UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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



For the quarterly period ended June 30,
2019



or



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

For the transition period to

Commission File Number 814-00098

EQUUS TOTAL RETURN, INC.

(Exact name of registrant as specified
in its charter)



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



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



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



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



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



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



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



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



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



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



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



There were 13,518,146
shares of the registrant’s common stock, $.001 par value, outstanding, as of August 14, 2019








Table of Contents




EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)



INDEX





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









































2


Table of Contents




EQUUS TOTAL RETURN, INC.

CONDENSED BALANCE SHEETS

(Unaudited)



Part I. Financial Information

Item 1. Unaudited Condensed Financial Statements



|                                                                                           |  | June 30,
                                                                                2019 |         | December 31,
                                                                                2018
|------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------------
|(in thousands, except per share amounts)                                                   |  |                                                                                               |         |                                                                                                  
|Assets                                                                                     |  |                                                                                               |         |                                                                                                  
|Investments in portfolio securities at fair value:                                         |  |                                                                                               |         |                                                                                                  
|Control investments (cost at $7,050 and $10,050, respectively)                             |  | $                                                                                             | 10,500  |                                                                                                  
|Affiliate investments (cost at $350)                                                       |  |                                                                                               | 24,500  |                                                                                                  
|Non-affiliate investments - related party (cost at $6,737 and $6,579, respectively)        |  |                                                                                               | 5,018   |                                                                                                  
|Non-affiliate investments (cost at $977)                                                   |  |                                                                                               | 977     |                                                                                                  
|Total investments in portfolio securities at fair value                                    |  |                                                                                               | 40,995  |                                                                                                  
|Temporary cash investments                                                                 |  |                                                                                               | 26,990  |                                                                                                  
|Cash and cash equivalents                                                                  |  |                                                                                               | 5,407   |                                                                                                  
|Restricted cash                                                                            |  |                                                                                               | 270     |                                                                                                  
|Accounts receivable from affiliates                                                        |  |                                                                                               | 561     |                                                                                                  
|Accrued interest and dividend receivable                                                   |  |                                                                                               | 489     |                                                                                                  
|Other assets                                                                               |  |                                                                                               | 258     |                                                                                                  
|Total assets                                                                               |  |                                                                                               | 74,970  |                                                                                                  
|Liabilities and net assets                                                                 |  |                                                                                               |         |                                                                                                  
|Accounts payable                                                                           |  |                                                                                               | 24      |                                                                                                  
|Accounts payable to related parties                                                        |  |                                                                                               | 23      |                                                                                                  
|Borrowing under margin account                                                             |  |                                                                                               | 26,990  |                                                                                                  
|Total liabilities                                                                          |  |                                                                                               | 27,037  |                                                                                                  
|                                                                                           |  |                                                                                               |         |                                                                                                  
|Commitments and contingencies (see Note 2)                                                 |  |                                                                                               |         |                                                                                                  
|                                                                                           |  |                                                                                               |         |                                                                                                  
|Net assets                                                                                 |  | $                                                                                             | 47,933  |                                                                                                  
|                                                                                           |  |                                                                                               |         |                                                                                                  
|Net assets consist of:                                                                     |  |                                                                                               |         |                                                                                                  
|Common stock, par value                                                                    |  | $                                                                                             | 13      |                                                                                                  
|Capital in excess of par value                                                             |  |                                                                                               | 55,901  |                                                                                                  
|Undistributed net investment losses                                                        |  |                                                                                               | (31,114 | )                                                                                                
|Undistributed net capital (losses) gains                                                   |  |                                                                                               | (2,748  | )                                                                                                
|Unrealized appreciation of portfolio securities, net                                       |  |                                                                                               | 27,600  |                                                                                                  
|Unrealized depreciation of portfolio securities, net - related party                       |  |                                                                                               | (1,719  | )                                                                                                
|Total net assets                                                                           |  | $                                                                                             | 47,933  |                                                                                                  
|Shares of common stock issued and outstanding, $.001 par value, 50,000 shares authorized   |  |                                                                                               | 13,518  |                                                                                                  
|Shares of preferred stock issued and outstanding, $.001 par value, 5,000 shares authorized |  |                                                                                               | —       |                                                                                                  
|Net asset value per share                                                                  |  | $                                                                                             | 3.55    |                                                                                                  







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 June 30, |        | Six Months Ended June 30,
|--------------------------------------------------------------------------------- |  | --------------------------- | ------ | -------------------------
|(in thousands, except per share amounts)                                          |  | 2019                        |        | 2018                     
|Investment income:                                                                |  |                             |        |                          
|Interest and dividend income:                                                     |  |                             |        |                          
|Non-affiliate investments - related party                                         |  | $                           | 80     |                          
|Non-affiliate investments                                                         |  |                             | —      |                          
|Total interest and dividend income                                                |  |                             | 80     |                          
|Interest from temporary cash investments                                          |  |                             | 11     |                          
|Total investment income                                                           |  |                             | 91     |                          
|                                                                                  |  |                             |        |                          
|Expenses:                                                                         |  |                             |        |                          
|Compensation expense                                                              |  |                             | 380    |                          
|Professional fees                                                                 |  |                             | 214    |                          
|Director fees and expenses                                                        |  |                             | 117    |                          
|General and administrative expenses                                               |  |                             | 108    |                          
|Mailing, printing and other expenses                                              |  |                             | 55     |                          
|Taxes                                                                             |  |                             | 11     |                          
|Interest expense                                                                  |  |                             | 2      |                          
|Total expenses                                                                    |  |                             | 887    |                          
|                                                                                  |  |                             |        |                          
|                                                                                  |  |                             |        |                          
|Net investment loss                                                               |  |                             | (797   | )                        
|                                                                                  |  |                             |        |                          
|Net realized (loss) gain:                                                         |  |                             |        |                          
|Affiliate investments                                                             |  |                             | (2,790 | )                        
|Temporary cash investments                                                        |  |                             | 23     |                          
|Net realized (loss) gain                                                          |  |                             | (2,767 | )                        
|                                                                                  |  |                             |        |                          
|Net unrealized appreciation of portfolio securities:                              |  |                             |        |                          
|End of period                                                                     |  |                             | 27,600 |                          
|Beginning of period                                                               |  |                             | 22,811 |                          
|Net change in net unrealized appreciation of portfolio securities                 |  |                             | 4,789  |                          
|                                                                                  |  |                             |        |                          
|Net unrealized depreciation of portfolio securities - related party:              |  |                             |        |                          
|End of period                                                                     |  |                             | (1,719 | )                        
|Beginning of period                                                               |  |                             | (1,795 | )                        
|Net change in net unrealized depreciation of portfolio securities - related party |  |                             | 76     |                          
|                                                                                  |  |                             |        |                          
|Net increase in net assets resulting from operations                              |  | $                           | 1,301  |                          
|                                                                                  |  |                             |        |                          
|Net increase in net assets resulting from operations per share:                   |  |                             |        |                          
|Basic and diluted                                                                 |  | $                           | 0.10   |                          
|Weighted average shares outstanding:                                              |  |                             |        |                          
|Basic and diluted                                                                 |  |                             | 13,518 |                          







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







4


Table of Contents




EQUUS TOTAL RETURN, INC.

