Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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, 2025, 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:

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our future operating results;

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our business prospects and the prospects of our existing and prospective portfolio companies;

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the return or impact of current and future investments;

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our contractual arrangements and other relationships with third parties;

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the dependence of our future success on the general economy and its impact on the industries in which we invest;

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the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;

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our expected financings and investments;

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our regulatory structure and tax treatment;

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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;

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the adequacy of our cash resources and working capital;

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the timing of cash flows, if any, from the operations of our portfolio companies;

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the impact of fluctuations in interest rates on our business;

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the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

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our ability to recover unrealized losses;

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market conditions and our ability to access additional capital, if deemed necessary;

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changes in interest rates and overall investment activity;

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developments in the global economy and resulting demand and supply for oil and natural gas;

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natural or man-made disasters and other external events that may disrupt our operations; and

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continued volatility of oil and natural gas prices.

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, 2025 ("10-K"). In particular, you should carefully consider the risks we have described in the 10-K and elsewhere in this Quarterly Report concerning our efforts to transform Equus into an operating company, as well as the coronavirus pandemic and the economic impact of the coronavirus on the Fund and our sole remaining portfolio company, as well as on oil and gas markets generally. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date this Quarterly Report is filed with the SEC.

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

We elected to be treated as a BDC under the 1940 Act. Prior to the fourth quarter of 2024, we qualified as a regulated investment company ("RIC") for federal income tax purposes and, therefore, were not required to pay corporate income taxes on any income or gains that we would have distributed distribute to our stockholders. During the fourth quarter of 2024, we elected to not qualify as a RIC and, consequently, we will be subject to normal corporate rates of taxation of our income and gains and will not be permitted to deduct distributions paid to our stockholders.

From time to time, we may have certain wholly-owned taxable subsidiaries ("Taxable Subsidiaries") each of which may hold one or more portfolio investments listed on our Schedules of Investments. The purpose of these Taxable Subsidiaries is, to the extent we re-qualify as a RIC, 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 requalify as a RIC and, therefore, cause us to incur federal income taxes as described above. 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 obtain (or preserve, as the case may be) RIC status and the resultant tax advantages. We do not consolidate the Taxable Subsidiaries for income tax purposes, with the exception of Texas Margin Tax, which is an entity level tax. The Taxable Subsidiaries may generate income tax expense because of the Taxable Subsidiaries' ownership of the portfolio companies. We reflect any such income tax expense on our Statements of Operations.

Conversion to an Operating Company

Authorization to Withdraw BDC Election. In previous years, holders of a majority of the outstanding common stock of the Fund approved our cessation as a BDC under the 1940 Act and authorized our Board to cause the Fund's withdrawal of its election to be classified as a BDC, effective as of a date designated by the Board and our Chief Executive Officer. Although this authorization has since expired, we may receive a further authorization from our shareholders in the future as a consequence of our expressed intent to transform Equus into an operating company. Notwithstanding any such authorization to withdraw our BDC election, we will not submit any such withdrawal unless and until Equus has entered into a definitive agreement to effect a transformative transaction. Further, even if we are again authorized to withdraw our election as a BDC, we will require a subsequent affirmative vote from holders of a majority of our outstanding voting shares to enter into any such definitive agreement or change the nature of our business. While we are presently evaluating various opportunities that could enable us to accomplish this transformation, we cannot assure you that we will be able to do so within any particular time period or at all, and, although we expect that our shareholders will grant a further authorization, we do not expect to cause the Fund to withdraw its election to be classified as BDC prior to June 30, 2026. Moreover, we cannot assure you that the terms of any such transformative transaction would be acceptable to us.

Reduction in Asset Coverage Ratio

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

2016 Equity Incentive Plan

On June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan ("2016 Plan"). On March 19, 2026, our shareholders approved the adoption of our 2025 Equity Incentive Plan ("2025 Plan", and together with the 2016 Plan, the "Incentive Plans"). The Incentive Plans are 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 Plans are 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 Plans permit 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 2016 Plan is 2,434,728 shares, and the maximum number of shares of common stock that are subject to awards granted under the 2025 Plan are 2,793,338 shares. The term of the 2016 Plan will expire on June 13, 2026 and the term of the 2025 Plan will expire on March 19, 2036. During 2017, we granted awards of restricted stock under the 2016 Plan to certain of our directors and executive officers in the aggregate amount of 844,500 shares. These awards were each subject to a vesting requirement over a 3-year period unless the recipient thereof was terminated or removed from their position as a director or executive officer without "cause", or as a result of constructive termination, as such terms are defined in the respective award agreements entered into by each of the recipients and the Fund. These were fully vested as of September 30, 2020. During 2025, we awarded an additional 380,523 shares of restricted stock under the Incentive Plan to officers of the Fund and to consultants of Morgan. These awards were fully vested at the grant date. No awards have yet been made under the 2025 Plan. 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. In the case of the most recent awards under the Incentive Plan which were fully-vested, we recognized share-based compensation expense on the date of grant, based on the number of restricted shares awarded and our closing trading price per share on such date.

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, 2025.

