MILL CITY VENTURES III, LTD. Our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth below should be read in conjunction with our audited financial statements, and notes thereto, filed together with this Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report may constitute "forward-looking statements"
for purposes of federal securities laws. Our forward-looking statements include,
but are not limited to, statements regarding our or our management team's
expectations, hopes, beliefs, intentions or strategies regarding the future. In
addition, any statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. The words "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may," "might," "plan,"
"possible," "potential," "predict," "project," "should," "would" and similar
expressions may identify forward-looking statements, but the absence of these
words does not mean that a statement is not forward-looking.
16
Table of Contents
The forward-looking statements contained in this report are based on our current
expectations and beliefs concerning future developments and their potential
effects on us. There can be no assurance that future developments affecting us
will be those that we have anticipated. These forward-looking statements involve
a number of risks, uncertainties or other assumptions that may cause actual
results or performance to be materially different from those expressed or
implied by these forward-looking statements. These risks and uncertainties
include, but are not limited to, those factors described in the "Risk Factors"
section of this report and those summarized below:
· our being a company with little operating history;
· our ability to select appropriate specialty finance investment
opportunities;· our expectations around the performance of borrowers in which we invest;
· our success in retaining our officers and directors, or replacing them in
the event we lose their services;
· actual and potential conflicts of interest involving our directors or
management team;· our ability to obtain additional financing, if needed and on acceptable
terms;
· our ability to source quality prospective borrowers for our specialty
finance solutions;
· our ability to consummate transactions due to the uncertainty resulting
from the ongoing COVID-19 pandemic and other unpredictable events such as
terrorist attacks, natural disasters or other significant outbreaks of
infectious diseases;
· the dependence of our success on the general economy and its impact on the
industries in which we invest;
· the ability of our portfolio companies to achieve their objectives;
· our regulatory structure and tax treatment;
· the adequacy of our cash resources and working capital;
· the timing of cash flows, if any, we receive from our investments;
· our overall financial performance and financial condition following this
offering;
· our public securities' potential liquidity and trading price;
· the lack of a market for our securities; and
· the other risks and uncertainties discussed in "Risk Factors" and
elsewhere in this report.
Should one or more of these risks or uncertainties materialize, or should any of
our assumptions prove incorrect, actual results may vary in material respects
from those projected in these forward-looking statements. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as may be required
under applicable securities laws.
Results of Operations
For the Year Ended December 31,
2022 2021
Investment Income:
Interest Income $ 4,199,453 $ 2,656,201
Operating Expenses:
General Operating Expenses 140,993 107,203
Legal and Accounting Expenses 1,592,218 453,440
Executive Management Compensation 541,590 556,432
Insurance Expense 111,110 108,165
Director's Fees 177,073 120,000
Interest Expense 195,893 9,511
Net Investment Gain $ 1,440,576 $ 1,301,450
17
Table of Contents
For the year ended
For the year endedDecember 31, 2021 , we earned$11,480 in interest payments from one equity investment company, an aggregate of$2,099,684 from 26 short-term loans; an additional$25,037 in bank interest on cash balances and note receivable; an aggregate of$467,500 in origination fees relating to our short-term loans; and an additional$52,500 in late fee penalties. As the table above indicates, we incurred operating expenses aggregating$2,758,877 for the year endedDecember 31, 2022 , and$1,354,751 for the year endedDecember 31, 2021 . A summary of the various components of our operating expenses for these periods is set forth below. General Operating Expenses. Our general operating expenses were$140,993 for the year endedDecember 31, 2022 and$107,203 for the year endedDecember 31, 2021 . The increase in the current period is primarily related to fees incurred during 2022 in relation to our line of credit (see Liquidity and Capital Resources below for more information on the "Loan Agreement" comprising our line of credit). Legal and Accounting Expenses. Our legal and accounting expenses were$1,592,218 for the year endedDecember 31, 2022 and$453,440 for the year endedDecember 31, 2021 . The increase in the current period is primarily related to legal, consulting and underwriting fees and costs incurred in connection with our public offering and listing on the Nasdaq Capital Market tier of the Nasdaq
exchange. Director's Fees. Our director's fees were$177,073 for the year ended December
31, 2022 and$120,000 for the year endedDecember 31, 2021 . The increase is due to a one-time director's stock bonus in April, 2022. Interest Expense. Our interest expense was$195,893 for the year endedDecember 31, 2022 and$9,511 for the year endedDecember 31, 2021 . The increase is due to our use of the line of credit arrangement we entered into in 2022 (see Liquidity and Capital Resources below for more information on the "Loan Agreement" comprising our line of credit). For the year endedDecember 31, 2022 our net investment gain was$1,440,576 . For the year endedDecember 31, 2021 , our net investment gain was$1,301,450 . The increased net investment gain during 2022 was primarily the result of higher interest income earned during 2022 from the short-term specialty finance solutions we provided in the form of short-term promissory notes bearing higher rates of interest and return, including related origination fees. Financial Condition For the year endedDecember 31, 2022 , we had an increase in net assets of$4,928,290 . This increase in net assets was primarily due to the capital we raised during ourAugust 2022 public offering and an increase in our interest income earned from the short-term loans we provided. Our net assets increased by$1,773,162 for the year endedDecember 31, 2021 , primarily due to the increase in our interest income earned from the short-term loans we provided. 18 Table of Contents
Liquidity and Capital Resources
Summary cash flow data is as follows:
For the Year Ended
December 31,
2022 2021
Cash flows used by:
Operating activities $ (4,888,302 ) $ (1,886,094 )
Financing activities 4,041,795 (1,618,337 )
Net decrease in cash (846,507 ) (3,504,431 )
Cash, beginning of period 1,936,148 5,440,579
Cash, end of period $ 1,089,641 $ 1,936,148
On January 3, 2022 , we entered into a Loan and Security Agreement (the "Loan
Agreement") with Eastman Investment, Inc. , a Nevada corporation, and Lyle A.