CONDENSED STATEMENTS OF CHANGES IN
NET ASSETS

(Unaudited)



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



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)



|                                                                                                                                      |  |                          
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|                                                                                                                                      |  | Six Months Ended June 30,
|(in thousands)                                                                                                                        |  | 2019                     
|Reconciliation of increase in net assets resulting from operations to net cash                                                        |  |                          
|(used in) provided by operating activities:                                                                                           |  |                          
|Net increase in net assets resulting from operations                                                                                  |  | $                        
|Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities: |  |                          
|Net realized loss (gain)                                                                                                              |  |                          
|Net change in unrealized appreciation of portfolio securities                                                                         |  |                          
|Net change in unrealized depreciation of portfolio securities - related party                                                         |  |                          
|Share-based incentive compensation                                                                                                    |  |                          
|Dissolution of portfolio securities                                                                                                   |  |                          
|Changes in operating assets and liabilities:                                                                                          |  |                          
|Purchases of temporary cash investments, net                                                                                          |  |                          
|Accounts receivable from affiliates                                                                                                   |  |                          
|Accrued interest and dividend receivable                                                                                              |  |                          
|Other assets                                                                                                                          |  |                          
|Accounts payable and accrued liabilities                                                                                              |  |                          
|Accounts payable to related parties                                                                                                   |  |                          
|Net cash (used in) provided by operating activities                                                                                   |  |                          
|Cash flows from financing activities:                                                                                                 |  |                          
|Borrowings under margin account                                                                                                       |  |                          
|Repayments under margin account                                                                                                       |  |                          
|Net cash provided by (used in) financing activities                                                                                   |  |                          
|Net decrease in cash and cash equivalents                                                                                             |  |                          
|Cash and cash equivalents and restricted cash at beginning of period                                                                  |  |                          
|                                                                                                                                      |  |                          
|Cash and cash equivalents and restricted cash at end of period                                                                        |  | $                        
|Non-cash operating and financing activities:                                                                                          |  |                          
|Accrued interest or dividends exchanged for portfolio securities - related party                                                      |  | $                        
|                                                                                                                                      |  |                          
|Supplemental disclosure of cash flow information:                                                                                     |  |                          
|Interest paid                                                                                                                         |  | $                        
|Income taxes paid                                                                                                                     |  | $                        







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









6


Table of Contents




EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED
PER SHARE DATA AND RATIOS

(Unaudited)







|                                                                                    |  | Six Months Ended June 30,
|----------------------------------------------------------------------------------- |  | -------------------------
|                                                                                    |  | 2019                     
|                                                                                    |  |                          
|Investment income                                                                   |  | $                        
|Expenses                                                                            |  |                          
|                                                                                    |  |                          
|Net investment loss                                                                 |  |                          
|                                                                                    |  |                          
|Net realized loss                                                                   |  |                          
|Net change in unrealized appreciation                                               |  |                          
|Net change in unrealized depreciation - related party                               |  |                          
|Net increase in net assets                                                          |  |                          
|Capital transactions:                                                               |  |                          
|Share-based incentive compensation                                                  |  |                          
|Dilutive effect of shares issued                                                    |  |                          
|Increase in net assets resulting from capital transactions                          |  |                          
|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 |  |                          
|Total return on market price (1)                                                    |  |                          

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



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







7


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

JUNE 30, 2019

(Unaudited)

(in thousands, except share data)



|                                                                                                      |                                | Date of Initial |                                        |        |           |        | Cost of    |   | Fair    
|----------------------------------------------------------------------------------------------------- | ------------------------------ | --------------- | -------------------------------------- | ------ | --------- | ------ | ---------- | - | --------
|Portfolio Company                                                                                     | Industry                       | Investment      | Investment                             |        | Principal |        | Investment |   | Value(1)
|Control Investments:  Majority-owned (3):                                                             |                                |                 |                                        |        |           |        |            |   |         
|Equus Energy, LLC
                                                              Houston, TX           | Energy                         | December 2011   | Member interest (100%)                 |        |           | $      | 7,050      | $ | 10,500  
|Total Control Investments: Majority-owned (represents 15.4% of total investments at fair value)       |                                |                 | $                                      | 7,050  | $         | 10,500
|Affiliate Investments (4):                                                                            |                                |                 |                                        |        |           |        |            |   |         
|PalletOne, Inc.
                                                                 Bartow, FL           | Shipping products and services | October 2001    | 350,000 shares of common stock (18.7%) |        |           | $      | 350        | $ | 24,500  
|Total Affiliate Investments (represents 34.1% of total investments at fair value)                     |                                |                 | $                                      | 350    | $         | 24,500
|Non-Affiliate Investments - Related Party (less than 5% owned):                                       |                                |                 |                                        |        |           |       
|MVC Capital, Inc.
                                    Purchase, NY                                    | Financial services             | May 2014        | 544,813 shares of common stock (1.7%)  |        |           | $      | 6,737      | $ | 5,018   
|Total Non-Affiliate Investments - Related Party (represents 7.4% of total investments at fair value)  |                                |                 | $                                      | 6,737  |           | 5,018 
|Non-Affiliate Investments (less than 5% owned):                                                       |                                |                 |                                        |        |           |       
|5TH Element Tracking, LLC
                                                                 Boston, MA | Business products and services | January 2015    | 14% promissory note due 5/18 (2)       | $      | 977       | $      | 977        | $ | 977     
|Total Non-Affiliate Investments (represents 1.4% of total investments at fair value)                  |                                |                 | $                                      | 977    | $         | 977   
|Total Investment in Portfolio Securities                                                              |                                |                 |                                        |        |           | $      | 15,114     | $ | 40,995  
|Temporary Cash Investments                                                                            |                                |                 |                                        |        |           |        |            |   |         
|U.S. Treasury Bill                                                                                    | Government                     | June 2019       | UST 0% 7/19                            | $      | 26,990    | $      | 26,990     | $ | 26,990  
|Total Temporary Cash Investments (represents 40.9% of total investments at fair value)                |                                |                 | $                                      | 26,990 | $         | 26,990
|Total Investments                                                                                     |                                |                 |                                        |        |           | $      | 42,104     | $ | 67,985  









|(1) | See Note 3 to the financial statements, Valuation of Investments.                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Non-income-producing.  See notes 5 and 9 to the financial statements.                                                                                          
|(3) | Majority owned investments are generally defined under the 1940 Act as companies in which we own more than 50% of the voting securities of the company.        
|(4) | Affiliate investments are generally defined under the 1940 Act as companies in which we own at least 5% but not more than 25% voting securities of the company.