Current Market Conditions

Impact of Economic and Geopolitical Events on the Oil and Gas Sector. Oil prices experienced a slow and steady decline beginning in the first quarter of 2024 and continuing until the end of 2025. The conflict in Iran, which commenced in February, 2026, has resulted in dramatically increased spot prices, ending the first quarter of 2026 at $101.30 per barrel. Conversely, since the beginning of 2024, natural gas prices steadily increased before declining in the first three quarters of 2025 and recovering at the end of 2025, and thereafter declining throughout the first three months of 2026, ending the quarter at $2.88 per MMBTU. Prior to the onset of hostilities in the Middle East, relative oil and gas price stability had been a significant factor in increased consolidation activity in the Williston Basin region in North Dakota where Morgan E&P, Inc. holds its development rights.

The U.S. Economy. U.S. GDP increased at an annualized rate of 2.0% for the first quarter of 2026 as compared to an increase of 0.5% for the fourth quarter of 2025, below consensus estimates of 2.0% for the quarter. The principal drivers of the increase over the fourth quarter of 2025 were the effect of the government shutdown during the fourth quarter, as well as increases in gross private domestic investment, government spending, and net exports. The Congressional Budget Office has projected full-year GDP growth of 2.2% for 2026, with a slowdown to 1.8% in 2027. (Sources: Federal Reserve Bank of Atlanta; Bureau of Economic Analysis; The Congressional Budget Office).

Employment and Housing. The U.S. added an estimated 115,000 jobs in April 2026 as compared to 178,000 jobs added in March 2026. The unemployment rate in April 2026 held relatively steady at 4.3%, unchanged from March 2026. However, the labor force participation rate decreased to 61.8%, the lowest since October 2021. The Congressional Budget Office now projects the unemployment rate for all of 2026 to decrease to 4.2% before increasing slightly to 4.4% in both 2027 and 2028. Persistently high borrowing costs continue to suppress sales volumes of both new and existing homes. Despite these headwinds, mid-level home prices have continued to rise moderately, outpacing inflation and driven by constrained supply. Conflicting economic signals-such as stable unemployment amid inflation pressures and high energy prices-have kept mortgage rates elevated, with the 30-year fixed rate averaging 6.25% to 6.35% in April 2026. Acquisition and refinancing activity is unlikely to rebound meaningfully until 2027 (Sources: Federal Reserve Bank of Chicago; Bureau of Labor Statistics; Congressional Budget Office).

Consumer Prices. Following a stable 2025, consumer prices began to edge upward in March 2026 and currently stand at 3.8% on an annualized basis, the highest in nearly three years, largely driven by increases in energy prices and housing costs. Consensus estimates for the remainder of 2026 are that inflation will remain above 3.3% for the remainder of the year. (Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; Morgan Stanley Research; Goldman Sachs).

Interest Rates. After cutting interest rates in each of the FOMC's September and October 2025 meetings by 25 basis points each time, the Fed has since determined to hold rates steady, declining to make further cuts during the remainder of 2025 and the first quarter of 2026. The April 2026 FOMC meeting which declined to cut the federal funds rate further, experienced four dissenting votes, the most in more than three decades. The new incoming Federal Reserve Chair is expected to be more aggressive than his predecessor regarding inflation, and consensus estimates are that he will be less inclined toward early rate cuts in 2026. (Sources: The Wall Street Journal; The Federal Reserve Board).

Mergers and Acquisitions. Global merger and acquisition activity strengthened meaningfully through late 2025 and into 2026, with deal volumes and aggregate transaction values continuing to recover from the depressed levels of the prior year. The rebound that began in the third quarter of 2025 - when global deal value surged sharply from 2024 levels and large-cap transactions returned to the market - has carried forward into 2026 as financing conditions stabilized and strategic buyers re-entered the pipeline. Technology, energy, life sciences, and telecommunications remain the most active sectors, with technology-driven transactions, particularly in artificial intelligence, cloud infrastructure, and financial services, continuing to anchor overall deal momentum. Expectations for further consolidation in 2026 remain high, supported by improving credit markets, strong balance-sheet capacity among strategic acquirers, and a growing backlog of private-equity-sponsored transactions preparing to come to market. (Sources: Ernst & Young; Bloomberg).

Private Equity. Private equity activity accelerated in the final months of 2025 and continued into 2026 with a more complex but still resilient profile. In the first quarter of 2026, global PE fundraising totaled $161.6 billion, a 15% increase from $140 billion in the fourth quarter of 2025, though still 6% below the $172.7 billion raised in the first quarter of 2025, reflecting a market that is stabilizing but not yet fully recovered. Deal activity showed a similar pattern, as U.S. private-equity investment reached $228 billion in the first quarter of 2026, supported by several large, high-conviction transactions, even as overall deal volume fell to a five-year low, underscoring a shift toward fewer but larger deals. The first quarter of 2026 witnessed 5,100 transactions valued at an aggregate of $481.6 billion, a sequential decline from the unusually strong second half of 2025 but still well above the stagnant levels of earlier years, suggesting normalization rather than contraction. For the remainder of 2026, analysts expect modest year-over-year growth in PE activity, building on the late-2025 rebound while the fundraising environment continues to recover more slowly. (Sources: Foley & Lardner; Ernst & Young).

