs of capital, reduced financial sponsor activity, and
increased regulatory scrutiny. Some industry commentators are predicting that consolidations will continue to increase in the remainder
of 2023 and into 2024, particularly in the areas of healthcare, technology, and energy. Higher interest rates and lower deal volumes have
kept valuation multiples at levels consistent with 2022, which is expected to facilitate increased transaction activity through the remainder
of the year. (Sources: Morgan Stanley; Washington Technology).



Private Equity.
After experiencing a record year in 2021, private equity activity slowed in 2022, particularly during the second half of the year. With
the increase in M&A dealmaking in the nine months of 2023, private equity analysts are also expecting an increase in investment opportunities,
particularly in view of comparably lower valuation multiples and, in the face of a predicted recession, increased motivation from sellers.
(Sources: The Wall Street Journal; CNBC; Washington Technology).



During the nine months
ended September 30, 2023, our net asset value increased from $2.61 per share to $3.49 per share, an increase of 33.7%. As of September
30, 2023, our common stock is trading at a 57.6% discount to our net asset value as compared to 45.2% as of December 31, 2022.



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 we areunable to borrow funds to make qualifying investments,
Equusmay no longer qualify as a RIC. The Fund would then be subject to corporate income tax
on its net investment income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary
dividends.



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



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



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



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Results of Operations



Investment Income and Expense



Net investment loss
was $1.2 million for the three months ended September 30, 2023 and $0.9 million for the three months ended September
30, 2022, respectively. Net investment loss was $3.2 million for the nine months ended September 30, 2023 and $2.6 million for
the nine months ended September 30, 2022, respectively.



Investment income
was $0.04 million and $0.06 million for the three and nine months ended September 30, 2023 due to the interest earned on portfolio investments
and short-term investments.



Compensation expense
was $1.5 million for the nine months ended September 30, 2023 and $1.1 million for the nine months ended September 30, 2022, as a result
of bonuses paid in 2023.



Professional fees
were comparable for the nine months ended September 30, 2023 and 2022, and were $0.7 million and $0.6 million, respectively.



General and administrative
expenses were comparable for the nine months ended September 30, 2023 and 2022, and were $0.1 million and $0.09 million, respectively.



Changes in Unrealized Appreciation/Depreciation of Portfolio Securities



During
the nine months ended September 30, 2023, we made a $2.4 million debt investment in Morgan E&P, LLC (“Morgan”) and also
invested $1.00 in the equity of Morgan.  We recorded a change in fair value of the equity of Morgan of $15.0 million.  The increase
was principally due to a significant increase in Morgan’s acreage rights and associated reserves, an increase in oil and gas prices,
and our expectation of Morgan generating operating cash flow from recent drilling activity in the near future in the Bakken shale region
where it holds leasehold acreage rights.



During the
nine months ended September 30, 2023, with respect to our holding in Equus Energy, LLC, we recorded no change in the fair value of this
investment.

During the
nine months ended September 30, 2022, with respect to our holding in Equus Energy, LLC, we recorded an increase in the fair value of this
investment by $2.5 million. Such change in fair value was principally due to increases in mineral acreage prices and an increase in 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.



Subsequent Events



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



On October 3, 2023,
our holding in $18.0 million in U.S. Treasury Bills matured and we repaid our margin loan.



During October and
November 2023, we advanced Morgan an additional $3.9 million under its existing credit facility with the Fund.



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Item 3. Quantitative and Qualitative Disclosure about Market Risk



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



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



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





Item 4. Controls and Procedures



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



Our
management, with the participation of our Fund’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness
of the design and operations of the Fund’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of September 30, 2023. Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the Fund’s disclosure controls and procedures were effective at a reasonable assurance level. There has been
no change in our internal control over financial reporting during the quarter ended September 30, 2023, that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.



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Part II. Other Information



Item 1. Legal Proceedings

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



Item 1A. Risk Factors



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



Readers should carefully
consider these risks and all other information contained in our annual report on Form 10-K (“10-K”) for the year ended December
31, 2022, including the Fund’s financial statements and the related notes thereto. The risks and uncertainties described in our
10-K and throughout this 10-Q are not the only ones facing the Fund.



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



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Item 6. Exhibits

3.       Articles
of Incorporation or Bylaws

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



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



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

10.       Material
Contracts

| | (a) | Safekeeping Agreement between the Fund and Amegy Bank, dated August 16, 2008. [Incorporated by reference to Exhibit 10(c) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 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) | Code of Ethics of the Fund (Rule 17j-1). [Incorporated by reference to Exhibit 10(f) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

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



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

32.       Rule 1350
Certifications

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



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





* Filed herewith





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SIGNATURE



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







Dated: November 14, 2023











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







44