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





8


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

JUNE 30, 2019

(Unaudited)







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



As a business development
company (“BDC”) regulated pursuant to the Investment Company Act of 1940 (“1940 Act”), we may invest up
to 30% of our assets in non-qualifying portfolio investments, as permitted by the 1940 Act. Specifically, we may invest up to 30%
of our assets in entities that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including
companies located outside of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act,
and publicly-traded entities with a market capitalization exceeding $250 million. As of June 30, 2019, we held 87.8% of our assets
at fair value in securities of portfolio companies that constituted qualifying investments under the 1940 Act. As of June 30, 2019,
except for our shares of MVC, all of our investments are in enterprises that are considered eligible portfolio companies under
the 1940 Act. We provide significant managerial assistance to portfolio companies that comprise 85.4% of the total value of the
investments in portfolio securities as of June 30, 2019.



We are classified
as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our
assets that may be invested in the securities of a single issuer. The value of one segment called “Shipping products and
services” includes one portfolio company and was 51.1% of our net asset value, 32.7% of our total assets and 59.8% of our
investments in portfolio company securities (at fair value) as of June 30, 2019. The value of one segment called “Energy”
includes one portfolio company and was 21.9% of our net asset value, 14.0% of our total assets and 25.6% of our investments in
portfolio company securities (at fair value) as of June 30, 2019. Changes in business or industry trends or in the financial condition,
results of operations, or the market’s assessment of any single portfolio company will affect the net asset value and the
market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding
numerous investments.





Our investments
in portfolio securities consist of the following types of securities as of June 30, 2019 (in thousands):



|Type of Securities                    |  | Cost |        | Fair Value |  | Fair Value as Percentage of
                                                                                                                      Net Assets
|------------------------------------- |  | ---- | ------ | ---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                      |  |      |        |            |  |                                                                                                                                                             
|Common stock                          |  | $    | 7,087  |            |  | $                                                                                                                                                           
|Limited liability company investments |  |      | 7,050  |            |  |                                                                                                                                                             
|Secured and subordinated debt         |  |      | 977    |            |  |                                                                                                                                                             
|Total                                 |  | $    | 15,114 |            |  | $                                                                                                                                                           







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





|Industry                       |  | Fair Value |        | Fair Value as Percentage of
                                                                                                                      Net Assets
|------------------------------ |  | ---------- | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Shipping products and services |  |            | 24,500 |                                                                                                                                                             
|Energy                         |  |            | 10,500 |                                                                                                                                                             
|Financial services             |  |            | 5,018  |                                                                                                                                                             
|Business products and services |  |            | 977    |                                                                                                                                                             
|Total                          |  | $          | 40,995 |                                                                                                                                                             







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



9


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2018

(Unaudited)

(in thousands, except share data)







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



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





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



10


Table of Contents




EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

DECEMBER 31, 2018

(in thousands, except share data)





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



As a BDC, we may
invest up to 30% of our assets in non-qualifying portfolio investments, as permitted by the 1940 Act. Specifically, we may invest
up to 30% of our assets in entities that are not considered “eligible portfolio companies” (as defined in the 1940
Act), including companies located outside of the United States, entities that are operating pursuant to certain exceptions under
the 1940 Act, and publicly-traded entities with a market capitalization exceeding $250 million. As of December 31, 2018, we had
invested 87.5% of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act. As
of December 31, 2018, except for our shares of MVC, all of our investments are in enterprises that are considered eligible portfolio
companies under the 1940 Act. We provide significant managerial assistance to portfolio companies that comprise 84.6% of the total
value of the investments in portfolio securities as of December 31, 2018.



We are classified
as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our
assets that may be invested in the securities of a single issuer. The value of one segment called “Shipping products and
services” includes one portfolio company and was 47.1% of our net asset value, 28.9% of our total assets and 58.5% of our
investments in portfolio company securities (at fair value) as of December 31, 2018. The value of one segment called “Energy”
includes one portfolio company and was 20.7% of our net asset value, 12.7% of our total assets and 25.7% of our investments in
portfolio company securities (at fair value) as of December 31, 2018. Changes in business or industry trends or in the financial
condition, results of operations, or the market’s assessment of any single portfolio company will affect the net asset value
and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company
holding numerous investments.



Our investments
in portfolio securities consist of the following types of securities as of December 31, 2018 (in thousands):





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



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



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



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

11


Table of Contents




EQUUS TOTAL RETURN, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(Unaudited)



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



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



So long as we remain
an investment company and not an operating company as contemplated in our Plan of Reorganization described in Note 6 below,
we will attempt to maximize the return to our stockholders in the form of current investment income and long-term capital gains
by investing in the debt and equity securities of companies with a total enterprise value of between $5.0 million and $75.0 million,
although we may engage in transactions with smaller or larger investee companies from time to time. We seek to invest primarily
in companies pursuing growth either through acquisition or organically, leveraged buyouts, management buyouts and recapitalizations
of existing businesses or special situations. Our income-producing investments may include debt securities including subordinate
debt, debt convertible into common or preferred stock, or debt combined with warrants and common and preferred stock. Debt and
preferred equity financing may also be used to create long-term capital appreciation through the exercise and sale of warrants
received in connection with the financing. We seek to achieve capital appreciation by making investments in equity and equity-oriented
securities issued by privately-owned companies (or smaller public companies) in transactions negotiated directly with such companies.
Given market conditions over the past several years and the performance of our portfolio, our Management and Board of Directors
believe it prudent to continue to review alternatives to refine and further clarify the current strategies.