Berman , as trustee of the Lyle A. Berman Revocable Trust . The Loan Agreement
provides us with a $5 million revolving line of credit to use in the ordinary
course of our short-term specialty finance business. Amounts drawn under the
Loan Agreement accrues interest at the per annum rate of 8%, and all our
obligations under the Loan Agreement are secured by a grant of a collateral
security interest in substantially all of our assets. The Loan Agreement,
together with our cash and cash equivalents, together comprise our sources of
liquidity. Management believes that these sources of liquidity, together with
cash obtained through maturing investments earlier made, will be sufficient for
the Company to fund its operations through the entirety of fiscal 2023.
Accordingly, at present we have no definitive plans to obtain other sourcesof liquidity through borrowing.
OnFebruary 11, 2022 , we filed a registration statement on Form S-1 seeking to register an offering of five-year common stock warrants that we intended to distribute to our shareholders as a dividend, and up to 2,697,603 shares of our common stock purchasable upon the exercise of those warrants. The warrants were contemplated to be exercisable at a price of$9.00 per share of common stock (adjusted to account for theAugust 2022 reverse stock split we effected on a 1-for-2.25 ratio). We recently determined to abandon this contemplated offering, and expect to file a withdrawal of this registration statement with the Commission soon after the filing of this report. Capital Expenditures
We did not have any material commitments for capital expenditures in fiscal 2022 and we do not anticipate any such capital expenditures for fiscal 2023.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, nor are we a party to any
contract or other obligation not included on its balance sheet that has, or is
reasonably likely to have, a current or future effect on our financial
condition.
Critical Accounting Policies
Critical accounting policies are policies that are both most important to the
portrayal of the Company's financial condition and results, and that require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Our critical accounting policies relate to investment valuation and
interest and dividend income as an investment company.
19
Table of Contents
Investment Valuation
Investment transactions are recorded on the trade date. Realized gains or losses
are measured by the difference between the net proceeds from the repayment or
sale and the amortized cost basis of the investment without regard to unrealized
gains or losses previously recognized, and include investments charged off
during the period, net of recoveries. Unrealized gains or losses primarily
reflect the change in investment values, including the reversal of previously
recorded unrealized gains or losses when gains or losses are realized.
Investments for which market quotations are readily available are typically
valued at such market quotations. In order to validate market quotations, we
look at a number of factors to determine if the quotations are representative of
fair value, including the source and nature of the quotations. Debt and equity
securities that are not publicly traded or whose market prices are not readily
available are valued at fair value as determined in good faith by our Board of
Directors, based on, among other things, the input of our executive management,
the Audit Committee of our Board of Directors and any independent third party
valuation expert that may be engaged by management to assist in the valuation of
our portfolio investments. Valuation determinations are in all cases made in
conformity with the written valuation policies and procedures respecting the
valuation of company investments.
Use of Estimates
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America , or GAAP. The application of
GAAP requires that we make estimates that affect our reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of investment income and
expenses during the reporting period. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. We evaluate our estimates and assumptions on an ongoing
basis. Our actual results may differ significantly from these estimates.
