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ISSUANCE OF EQUUS SECURITIES
 12 Months Ended
Dec. 31, 2025
ISSUANCE OF EQUUS SECURITIES  
ISSUANCE OF EQUUS SECURITIES

(5) ISSUANCE OF EQUUS SECURITIES

 

Convertible Senior Note

 

On February 7, 2025, the Fund issued a one-year senior convertible promissory note bearing interest at the rate of 10.0% per annum in exchange for $2.0 million in cash (“Equus Note”). The Equus Note is convertible into shares of the Fund’s common stock at a conversion price of $1.50 per share. Pursuant to the terms of the Equus Note, the holder has the right, at its option, at any time to convert the Equus Note into a number of fully-paid and nonassessable shares of Equus common stock determined by dividing (i) the sum of the outstanding principal balance and accrued but unpaid interest of the Equus Note being converted by (ii) the conversion price.

 

The Fund has the right, at any time and from time to time, to prepay the Equus Note in whole or in part without premium or penalty. All interest payments may be made in cash and/or in shares of Equus common stock at the sole option of the Fund. All payments due under the Equus Note are senior to all other indebtedness of the Fund and its subsidiaries. The Fund is required to reserve sufficient authorized but unissued shares of its common stock to satisfy the holder of the Equus Note upon the conversion thereof. Pursuant to the Subscription Agreement entered into by the Fund and the holder of the Equus Note, the Fund is also required to cause certain stockholders of the Fund to approve the issuance of Equus shares in the event of a conversion of the Equus Note and the Warrants described below. Further, the Fund is restricted from incurring or guaranteeing further indebtedness, subject to certain exceptions, without the consent of the holder of the Equus Note. On February 7, 2026, the Equus Note matured and remains unpaid. The Equus Note requires the lender to provide written notice of default but, as of the date of filing of this Annual Report on Form 10-K, no such notice has been provided.

 

The Fund accounts for the Equus Note under ASC 470-20, “Debt—Debt with Conversion and other Options” (“ASC 470”). The Equus Note is assessed under ASC 815 for any conversion features which may require bifurcation. The Fund is not required to account for the debt instrument at fair value, and did not elect to measure debt at fair value in accordance with ASC 815, Derivatives and Hedging, and ASC 825, Financial Instruments. We evaluated the conversion feature of the Equus Note offering for an embedded derivative in accordance with ASC 815, Derivatives and Hedging, and the substantial premium model in accordance with ASC 470, Debt. Based on our assessment, separate accounting for the conversion feature of the Equus Note is not required.

 

The Fund has $2,123,111 and $0 in convertible notes payable as of December 31, 2025, and December 31, 2024, respectively. As of December 31, 2025, the fair value of the convertible note based on level 2 inputs using the lattice model was $2,202,885, with an effective interest rate of 31.53%.

 

The balances as of December 31, 2025 were as follows:

 

 

Carrying amount

Collateral

Issue date

Maturity date

Conversion price

Conversion shares

About Investment, Ltd

$2,123,111a)

(b)

2/7/2025

2/7/2026

$1.50

1,999,999

 

(a) Including accrued interest of $182,222 as of December 31, 2025.

 

(b) Collateral for the Equus Note consists of the Fund’s holdings in CitroTech, Inc. as shown in the Schedule of Investments.

The net carrying amount of the liability and equity components of the Note was as follows:

 

 

 

December 31, 2025

 

Note liability component:

 

 

 

Principal

 

$2,000,000

 

PIK’d interest

 

 

182,222

 

Debt discount (equity component)

 

 

(59,111)

Net carrying amount

 

$2,123,111

 

 

Interest expense recognized related to the convertible note at December 31, 2025 was $182,222.

 

Stock Purchase Warrants

 

Contemporaneously with the issuance of the Equus Note, the Fund also issued two common stock purchase warrants (collectively, the “Warrants”) to acquire an aggregate of 1,999,999 shares of the Fund’s common stock at an exercise price of $1.50 per share.

 

Ordinarily, the Fund would account for warrants issued to purchase shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity. However, since the terms of the Warrants may be modified by the holders thereof in the event of the subsequent issuance of Equus securities with terms deemed by such holders to be more favorable than the Warrants, we have accounted for the Warrants as a liability.

 

The Fund accounts for the Warrants as a liability under fair value Level 3 hierarchy, using a Black-Scholes option pricing model. The significant unobservable assumption is expected volatility. The assumptions used to measure the fair value at inception and as of December 31, 2025, under this model include the following:

 

 

 

At inception

 

 

December 31, 2025

 

Stock price

 

$1.24

 

 

$1.41

 

Exercise price

 

$1.50

 

 

$1.50

 

Expected volatility

 

 

38.0%

 

 

55.8%

Expected term (years)

 

 

5.00

 

 

 

4.11

 

Risk free rate

 

 

4.34%

 

 

3.73%

Dividend yield

 

 

0.0%

 

 

0.0%

 

The net carrying amount of the liability related to the Warrants was as follows:

 

 

 

December 31, 2025

 

Warrant liability component:

 

 

 

Warrant at inception

 

$560,000

 

Unrealized gain or warrant liability

 

 

297,000

 

Net carrying amount of the warrant liability

 

$857,000