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









Basis of Presentation—In
accordance with Article 6 of Regulation S-X under the Securities Act and the Securities Exchange Act of 1934, as amended (“Exchange
Act”), we do not consolidate portfolio company investments, including those in which we have a controlling interest. Our
interim unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”), for interim financial information and in accordance with the requirements of reporting
on Form 10-Q and Article 10 of Regulation S-X, under the Exchange Act. Accordingly, they are unaudited and exclude some disclosures
required for annual financial statements. We believe that we have made all adjustments, consisting solely of normal recurring accruals,
necessary for the fair presentation of these interim financial statements.









The results of
operations for the three months ended June 30, 2019 are not necessarily indicative of results that ultimately may be achieved for
the remainder of the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K for the fiscal year ended December
31, 2018, as filed with the Securities and Exchange Commission (“SEC”).



12


Table of Contents






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







Liquidity—There
are several factors that may materially affect our liquidity during the reasonably foreseeable future. We are evaluating the impact
of current market conditions on our portfolio company valuations and their ability to provide current income. We have followed
valuation techniques in a consistent manner; however, we are cognizant of current market conditions that might affect future valuations
of portfolio securities. We believe that our operating cash flow and cash on hand will be sufficient to meet operating requirements
and, to the extent we remain a BDC, to finance routine follow-on investments, if any, through the next twelve months.



Cash and Cash
Equivalents—As of June 30, 2019, we had cash and cash equivalents of $5.4 million. We had $41.0 million of our net assets
of $47.9 million invested in portfolio securities.



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



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



Restricted Cash
and Temporary Cash Investments— As of June 30, 2019, we had $27.2 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 to maintain our pass-through tax treatment. Of this amount, $27.3 million was invested in U.S. Treasury bills and $0.3
million represented a required 1% brokerage margin deposit. These securities were held by a securities brokerage firm and pledged
along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured on July 5, 2019 and we subsequently
repaid this margin loan, plus interest.



As of December
31, 2018, we had $27.3 million of restricted cash and of temporary cash investments, including primarily the proceeds of a quarter-end
margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $27.0 million was
invested in U.S. Treasury bills and $0.3 million represented a required 1% brokerage margin deposit. These securities were held
by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills
were sold on January 2, 2019 and we subsequently repaid this margin loan, plus interest.



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



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



As of June 30,
2019, we had no outstanding commitments to our portfolio company investments.







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







As of June 30,
2019, we borrowed $27.0 million to maintain our RIC status by utilizing a margin account with a securities brokerage firm. We collateralized
such borrowings with restricted cash and temporary cash investments in U.S. Treasury bills of $27.3 million.



As of December
31, 2018, we borrowed $27.0 million to maintain our RIC status by utilizing a margin account with a securities brokerage firm.
We collateralized such borrowings with restricted cash and temporary cash investments in U.S. Treasury bills of $27.3 million.





13


Table of Contents








Certain Risks
and Uncertainties—Market and economic volatility which has become endemic in the past few years has constrained the availability
of debt financing for small and medium-sized companies such as Equus and its portfolio companies. Such debt financing generally
has shorter maturities, higher interest rates and fees, and more restrictive terms than debt facilities available in the past.
In addition, during these years and continuing into the first six months of 2019, the price of our common stock remained well below
our net asset value, thereby making it undesirable to issue additional shares of our common stock below net asset value. Because
of these challenges, our near-term strategies shifted from originating debt and equity investments to preserving liquidity necessary
to meet our operational needs. Key initiatives that we have previously undertaken to provide necessary liquidity include monetizations,
the suspension of dividends and the internalization of management. We are also evaluating potential opportunities that could enable
us to effect a change to our business and become an operating company as described in Note 6 – Plan of Reorganization
below. We believe we have sufficient liquidity to meet our operating requirements for the remainder of 2019 and the first six months
of 2020.







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







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



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



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





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



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



Investments are valued utilizing a yield analysis, enterprise value (“EV”) analysis, net asset
value analysis, liquidation analysis, discounted cash flow analysis, or a combination of methods, as appropriate. The yield analysis
uses loan spreads and other relevant information implied by market data involving identical or comparable assets or liabilities.
Under the EV analysis, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities
in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically
use a market multiples approach that considers relevant and applicable market trading data of guideline public companies, transaction
metrics from precedent M&A transactions and/or a discounted cash flow analysis. The net asset value analysis is used to derive
a value of an underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization
rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies
and/or relevant



14


Table of Contents




transactions. The liquidation analysis is intended to approximate the net recovery value of an investment
based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s
assets. The discounted cash flow analysis uses valuation techniques to convert future cash flows or earnings to a range of fair
values from which a single estimate may be derived utilizing an appropriate discount rate. The measurement is based on the net
present value indicated by current market expectations about those future amounts.





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



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



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



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



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



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



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







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









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

15


Table of Contents


exchanges for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition
of the investment and anticipated financing transactions after the valuation date.



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



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



We assess the levels
of the investments at each measurement date, and transfers between levels are recognized on the subsequent measurement date closest
in time to the actual date of the event or change in circumstances that caused the transfer. There were no transfers among Level
1, 2 and 3 for the six months ended June 30, 2019 and the year ended December 31, 2018.



As of June 30,
2019, investments measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of
significant input to the valuations:





|                                                 | Fair Value Measurements as of June 30, 2019
|------------------------------------------------ | -------------------------------------------
|(in thousands)                                   |                                            
|Assets                                           |                                            
|Investments:                                     |                                            
|Control investments                              |                                            
|Affiliate investments                            |                                            
|Non-affiliate investments - related party        |                                            
|Non-affiliate investments                        |                                            
|Total investments                                |                                            
|Temporary cash investments                       |                                            
|Total investments and temporary cash investments |                                            





16


Table of Contents




As of December 31, 2018, investments
measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input
to the valuations:



|                                                 | Fair Value Measurements as of December 31, 2018
|------------------------------------------------ | -----------------------------------------------
|(in thousands)                                   |                                                
|Assets                                           |                                                
|Investments:                                     |                                                
|Control investments                              |                                                
|Affiliate investments                            |                                                
|Non-affiliate investments - related party        |                                                
|Non-affiliate investments                        |                                                
|Total investments                                |                                                
|Temporary cash investments                       |                                                
|Total investments and temporary cash investments |                                                





The following table
provides a reconciliation of fair value changes during the six months ended June 30, 2019 for all investments for which we determine
fair value using unobservable (Level 3) factors:





|                                   | Fair value measurements using significant unobservable inputs (Level 3)
|---------------------------------- | -----------------------------------------------------------------------
|(in thousands)                     |                                                                        
|Fair value as of December 31, 2018 |                                                                        
|Realized losses                    |                                                                        
|Change in unrealized appreciation  |                                                                        
|Proceeds from sales/dispositions   |                                                                        
|Transfers in (out) of Level 3      |                                                                        
|Fair value as of June 30, 2019     |                                                                        