20
Table of Contents
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item
Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID:
F-2
542)
Balance Sheets -December 31, 2022 andDecember 31, 2021
F-4
Statements of Operations - Years ended
F-5
31, 2021
Statements of Shareholders' Equity - Years ended
F-6
Statements of Cash Flows - Years ended
F-7
31, 2021
Investment Schedules -December 31, 2022 andDecember 31, 2021 F-8 Notes to Financial Statements F-10 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders' of
Opinion on the Financial Statements
We have audited the accompanying balance sheets ofMill City Ventures III, Ltd. (the Company) as ofDecember 31, 2022 and 2021, including the investment schedules and the related statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period endedDecember 31, 2022 , and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter - Investment Valuation
As explained in Note 7 to the financial statements, the accompanying financial statements include investments valued at$16,708,432 and$13,662,500 for 2022 and 2021, respectively, whose fair values have been estimated by management in absence of readily determinable fair values. Such estimates are based on financial and other information provided by management in absence of readily determinable fair values. Such estimates are based on financial and other information provided by management of its portfolio companies and pertinent market and industry data. These investments are valued in accordance with FASB ASC 820, "Fair Value Measurement", which requires the Company to assume that the portfolio investments are sold in a principal market to market participants. The Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to these valuation techniques are observable or unobservable. The investments are valued based on unobservable inputs as ofDecember 31, 2022 and 2021 of$16,708,432 and$13,662,500 , respectively. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate significantly over short periods of time. These determinations of fair value could differ materially from the values that would have been utilized had a ready market for these investments existed. Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2)
involved our especially, subjective, or complex judgements. The communication of
critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters
or on the accounts or disclosures to which they relate.
Valuation of investments which utilize significant unobservable inputs
Description of At December 31, 2022 , the balances of the Company's
the Matter investments, at fair value, categorized as Level 3 within the
fair value hierarchy totaled $16,708,432 . The fair value of
these investments is determined by management using the
valuation techniques and significant unobservable inputs
described in Notes 6 and 7 to the financial statements.
Auditing the fair value of the Company's investments
categorized as Level 3 within the fair value hierarchy was
complex and involved a high degree of auditor subjectivity due
to the estimation uncertainty resulting from the unobservable
nature of the inputs used in the valuations and the limited
number of comparable market transactions for the same or
similar investments.
How We Addressed We obtained an understanding and evaluated the design of
the Matter in Our controls over the Company's valuation process, including
Audit management's assessment of the significant inputs and estimates
used in the fair value measurements.
We performed the following procedures, among others, for the
Company's Level 3 investments:
· We evaluated the valuation techniques used by the Company
and considered the consistency in application of the
valuation techniques to each subject investment and
investment class. We also consulted with our valuation
department to ascertain that the Company's valuation method
was widely accepted.
· We involved senior, more experienced audit team members to
perform audit procedures.
· We evaluated the reasonableness of the significant
unobservable inputs by comparing the inputs used by the
Company to third-party sources, if available, such as
market indexes or other market data.
· We considered other information obtained during the audit
that corroborated or contradicted the Company's inputs or
fair value measurements.
· For investments sold during the year, we compared the
transaction price to the Company's fair value estimate to
assess the reasonableness of management's fair value
estimates.
[[Image Removed: mcvt_10kimg3.jpg]]
We have served as the Company's auditor since 2019
Minneapolis, Minnesota April 17, 2023 F-3 Table of Contents Mill City Ventures III, Ltd. Balance Sheets December 31, December 31, 2022 2021 ASSETS Investments, at fair value:$ 16,708,432 $
14,098,675
Non-control/non-affiliate investments (cost:$17,359,804 and$13,933,057 respectively) Cash 1,089,641
1,936,148
Note receivable, related party 250,000
250,000
Prepaid expenses 49,219
83,674
Interest and dividend receivables 250,879
324,350
Right-of-use operating lease asset 16,398
4,984
Deferred taxes 201,000 -
Total Assets $ 18,565,569 $ 16,697,831
LIABILITIES
Accounts payable $ 136,514 $ 64,028
Dividend payable - 100Payable for purchase of investments -
1,900,000 Operating lease liability 16,562 5,654 Deferred interest income 70,154 - Accrued income tax - 1,269,000 Deferred taxes - 45,000 Total Liabilities 223,230 3,283,782
Commitments and Contingencies
SHAREHOLDERS EQUITY (NET ASSETS)
Common stock, par value $0.001 per share
(111,111,111 authorized; 6,185,255 and 4,795,739
outstanding) 12,215 10,790
Additional paid-in capital 15,043,291 10,694,163
Accumulated deficit (1,159,665 ) (1,159,665 )Accumulated undistributed investment loss (615,960 ) (1,877,667 ) Accumulated undistributed net realized gains on investment transactions 5,713,829
5,580,810
Net unrealized appreciation (depreciation) in value of investments (651,371 )
165,618
Total Shareholders' Equity (Net Assets) 18,342,339
13,414,049
Total Liabilities and Shareholders' Equity$ 18,565,569 $
16,697,831
Net Asset Value Per Common Share$ 2.97 $
2.80
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
Mill City Ventures III, Ltd.