During the three months ended March 31, 2026, our net asset value increased from $1.19 per share to $1.50 per share, an increase of 26.1%. As of March 31, 2026, our common stock is trading at a 18.5% discount to our net asset value as compared to 18.5% premium to our net asset value as of December 31, 2025.

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, in the event we seek to requalify as a RIC, we may periodically borrow funds to make qualifying investments to maintain this tax status. In such case, we will borrow such funds by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement will be available in the future. If we seek to requalify as a RIC and are unable to borrow funds to make qualifying investments, Equus would continue to be subject to corporate income tax on its net investment income and realized capital gains, and distributions to stockholders would continue to 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.

On February 7, 2025, the Fund issued a one-year senior convertible promissory note bearing interest at 10% per annum in exchange for $2.0 million ("Equus Note") On February 7, 2026, the Equus Note matured and remains unpaid as of March 31, 2026 and remains unpaid as of March 31, 2026 and continuing until the filing of this Quarterly Report on Form 10-Q.

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

We are evaluating the impact of current market conditions on our portfolio company valuations and their ability to provide current income. We believe we have followed valuation techniques in a reasonably consistent manner; however, we are cognizant of current market conditions that might affect future valuations of portfolio securities.

It is possible the Fund will require loans, capital investment from one or more sources, or will be required to dispose of certain of its investments, to cover a potential cash shortfall. The Fund does not presently have any existing commitments to fund any such shortfall, should it occur, and cannot guarantee that it will be able to execute on such plans in the future.

Results of Operations

Investment Income and Expense

Net investment loss was $0.9 million and $1.1 million for the three months ended March 31, 2026 and 2025,

respectively. The decrease was primarily due to $0.3 million in transaction costs related to the issuance of a convertible promissory note in described in Note 5, offset by an increase in interest expense of $0.1 million.

Total investment income was comparable at $0.3 for the three months ended March 31, 2026 and 2025, respectively.

Compensation expense was comparable at $0.6 million for the three months ended March 31, 2026 and 2025, respectively.

Professional fees were comparable at $0.3 million for the three months ended March 31, 2026 and 2025, respectively.

Transaction costs, relating to the issuance of a convertible promissory note described in Note 5 of the financial statement footnotes above were $0 and $0.3 million for the three months ended March 31, 2026 and 2025, respectively.

Changes in Unrealized Appreciation/Depreciation of Portfolio Securities

During the three months ended March 31, 2026, we recorded an increase of $5.0 million in fair value of our equity holding in Morgan E&P, Inc. ("Morgan"), largely as a result of the substantial increase in oil prices during the quarter, as well as increases in the forward price for oil in future periods.

During the three months ended March 31, 2026, we recorded a decrease of $0.2 million in fair value of our equity holding in CitroTech. ("CITR") due to the reversal of the unrealized appreciation of $0.5 million of the fair value of this investment due to the sale of shares, offset by the increase in unrealized appreciation of $0.3 million due to the increase in the closing share price at March 31, 2026.

During the three months ended March 31, 2025, we recorded an increase of $1.0 million in fair value of our equity holding in Morgan largely due to significant increases in the short and long-term price of crude oil.

On March 3, 2025, we sold Equus Energy to North American Energy Opportunities Corp., a developer of upstream oil and gas assets ("NAEOC"). The consideration provided by NAEOC consisted of $1.25 million in cash and 27,500 shares of preferred stock, redeemable within 6 months of the date of issuance at $100.00 per share based upon fulfillment of certain conditions.

During the three months ended March 31, 2025, we recorded a $0.1 million decrease in fair value in our investment in NAEOC.

During the three months ended March 31,2025, with respect to our holding in Equus Energy, LLC, we recorded a reversal of the unrealized depreciation of $4.1 million of the fair value of this investment as a result of the sale of this investment.

On February 10, 2025, we purchased from CitroTech, Inc., a developer of fire suppression products ("CITR"), a 1-year senior convertible promissory note bearing interest at the rate of 10% per annum, in exchange for $1.5 million in cash ("CITR Note"). Contemporaneously with the purchase of the CITR Note, the Fund also received a common stock purchase warrant ("CITR Warrant") to acquire an aggregate of 1,875,000 shares of CITR common stock at an exercise price of $0.50 per share. The shares of CITR are traded on the NYSE American Stock Exchange and, as of March 31, 2025, the closing trading price of CITRI shares was $1.20. Accordingly, during the three months ended March 31, 2025, we recorded an increase of $3.0 million in fair value of the CITR Note and $1.3 million increase in the fair value of the CITR Warrant.

Change in Unrealized Depreciation on Warrant Liability

During the three months ended March 31, 2026, with respect to the warrants issued, we recognized depreciation of the warrant liability of $0.3 million.

Dividends

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

Subsequent Events

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

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From the period commencing April 1, 2026 until the filing of this report on Form 10-Q, we sold an additional 172,767 shares of CitroTech, Inc.

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On May 13, 2026, we extended the maturity date of the Fund's $10.5 million loan facility to Morgan from May 13, 2026 to May 13, 2028.