The following table
provides a reconciliation of fair value changes during the three months ended June 30, 2018 for all investments for which we determine
fair value using unobservable (Level 3) factors:





|                                   | Fair value measurements using significant unobservable inputs (Level 3)
|---------------------------------- | -----------------------------------------------------------------------
|(in thousands)                     |                                                                        
|Fair value as of December 31, 2017 |                                                                        
|Change in unrealized appreciation  |                                                                        
|Fair value as of June 30, 2018     |                                                                        







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



17


Table of Contents




The following table
summarizes the significant non-observable inputs in the fair value measurements of our Level 3 investments by category of investment
and valuation technique as of June 30, 2019:





|                                      |  |            |        |                      |  |                                                                                                                           |  | Range                                                                                                           
|------------------------------------- |  | ---------- | ------ | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|(in thousands)                        |  | Fair Value |        | Valuation Techniques |  | Unobservable Inputs                                                                                                       |  | Minimum                                                                                                         
|Secured and subordinated debt         |  | $          | 977    |                      |  | Yield analysis                                                                                                            |  | Discount for lack of marketability                                                                              
|Common stock                          |  |            | 24,500 |                      |  | Income/
                                   Market approach                                                                |  | EBITDA Multiple/Discount for lack of marketability/Control premium                                              
|Limited liability company investments |  |            | 10,500 |                      |  | Asset approach
                                                        Discounted cash flow; Guideline transaction method |  | Recovery rate
                                                        Reserve
adjustment factors Market approach
|                                      |  | $          | 35,977 |                      |  |                                                                                                                           |  |                                                                                                                 









Because of the
inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting
to $36.0 million and $30.7 million as of June 30, 2019 and December 31, 2018, respectively, our fair value determinations may materially
differ from the values that would have been used had a ready market existed for these securities. As of June 30, 2019 and December
31, 2018, one of our portfolio investments, consisting of 544,813 and 527,138 common shares of MVC, respectively, was publicly
listed on the NYSE.



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



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



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



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



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

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation—Realized
gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment or a financial
instrument and the cost basis of the investment or financial instrument, without regard to unrealized appreciation or depreciation
previously recognized, and includes investments written-off during the





18


Table of Contents


period net of recoveries and realized gains or losses from in-kind redemptions. Net change in
unrealized appreciation or depreciation reflects the net change in the fair value of the portfolio company investments and financial
instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial
instruments to realized gains or losses.



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



Share-Based
Compensation—We account for our share-based compensation using the fair value method, as prescribed by ASC 718, Compensation—Stock
Compensation. Accordingly, for restricted stock awards, we measure the grant date fair value based upon the market price of our
common stock on the date of the grant and amortize the fair value of the awards as share-based compensation expense over the requisite
service period, which is generally the vesting term and account for forfeitures as they occur.



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



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



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



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



Texas margin tax
applies to legal entities conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is
calculated by applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an
income tax. As a result, we have no provision for margin tax expense for the six months ended June 30, 2019, respectively, and
we paid $3 thousand in state income tax for the year ended December 31, 2018.









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





Accounting Standards
Not Yet Adopted—In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)—Measurement
of Credit Losses on Financial Instruments, which amends the financial instruments impairment guidance so that an entity is
required to measure expected credit losses for

19


Table of Contents


financial assets based on historical experience, current conditions and reasonable
and supportable forecasts. As such, an entity will use forward-looking information to estimate credit losses. ASU 2016-13 also
amends the guidance in FASB ASC Subtopic 325-40,Investments -Other, Beneficial Interests in Securitized Financial Assets, related
to the subsequent measurement of accretable yield recognized as interest income over the life of a beneficial interest in securitized
financial assets under the effective yield method. ASU 2016-13 effective for public business entities that meet the U.S. GAAP definition
of an SEC filer, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
There was no impact on the financial position or financial statement disclosures.







On August 28, 2018,
the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of ASC 820. The amendments remove
certain disclosure requirements and modify certain others. The amendments remove the requirement to disclose (1) the amount of
and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between
levels, (3) the valuation processes for Level 3 fair value measurements and (4) the changes in unrealized gains and losses for
the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. Also, (1)
in lieu of a roll-forward for Level 3 fair value measurements, an entity is required to disclose transfers into and out of Level
3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities, (2) for investments in certain entities
that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the
date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced
the timing publicly, and (3) the amendments clarify that the measurement uncertainty disclosure is to communicate information about
the uncertainty in measurement as of the reporting date. Early adoption is permitted. We are currently evaluating the impact of
ASU 2018-13 on our financial statements and will make any disclosure adjustments in year-end financial statements.





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





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







We may also pay
other one-time or recurring fees to members of our Board of Directors in special circumstances. In
respect of services provided to the Fund by members of the Board not in connection with their roles and duties as directors, the
Fund pays a rate of $300 per hour for services.During each of the six months ended June 30, 2019 and June 30, 2018,
we paid Kenneth I. Denos, P.C., a professional corporation owned by Kenneth I. Denos, a director of the Fund, $0.2 million for
services provided to the Fund.



20


Table of Contents






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



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



Also during the
six months ended June 30, 2019, we dissolved Equus Media Development Company, LLC (“EMDC”), a wholly-owned subsidiary
of the Fund and transferred EMDC’s assets, consisting of approximately $210,000 in cash and various creative entertainment
properties, to the Fund.



During the six
months ended June 30, 2019, we recorded a net change in unrealized appreciation of $8.8 million, to a net unrealized appreciation
of $25.9 million. Such change in unrealized appreciation resulted primarily from the following changes:



| | (i)   | Increase in the fair value of our shareholding in MVC of $0.7 million due to an increase in the share price of MVC and the receipt of dividend payments in the form of additional shares of MVC during the period;                                                                    
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                       
| | (ii)  | Increase in fair value of our shareholding in PalletOne, Inc. of $4.0 million due to improved operating performance and overall improvement in comparable industry sectors;                                                                                                           
| |       |                                                                                                                                                                                                                                                                                       
| | (iii) | Transfer of unrealized depreciation to realized loss of our holdings in EMDC of $2.8 million in connection with the dissolution of EMDC and the transfer of its assets to the Fund; and                                                                                               
| |       |                                                                                                                                                                                                                                                                                       
| | (iv)  | Increase in the fair value of our holdings in Equus Energy, LLC of $1.5 million, principally due to increases in mineral acreage prices proximate to the company’s leasehold interests and an increase in the short- and long-term prices for crude oil during the first half of 2019.