Statements of Operations
Year Ended
December 31, December 31,
2022 2021
Investment Income
Interest income $ 4,199,453 $ 2,656,201
Total Investment Income 4,199,453 2,656,201
Operating Expenses
Professional fees 1,592,218 453,440
Payroll 541,590 556,432
Insurance 111,110 108,165
Occupancy 73,146 66,459
Director's fees 177,073 120,000
Interest expense 195,893 9,511Other general and administrative 67,847
40,744
Total Operating Expenses 2,758,877 1,354,751
Net Investment Gain 1,440,576 1,301,450Realized and Unrealized Gain (Loss) on Investments Net realized gain on investments
133,019 4,118,001
Net change in unrealized depreciation on investments (816,989 ) (1,533,703 ) Net Realized and Unrealized Gain (Loss) on Investments (683,970 )
2,584,298
Net Increase in Net Assets Resulting from Operations Before Taxes 756,606 3,885,748 Provision For Income Taxes 178,869 1,054,698 Net Increase in Net Assets Resulting from Operations$ 577,737 $
2,831,050
Net Increase in Net Assets Resulting from Operations per share: Basic and diluted $ 0.11 $
0.59
Weighted-average number of common shares outstanding - basic and diluted 5,333,028
4,795,242
The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
Mill City Ventures III, Ltd.
Statements of Shareholders' Equity
For the years ended December 31, 2022 and 2021
Accumulated
Undistributed Net Net Unrealized
Year Ended Additional Accumulated Realized Gain on Appreciation Total
December 31, Paid In Accumulated Undistributed Net Investments (Depreciation) in Shareholders' 2022
Common Shares Par Value Capital Deficit Investment Loss Transactions value of Investments Equity
Balance as of
December 31,
2021 4,795,739 $ 10,790 $ 10,694,163 $ (1,159,665 ) $ (1,877,667 ) $ 5,580,810 $ 165,618 $ 13,414,049
Common shares
issued in
public
offering net
of
underwriting
costs and
warrants 1,250,000 1,250 3,839,372 - - 3,840,622
Warramts
issued to
underwriter 201,173 201,173
Common shares
issued in
reverse stock
split
rounding 735 - - -
Common shares
issued in
stock-based
compensation 61,004 97 149,218 - - 149,315
Common shares
issued in
consideration
for expense
payment 77,777 78 159,365 - - 159,443
Undistributed
net
investment
gain - - - 1,261,707 - - 1,261,707
Undistributed
net realized
gain on
investment
transactions - - - - 133,019 - 133,019
Depreciation
in value of
investments - - - - - (816,989 ) (816,989 )
Balance as of
December 31,
2022 6,185,255 $ 12,215 $ 15,043,291 $ (1,159,665 ) $ (615,960 ) $ 5,713,829 $ (651,371 ) $ 18,342,339
Accumulated
Undistributed Net Net Unrealized
Year Ended Additional Accumulated Realized Gain on Appreciation Total
December 31, Paid In Accumulated Undistributed Net Investments (Depreciation) in Shareholders' 2021
Common Shares Par Value Capital Deficit Investment Loss Transactions value of Investments Equity
Balance as of
December 31,
2020 4,793,739 $ 10,786 $ 10,673,014 $ (1,159,665 ) $ (2,124,419 ) $ 2,541,850 $ 1,699,321 $ 11,640,887
Dividend
Declared - - - - (1,079,041 ) - (1,079,041 )
Common shares
issued in
consideration
for expense
payment 2,000 4 21,149 - - 21,153
Undistributed
net
investment
gain - - - 246,752 - - 246,752
Undistributed
net realized
gain on
investment
transactions - - - - 4,118,001 - 4,118,001
Depreciation
in value of
investments - - - - - (1,533,703 ) (1,533,703 )
The accompanying notes are an integral part of these financial statements.
F-6
Table of Contents
Mill City Ventures III, Ltd.