During the six
months ended June 30, 2018, we received dividends in the form of additional shares of $0.1 million relating to our shareholding
in MVC.



During the six
months ended June 30, 2018, we recorded a net change in unrealized appreciation of $2.9 million, to a net unrealized appreciation
of $16.2 million. Such change in unrealized appreciation resulted primarily from the following changes:



| | (i)   | Decrease in the fair value of our shareholding in MVC of
        $0.4 million due to a decrease in the share price of MVC, offset by the receipt of dividend payments in the form of additional
        shares of MVC during the period;                                                        
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  | Increase in fair value of our shareholding in PalletOne, Inc.
        of $2.3 million due to increases in revenue and EBITDA, as well as promising acquisition and growth prospects; and                                                                                                        
| | (iii) | Increase in the fair value of our holdings in Equus Energy,
        LLC of $1.0 million, principally due to increases in mineral acreage prices proximate to the company’s leasehold interests
        and a moderate increase in the short- and long-term prices for crude oil and natural gas.



21


Table of Contents






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





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



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



Authorization
to Withdraw BDC Election—On January 21, 2019, holders of a majority of the outstanding common stock of the Fund approved
our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified
as a BDC, effective as of a date designated by the Board and our Chief Executive Officer. Although this authorization, which was
given as a consequence of our Plan of Reorganization, expired on July 31, 2019, we expect to receive an additional authorization
from our stockholders in the future. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any
such withdrawal unless and until Equus has entered into a definitive agreement to effect a “Consolidation”. Further,
even if we are again authorized to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of
a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business.





| | (7) | 2016 Equity Incentive Plan
| | --- | --------------------------





Share-Based
Incentive Compensation—On June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive
Plan”). On January 10, 2017, the SEC issued an order approving the Incentive Plan and certain awards intended to be made
thereunder. The Incentive Plan is intended to promote the interests of the Fund by encouraging officers, employees, and directors
of the Fund and its affiliates to acquire or increase their equity interest in the Fund and to provide a means whereby they may
develop a proprietary interest in the development and financial success of the Fund, to encourage them to remain with and devote
their best efforts to the business of the Fund, thereby advancing the interests of the Fund and its stockholders. The Incentive
Plan is also intended to enhance the ability of the Fund and its affiliates to attract and retain the services of individuals who
are essential for the growth and profitability of the Fund. The Incentive Plan permits the award of restricted stock as well as
common stock purchase options. The maximum number of shares of common stock that are subject to awards granted under the Incentive
Plan is 2,434,728 shares. The term of the Incentive Plan will expire on June 13, 2026. On March 17, 2017, we granted awards of
restricted stock under the Incentive Plan to certain of our directors and executive officers in the aggregate amount of 844,500
shares. The awards are each subject to a vesting requirement over a 3-year period unless the recipient thereof is terminated or
removed from their position as a director or executive officer without “cause”, or as a result of constructive termination,
as such terms are defined in the respective award agreements entered into by each of the recipients and the Fund. As of March 31,
2019, 280,000 shares of restricted stock which were granted pursuant to the Incentive Plan, remained unvested. We account for share-based
compensation using the fair value method, as prescribed by ASC 718. Accordingly, for restricted stock awards, we measure the grant
date fair value based upon the market price of our common stock on the date of the grant and amortize the fair value of the awards
as share-based compensation expense over the requisite service period, which is generally the vesting term. For the six months
ended June 30, 2019 and 2018, we recorded compensation expense of $0.2 million and $0.3 million, respectively, in connection with
these awards.





22


Table of Contents






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





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



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



Revenue and
Income—During the three months ended June 30, 2019, Equus Energy’s revenue, operating revenue less direct operating
expenses, and net loss were $0.2 million, $0.02 million, and ($0.08) million, respectively, as compared to revenue, operating revenue
less direct operating expenses, and net loss which $0.3 million, $0.05 million, and ($0.1) million, respectively, for the three
months ended June 30, 2018.



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



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





23


Table of Contents




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



EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Balance
Sheets





|                                                           |  | June 30, |        | December 31,
|---------------------------------------------------------- |  | -------- | ------ | ------------
|                                                           |  | 2019     |        | 2018        
|                                                           |  |          |        |             
|                                                           |  |          |        |             
|Assets                                                     |  |          |        |             
|Current assets:                                            |  |          |        |             
|Cash and cash equivalents                                  |  | $        | 832    |             
|Accounts receivable                                        |  |          | 112    |             
|Other current assets                                       |  |          | 34     |             
|Total current assets                                       |  |          | 978    |             
|Oil and gas properties                                     |  |          | 8,008  |             
|Less: accumulated depletion, depreciation and amortization |  |          | (7,854 | )           
|Net oil and gas properties                                 |  |          | 154    |             
|Total assets                                               |  | $1,132   |        |             
|                                                           |  |          |        |             
|Liabilities and member's equity                            |  |          |        |             
|Current liabilities:                                       |  |          |        |             
|Accounts payable and other                                 |  | $        | 170    |             
|Due to affiliate                                           |  |          | 561    |             
|Total current liabilities                                  |  |          | 731    |             
|Asset retirement obligations                               |  |          | 198    |             
|Total liabilities                                          |  | 929      |        |             
|                                                           |  |          |        |             
|Total member's equity                                      |  |          | 203    |             
|                                                           |  |          |        |             
|Total liabilities and member's equity                      |  | $1,131   |        |             







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





24


Table of Contents




EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements
of Operations





|                                                    |  |                                 |     |                           |  |      |      |     
|--------------------------------------------------- |  | ------------------------------- | --- | ------------------------- |  | ---- | ---- | ----
|                                                    |  | Three Months Ended June
    30, |     | Six
Months Ended June 30,
|                                                    |  | 2019                            |     | 2018                      |  | 2019 |      | 2018
|                                                    |  |                                 |     |                           |  |      |      |     
|                                                    |  |                                 |     |                           |  |      |      |     
|Operating revenue                                   |  | $                               | 217 |                           |  | $    | 282  |     
|Operating expenses                                  |  |                                 |     |                           |  |      |      |     
|Direct operating expenses                           |  |                                 | 198 |                           |  |      | 231  |     
|General and administrative                          |  |                                 | 73  |                           |  |      | 59   |     
|Depletion, depreciation, amortization and accretion |  |                                 | 31  |                           |  |      | 104  |     
|Total operating expenses                            |  |                                 | 302 |                           |  |      | 394  |     
|Operating loss before income tax expense            |  |                                 | (85 | )                         |  |      | (112 | )   
|Income tax benefit (expense)                        |  |                                 | —   |                           |  |      | —    |     
|Net loss                                            |  | $                               | (85 | )                         |  | $    | (112 | )   



EQUUS ENERGY, LLC

Unaudited Condensed Consolidated Statements
of Cash Flows





|                                                    |  | Six Months Ended June 30,
|--------------------------------------------------- |  | -------------------------
|                                                    |  | 2019                     
|                                                    |  |                          
|Cash flows from operating activities:               |  |                          
|Net loss                                            |  |                          
|Adjustments to reconcile net loss to                |  |                          
|net cash used in operating activities:              |  |                          
|Depletion, depreciation, amortization and accretion |  |                          
|Changes in operating assets and liabilites:         |  |                          
|Accounts receivable                                 |  |                          
|Prepaid expenses and other current assets           |  |                          
|Accounts payable and other                          |  |                          
|Due to affiliate                                    |  |                          
|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          |  | $                        







25


Table of Contents






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



The capitalized
costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated cost of dismantlement
and abandonment, net of salvage value, are amortized on a unit-of-production method over the estimated productive life of the proved
oil and gas reserves. Unevaluated oil and gas properties are excluded from this calculation.  Depletion, depreciation, amortization
and accretion expense for the Company’s oil and gas properties totaled $0.03 million and $0.1 million for the three months
ended June 30, 2019 and 2018, respectively and $0.1 million and $0.2 million for the six months ended June 30, 2019 and June 30,
2018, respectively .



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







| | (a) | As of June 30, 2019, the present value of estimated future net revenue from the projected production of proved oil and gas reserves, calculated at the simple arithmetic average, first-day-of-the-month prices during the twelve-month period before the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) and a discount factor of 10%;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | The cost of investments in unproved and unevaluated properties excluded from the costs being amortized; and                                                                                                                                                                                                                                                                                             
| | (c) | The lower of cost or estimated fair value of unproved properties included in the costs being amortized.                                                                                                                                                                                                                                                                                                 







When it is determined
that oil and gas property costs exceed the ceiling limitation, an impairment charge is recorded to reduce its carrying value to
the ceiling limitation.  The Company did not recognize an impairment loss on its oil and gas properties during the three months
ended June 30, 2019 and 2018, respectively.



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









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



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



Income Taxes—A
limited liability company is not subject to the payment of federal income taxes as components of its income and expenses flow through
directly to the members. However, the Company is subject to certain state income taxes. Texas margin tax applies to legal entities
conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a
tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. Taxable Subsidiaries
may generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect any
such income tax expense on our Statements of Operations.  As of June 30, 2019 and 2018, the Company had no federal income
tax expense.









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





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



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



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



26


Table of Contents






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





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



The information
contained in this section should be read in conjunction with our financial statements and notes thereto appearing elsewhere in
this Quarterly Report and in conjunction with the financial statements and notes thereto in the Fund’s Form 10-K for the
year ended December 31, 2018, as filed with the SEC. In addition, some of the statements in this report constitute forward-looking
statements. The matters discussed in this Quarterly Report, as well as in future oral and written statements by management of Equus,
that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties
which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements.
Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements
by terminology such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “target,” “projects,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of these terms
or other similar words. Important assumptions include our ability to originate new investments, achieve certain margins and levels
of profitability, and the availability of additional capital. In light of these and other uncertainties, the inclusion of a forward-looking
statement in this Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved.
The forward-looking statements contained in this Quarterly Report include statements as to:







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







There are a number
of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking
statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained
in this Quarterly Report, please see the discussion in Part II, “Item 1A. Risk Factors”, and in Part I, “Item
1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. You should not place undue
reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events
as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect
events or circumstances occurring after the date this Quarterly Report is filed with the SEC.





27


Table of Contents






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



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





Plan of Reorganization





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



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





28


Table of Contents






Authorization
to Withdraw BDC Election— On January 21, 2019, holders of a majority of the outstanding common stock of the Fund approved
our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund’s withdrawal of its election to be classified
as a BDC, effective as of a date designated by the Board and our Chief Executive Officer. Although this authorization, which was
given as a consequence of our Plan of Reorganization, expired on July 31, 2019, we expect to receive an additional authorization
from our stockholders in the future. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any
such withdrawal unless and until Equus has entered into a definitive agreement to effect a “Consolidation”. Further,
even if we are again authorized to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of
a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business.





2016 Equity Incentive Plan





On June 13, 2016,
our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”). On January 10, 2017, the
SEC issued an order approving the Incentive Plan and certain awards intended to be made thereunder. The Incentive Plan is intended
to promote the interests of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates to acquire
or increase their equity interest in the Fund and to provide a means whereby they may develop a proprietary interest in the development
and financial success of the Fund, to encourage them to remain with and devote their best efforts to the business of the Fund,
thereby advancing the interests of the Fund and its stockholders. The Incentive Plan is also intended to enhance the ability of
the Fund and its affiliates to attract and retain the services of individuals who are essential for the growth and profitability
of the Fund. The Incentive Plan permits the award of restricted stock as well as common stock purchase options. The maximum number
of shares of common stock that are subject to awards granted under the Incentive Plan is 2,434,728 shares. The term of the Incentive
Plan will expire on June 13, 2026. On March 17, 2017, we granted awards of restricted stock under the Plan to certain of our directors
and executive officers in the aggregate amount of 844,500 shares. The awards are each subject to a vesting requirement over a 3-year
period unless the recipient thereof is terminated or removed from their position as a director or executive officer without “cause”,
or as a result of constructive termination, as such terms are defined in the respective award agreements entered into by each of
the recipients and the Fund. For the three months ended March 31, 2019 and 2018, we recorded compensation expense of $0.08 million
and $0.2 million, respectively, in connection with these awards.





Critical Accounting Policies



See the Fund’s
Critical Accounting Policies from the disclosure set forth in the Fund’s Annual Report on Form 10-K for the year ended December
31, 2018.