Statements of Cash Flows
Year Ended
December 31, December 31,
2022 2021
Cash flows from operating activities:
Net increase in net assets resulting from
operations $ 577,737 $ 2,831,050
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: Net change in unrealized depreciation on investments 816,989
1,533,703
Net realized gain on investments (133,019 ) (4,118,001 ) Purchases of investments (23,558,458 ) (27,029,292 ) Proceeds from sales of investments 20,264,731
22,188,562
Deferred income taxes (246,000 ) (213,000 ) Stock-based compensation to employees and vendors 308,758
15,403
Changes in operating assets and liabilities: Prepaid expenses and other assets 23,041 (21,475 ) Interest and dividends receivable 73,471 (258,439 ) Receivable for investment sales -
19,313
Payable for investment purchase (1,900,000 )
1,900,000
Accounts payable and other liabilities 83,294
10,804
Deferred interest income 70,154 -
Accrued income taxes (1,269,000 ) 1,255,278Net cash used in operating activities (4,888,302 ) (1,886,094 ) Cash flows from financing activities: Proceeds from public offering, net of underwriting discounts and offering costs 4,041,795 - Proceeds from line of credit 9,793,800 - Repayments on line of credit (9,793,800 ) -
Payments for common stock dividend - (1,618,337 ) Net cash provided (used) by financing activities 4,041,795
(1,618,337 ) Net decrease in cash (846,507 ) (3,504,431 ) Cash, beginning of period 1,936,148 5,440,579 Cash, end of period$ 1,089,641 $ 1,936,148 Supplemental disclosure of cash flow information: Cash paid for income taxes$ 428,948 $
32,398
Cash paid for interest$ 195,894 $
9,511
Non-cash financing activities: Common shares issued as consideration for investment $ -$ 5,750 The accompanying notes are an integral part of these financial statements. F-7 Table of Contents Mill City Ventures III, Ltd. Investment Schedule As of December 31, 2022 Percentage of Investment / Industry Cost Fair Value Net Assets Short-Term Non-banking Loans Business Services - 18% secured loans Liberated Syndication Inc.$ 2,250,000 $ 2,255,625 12.30 % Business Services - 15% secured loans Mustang Litigation Funding 5,000,000 4,975,955 27.13 % Consumer - 15% secured loans 400,000 398,635 2.17 % Intelligent Mapping, LLC 2,900,000 2,873,893 15.67 % Financial - 33% secured loans Benton Financial, LLC 2,479,125 2,478,030 13.51 % Financial - 12% secured loans 500,000 345,421 1.88 % Information Technology - 15% convertible note 212,500 213,656 1.16 %
Real Estate - 15% secured loans 745,000 746,354 4.07 % Real Estate - 12% secured loans Alatus Development Corp 1,000,000 998,363 5.44 % Total Short-Term Non-Banking Loans 15,486,625 15,285,932
83.33 %
Preferred Stock
Consumer
Wisdom Gaming, Inc 900,000 900,000 4.91 %
Information Technology 150,000 300,000 1.64 %
Total Preferred Stock 1,050,000 1,200,000 6.55 %
Warrants
Healthcare 679 - 0.00 %
Other Equity
Consumer 212,500 212,500 1.16 %
Financial 610,000 10,000 0.05 %
Total Other Equity 822,500 222,500 1.21 %
Total Investments $ 17,359,804 $ 16,708,432 91.09 %
Total Cash 1,089,641 1,089,641 5.94 %
Total Investments and Cash $ 18,449,445 $ 17,798,073 97.03 %
The accompanying notes are an integral part of these financial statements.
F-8
Table of Contents
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 2021
Percentage of
Investment / Industry Cost Fair Value Net Assets
Short-Term Non-banking Loans
Consumer - 15% secured loans
AirDog Supplies, Inc. $ 1,250,000 $ 1,250,000 9.32 %
Financial - 52% secured loans 500,000 500,000 3.73 %
Financial - 12% secured loans 500,000 500,000 3.73 %
Litigation Financing - 23% secured
loans
The Cross Law Firm, LLC 1,805,750 1,800,000 13.42 %
Real Estate - 15% secured loans 700,000 700,000 5.22 %
Tailwinds, LLC 3,000,000 3,000,000 22.36 %
Real Estate - 12% secured loans
Alatus Development, LLC 3,900,000 3,900,000 29.07 %
Total Short-Term Non-Banking Loans 11,655,750 11,650,000
86.85 %
Common Stock
Financial Services 414,128 436,175 3.25 %
Preferred Stock
Consumer
Wisdom Gaming, Inc 900,000 900,000 6.71 %
Information Technology 150,000 300,000 2.24 %
Total Preferred Stock 1,050,000 1,200,000 8.95 %
Warrants
Healthcare 679 - 0.00 %
Other Equity
Consumer 212,500 212,500 1.58 %
Financial 600,000 600,000 4.47 %
Total Other Equity 812,500 812,500 6.05 %
Total Investments $ 13,933,057 $ 14,098,675 105.10 %
Total Cash 1,936,148 1,936,148 14.43 %
Total Investments and Cash $ 15,869,205 $ 16,034,823 119.53 %
The accompanying notes are an integral part of these financial statements.
F-9
Table of Contents
NOTE 1 - ORGANIZATION
In this report, we generally refer to Mill City Ventures III, Ltd. in the first
person "we." On occasion, we refer to our company in the third person as "Mill
City Ventures " or the "Company." The Company follows accounting and reporting
guidance in Accounting Standards ("ASC") 946.
We were incorporated in Minnesota in January 2006 . Until December 13, 2012 , we
were a development-stage company that focused on promoting and placing a
proprietary poker game online and into casinos and entertainment facilities
nationwide. In 2013, we elected to become a business development company ("BDC")
under the Investment Company Act of 1940 (the "1940 Act"). We operated as a BDC
until we withdrew our BDC election at the end of December 2019 . Since that time,
we have remained a public reporting company filing periodic reports with the
SEC . We engage in the business of providing short-term specialty finance
solutions, typically in the form of short-term loans, primarily to small
businesses, both private and public, and high-net-worth individuals. To avoid
regulation under the 1940 Act, we generally seek to structure our investments so
they do not constitute "securities" for purposes of federal securities laws, and
we monitor our investments as a whole to ensure that no more than 40% of our
total assets consist of "investment securities" as defined under the 1940 Act.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the "Valuation of portfolio investments" caption below, and "Note 7 - Fair Value of Financial Instruments" below. The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946.
The presentation of certain items in the financial statements for the year endedDecember 31, 2021 , has been changed to conform to the classifications used in 2022. These reclassifications had no effect on shareholders' equity or net increase in net assets as previously recorded. Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess ofFDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits. Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), issued by theFinancial Accounting Standards Board ("FASB"), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by the our Board of Directors based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures. Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the relative observability of inputs used in the valuation. The three levels are defined as follows:
· Level 1: Observable inputs based on quoted prices (unadjusted) in active
markets for identical assets or liabilities.
· Level 2: Observable inputs based on quoted prices for similar assets and
liabilities in active markets, or quoted prices for identical assets and
liabilities in inactive markets.
· Level 3: Unobservable inputs that reflect an entity's own assumptions
about what inputs a market participant would use in pricing the asset or
liability based on the best information available in the circumstances.
F-10
Table of Contents
Our valuation policy and procedures: Under our valuation policies and
procedures, we evaluate the source of inputs, including any markets in which our
investments are trading, and then apply the resulting information in determining
fair value. For our Level 1 investment assets, our valuation policy generally
requires us to use a market approach, considering the last quoted closing price
of a security we own that is listed on a securities exchange, and in a case
where a security we own is listed on an over-the-counter market, to average the
last quoted bid and ask price on the most active market on which the security is
quoted. In the case of traded debt securities the prices for which are not
readily available, we may value those securities using a discounted cash
flows approach, at their weighted-average yield to maturity.
The estimated fair value of our Level 3 investment assets is determined on a
quarterly basis by our Board of Directors. In general, we value our Level 3
equity investments at cost unless circumstances warrant a different approach.
Examples of these circumstances includes a situation in which a portfolio
company has engaged in a subsequent financing of more than a de minimis size
involving sophisticated investors (in which case we may use the price involved
in that financing as a determinative input absent other known factors), or when
a portfolio company is engaged in the process of a transaction that we determine
is reasonably likely to occur (in which case we may use the price involved in
the pending transaction as a determinative input absent other known factors).
Other facts and circumstances that may serve as an input supporting a change in
the valuation of our Level 3 equity investments include (i) a third-party
valuation conducted by an independent and qualified professional, (ii) changes
in the performance of long-term financial prospects of the portfolio company,
(iii) a subsequent financing that changes the distribution rights associated
with the equity security we hold, or (iv) sale transactions involving comparable
companies, but only if further supported by a third-party valuation conducted by
an independent and qualified professional.
When valuing preferred equity investments, we generally view intrinsic value as
a key input. Intrinsic value means the value of any conversion feature (if the
preferred investment is convertible) or the value of any liquidation or other
preference. Discounts to intrinsic value may be applied in cases where the
issuer's financial condition is impaired or, in cases where intrinsic value
relating to a conversion is determined to be a key input, to account for resale
restrictions applicable to the securities issuable upon conversion.
When valuing warrants, our valuation policy and procedures indicate that value
will generally be the difference between the closing price of the underlying
equity security and the exercise price, after applying an appropriate discount
for restriction, if applicable, in situations where the underlying security is
marketable. If the underlying security is not marketable, then intrinsic value
will be considered consistent with the principles described above. Generally,
"out-of-the-money" warrants will be valued at cost or zero.