Current Market Conditions





The U.S. economy
expanded at an annualized rate of 2.1% during the second quarter of 2019, following growth of 3.1% during the first quarter of
2019 and an increase of 2.9% for all of 2018. The decrease in GDP during the second quarter of 2019 was principally due to decreased
exports, higher inventories, lower fixed residential and nonresidential investment, and increased imports. Despite rising trade
tensions, the Conference Board Economic Forecast projects overall GDP growth in 2019 to be 2.5%, decreasing to 2.0% for 2020. The
U.S. unemployment rate is near a 50-year low, continuing to present a tight labor market for employers. Meanwhile, housing starts
and building permits slowed during 2018 and have continued to trend downward during the first six months of 2019, which has contrasted
with strong growth in existing home sales during the same period. Business investment has continued to be a strong contributor
to GDP growth and is expected to remain largely stable during the remainder of 2019. (Sources: U.S. Dept. of Commerce Bureau
of Economic Analysis, Bureau of Labor Statistics, Conference Board Leading Economic Index).



Merger and acquisition
activity was strong in 2018, with $3.5 trillion in worldwide transactions consummated during the year. Although such activity slowed
during the first quarter of 2019, it accelerated during the second quarter of 2019, resulting in approximately $2 trillion in global
transactions announced during the six month period. In the United States, merger and acquisition activity was up 19% in the first
six months of 2019 as compared to the six months ended June 30, 2018. Market conditions for business transactions during the first
six months of 2019 have continued to steadily improve, continuing a multi-year trend, as larger corporations have had increased
access to credit markets and are still holding significant amounts of cash and have focused on acquisitions as part of future growth
plans. Private equity funds raised almost $46 billion during the first three months of 2019, but did so in an increasingly smaller
number of vehicles, resulting in larger fund sizes overall. Total investments during the quarter were approximately $202 billion,
an increase of 3.6% from the first quarter of 2018. Data for the second quarter of 2019 have not yet been released but larger amounts
of capital have pushed median valuation multiples above 12x during the first six months of 2019, constraining investment yields
(Sources: The New York Times, The Wall Street Journal, PitchBook).





29


Table of Contents






During the six
months ended June 30, 2019, our net asset value increased from $3.22 per share to $3.55 per share, an increase of 10.2%. As of
June 30, 2019, our common stock is trading at a 53.8% discount to our net asset value as compared to 39.1% as of December 31, 2018.







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





Liquidity and Capital Resources





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



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



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



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



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





Results of Operations



Investment Income and Expense





Net investment loss was $0.8 million
and $0.9 million for the three months ended June 30, 2019 and 2018, respectively, and $1.8 million and $1.9 million for the six
months ended June 30, 2019 and June 30, 2018, respectively, due to a decline in professional fees for the periods.



Investment income
was $0.1 million for the three months ended June 30, 2019 and 2018, respectively and $0.1 million and $0.2 million for the six
months ended June 30, 2019 and 2018. The decrease is due to the decline of interest-bearing investments. Total expense was $0.9
million and $1.1 million for the three months ended June 30, 2019 and 201, respectively and $1.9 million and $2.2 million for the
six months ended June 30, 2019. This decrease was mainly due to the decline in compensation expense and professional fees.



30


Table of Contents






Realized
Gains and Losses on Sales of Portfolio Securities





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



During the six months ended June 30,
2018, we realized a gain of $1.0 thousand from the sale of temporary cash investments.



Changes in Unrealized Appreciation/Depreciation
of Portfolio Securities



During the six months ended June 30,
2019, we recorded a net change in unrealized appreciation of $8.8 million, to a net unrealized appreciation of $25.9 million. Such
change in unrealized appreciation resulted primarily from the following changes:







| | (i)   | Increase in the fair value of our shareholding in MVC of $0.7 million due to an increase in the share price of MVC and the receipt of dividend payments in the form of additional shares of MVC during the period;                                                                    
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                       
| | (ii)  | Increase in fair value of our shareholding in PalletOne, Inc. of $4.0 million due to improved operating performance and overall improvement in comparable industry sectors;                                                                                                           
| |       |                                                                                                                                                                                                                                                                                       
| | (iii) | Transfer of unrealized depreciation to realized loss of our holdings in EMDC of $2.8 million in connection with the liquidation and dissolution of EMDC; and                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                       
| | (iv)  | Increase in the fair value of our holdings in Equus Energy, LLC of $1.5 million, principally due to increases in mineral acreage prices proximate to the company’s leasehold interests and an increase in the short- and long-term prices for crude oil during the first half of 2019.







During the six
months ended June 30, 2018, we recorded a net change in unrealized appreciation of $2.9 million, to a net unrealized appreciation
of $16.2 million. Such change in unrealized appreciation resulted primarily from the following changes:







|(i)   | Decrease in the fair value of our shareholding in MVC of
        $0.4 million due to a decrease in the share price of MVC, offset by the receipt of dividend payments in the form of additional
        shares of MVC during the period;                                                        
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  | Increase in fair value of our shareholding in PalletOne, Inc.
        of $2.3 million due to increases in revenue and EBITDA, as well as promising acquisition and growth prospects; and                                                                                                        
|(iii) | Increase in the fair value of our holdings in Equus Energy,
        LLC of $1.0 million, principally due to increases in mineral acreage prices proximate to the company’s leasehold interests
        and a moderate increase in the short- and long-term prices for crude oil and natural gas.





Dividends



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



Portfolio Securities



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



During the six
months ended June 30, 2018, we received dividends in the form of additional shares of $0.1 million relating to our shareholding
in MVC.



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



31


Table of Contents




Subsequent Events



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



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



Item 3. Quantitative and Qualitative Disclosure about
Market Risk





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



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



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





Item 4. Controls and
Procedures





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



Our management,
with the participation of our Fund’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness
of the design and operations of the Fund’s “disclosure controls and procedures” (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of June 30, 2019. Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the Fund’s disclosure controls and procedures were effective at a reasonable assurance level.
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2019, that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.



32


Table of Contents






Part II. Other Information



Item
1. Legal Proceedings





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



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





Item 1A. Risk Factors





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



Readers should
carefully consider these risks and all other information contained in our annual report on Form 10-K for the year ended December
31, 2018, including the Fund’s financial statements and the related notes thereto. Although there have been no changes to
the risk factors facing the Fund since the filing of our Form 10-K, the risks and uncertainties described therein are not the only
ones facing the Fund.



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





33


Table of Contents




Item 6. Exhibits





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







34


Table of Contents






SIGNATURE



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





|                       |  |                                                       
|---------------------- |  | ------------------------------------------------------
|Dated: August 14, 2019 |  | /s/
    John A. Hardy                                 
|                       |  | John A. Hardy
        Chief  Executive
        Officer





















35