For non-traded (Level 3) debt instruments with a residual maturity less than or
equal to 60 days, we will generally value such instruments based on a discounted
cash flows approach, considering the straight-line amortized face value of the
debt unless justification for impairment exists. For level 3 non-banking loans
with a maturity in excess of 60 days, fair value is determined based on the
initial purchase price and adjusted as necessary to reflect any changes in the
financial strength of the creditor and changes in interest rates in the
high-yield credit markets.
On a quarterly basis, our management provides members of our Board of Directors
with recommendations, if any, to change any existing valuations of our portfolio
investments or hierarchy levels for purposes of determining the fair value of
such investments based upon the foregoing. In such a case, the Board of
Directors would then discuss these materials and, consistent with the policies
and approaches outlined above, makes final determinations respecting the
valuation and hierarchy levels of our portfolio investments.
We made no changes to our valuation policy and procedures during the reporting period.
Income taxes: We account for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities using enacted
tax rates in effect for the tax year in which the differences are expected to
reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income for the period that includes the enactment
date.
F-11
Table of Contents
We record net deferred tax assets to the extent we believe these assets will
more likely than not be realized. In making such determination, we consider all
available evidence, including future reversals of existing taxable temporary
differences, projected future taxable income, tax planning strategies, and
recent financial operations. In the event we were to determine we would not be
able to realize our deferred income tax assets, we would make an adjustment to
the valuation allowance, which would reduce the provision for income taxes.
We file income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. The Company does not believe there will be any material changes
in its unrecognized tax positions over the next 12 months. Our evaluation was
performed for the tax years ended December 31, 2019 through 2021, which are the
tax years that remain subject to examination by the tax jurisdictions as of
December 31, 2022 .
Revenue recognition: Realized gains or losses on the sale of investments are calculated using the specific investment method.
Interest income, adjusted for amortization of premiums and accretion of
discounts, is recorded on an accrual basis. Discounts from and premiums to par
value on securities purchased are accreted or amortized, as applicable, into
interest income over the life of the related security using the effective-yield
method. The amortized cost of investments represents the original cost, adjusted
for the accretion of discounts and amortization of premiums, if any. Loans are
generally placed on non-accrual status when principal or interest payments are
past due 30 days or more, or when there is reasonable doubt that principal or
interest will be collected in full. Loan origination fees are recognized when
loans are issued. Accrued and unpaid interest is generally reversed when a loan
is placed on non-accrual status. Interest payments received on non-accrual loans
may be recognized as income or applied to principal depending upon management's
judgment regarding collectability. Non-accrual loans are restored to accrual
status when past-due principal and interest is paid and, in management's
judgment, are likely to remain current. We may make exceptions to the policy
described above if a loan has sufficient collateral value and is in the process
of collection.
Dividend income on preferred equity securities is recorded as dividend income on
an accrual basis to the extent that such amounts are payable by the portfolio
company and are expected to be collected. Dividend income on common equity
securities is recorded on the record date for private portfolio companies or on
the ex-dividend date for publicly traded portfolio companies.
Certain investments may have contractual payment-in-kind ("PIK") interest or
dividends. PIK represents accrued interest or accumulated dividends that are
added to the loan principal or stated value of the investment on the respective
interest- or dividend-payment dates rather than being paid in cash, and
generally becomes due at maturity or upon being repurchased by the issuer. PIK
interest or dividends is recorded as interest or dividend income, as applicable.
If at any point we believe that PIK interest or dividends is not expected be
realized, the PIK-generating investment will be placed on non-accrual status.
Accrued PIK interest or dividends are generally reversed through interest or
dividend income, respectively, when an investment in placed on non-accrual
status.
Allocation of net gains and losses: All income, gains, losses, deductions and
credits for any investment are allocated in a manner proportionate to the shares
owned.
Management and service fees: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.
NOTE 3 - NET GAIN PER COMMON SHARE
Basic net gain (loss) per common share is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net
gain
per common share follows:
For the Year Ended
December 31,
2022 2021
Numerator: Net increase in net assets resulting from
operations $ 577,737
5,333,028 4,795,242
Basic and diluted net gain per common share$ 0.11
$ 0.59 F-12 Table of Contents AtDecember 31, 2022 and 2021, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares other than conditional option grants (for an aggregate of 870,000 shares of common stock) that were, atDecember 31, 2022 , unexercisable and subject to voiding in the absence of shareholder approval of the related 2022 Stock Incentive Plan. The Company's shareholders subsequently approved the plan onJanuary 20, 2023 at a special meeting of shareholders called for that purpose. NOTE 4 - LEASES We are subject to two non-cancelable operating leases for office space expiringApril 2, 2023 . These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew. Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as ofDecember 31, 2022 andDecember 31, 2021 was 4.5% and the weighted-average remaining lease term is one year.
Rent expense for office facilities for the year ended
The components of our operating leases were as follows for the years endedDecember 31 : 2022 2021 Operating lease costs$ 21,291 $ 19,116 Variable lease cost 18,325 17,613 Short-term lease cost 33,530 29,730 Total$ 73,146 $ 66,459 Supplemental balance sheet information consisted of the following atDecember 31 : Operating Lease 2022 2021 Right-of-use assets$ 16,398 $ 4,984
Operating Lease Liability
$ - $ -
Maturity analysis under lease agreements consisted of the following as of
December 31 :
2022 2021
2022 $ - $ 5,698
2023 16,675 -
Total lease payments 16,675 5,698
Less: Present value discount (113 ) (44 )
Present value of lease liabilities
Supplemental cash flow information related to leases for the years ended
2022 2021
Operating cash outflow from operating leases
F-13
Table of Contents
NOTE 5-SHAREHOLDERS' EQUITY
At December 31, 2022 a total of 6,185,255 shares of common stock were issued and
outstanding. At December 31, 2021 a total of 4,795,739 shares of common stock
were issued and outstanding.
On August 9, 2022 , the Company effected a stock combination (reverse stock
split) of its common shares on a 1-for-2.25 basis such that every 2.25 shares of
common stock issued and outstanding on that date were combined into one share of
common stock. Any fractional share resulting from the reverse stock split was
rounded up to the nearest whole share. The reverse stock split was approved by
the Company's Board of Directors in accordance with Minnesota law and resulted
in a proportionate reduction in the number of authorized shares of capital stock
available for issuance under the Company's articles of incorporation. This
reduction was affected pursuant to the filing of articles of amendment with the
Minnesota Secretary of State indicating that the Company, on a
post-reverse-split basis, is authorized to issue up to 111,111,111 shares of
capital stock.
On August 11, 2022 , the Company completed its public offer and sale of 1,250,000
common shares pursuant to a registration statement filed with the SEC and
declared effective on August 9, 2022 . Shares were sold by the Company at $4.00
per share, resulting in gross proceeds of $5,000,000 . As part of the registered
public offering, the Company granted the underwriters a 45-day option to
purchase up to 187,500 additional common shares at the offering price, less
underwriting discounts which option was not exercised. In connection with the
offering, the Company issued the underwriter a five-year warrant to purchase up
to 75,000 common shares at the per-share price of $5.00 . Net proceeds to the
Company after the payment of underwriting discounts, underwriting expenses, and
the Company's own offering-related expenses were approximately $4,041,000 .
In connection with the public offering, the Company issued a five-year warrant
to the underwriter. The warrant allows the underwriter to purchase up to 75,000
common shares at $5.00 per share. This warrant is exercisable after 180 days,
and expires on August 8, 2027 . This warrant is equity-classified and the fair
value was $201,173 on the offering date.
During 2022, there were 1,389,516 shares issued by the Company.
NOTE 6 - INVESTMENTS The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as ofDecember 31, 2022 (together with the corresponding percentage of total portfolio investments): As of December 31, 2022 Investments at Percentage of Investments at Percentage of Amortized Cost Amortized Cost Fair Value Fair Value Short-term Non-banking Loans$ 15,486,625 89.2 %$ 15,285,932 91.5 % Preferred Stock 1,050,000 6.1 1,200,000 7.2 Warrants 679 - - - Other Equity 822,500 4.7 222,500 1.3 Total$ 17,359,804 100.0 %$ 16,708,432 100.0 % The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as ofDecember 31, 2021 (together with the corresponding percentage of total portfolio investments): As of December 31, 2021 Investments at Percentage of Investments at Percentage of Amortized Cost Amortized Cost Fair Value Fair Value Short-term Non-banking Loans$ 11,655,750 83.7 %$ 11,650,000 82.6 % Preferred Stock 1,050,000 7.5 1,200,000 8.5 Common Stock 414,128 3.0 436,175 3.1 Warrants 679 - - - Other Equity 812,500 5.8 812,500 5.8 Total$ 13,933,057 100.0 %$ 14,098,675 100.0 % F-14 Table of Contents
The following table shows the composition of our investment portfolio by
industry grouping, based on fair value as of
As of December 31, 2022
Investments at Percentage of
Fair Value Fair Value
Business Services $ 7,231,580 43.3 %
Consumer 4,385,028 26.2
Financial 2,833,451 17.0
Information Technology 513,656 3.1
Real Estate 1,744,717 10.4
Total $ 16,708,432 100.0 %
The following table shows the composition of our investment portfolio by
industry grouping, based on fair value as of
As of December 31, 2021
Investments at Percentage of
Fair Value Fair Value
Consumer $ 2,362,500 16.8 %
Financial 3,836,175 27.2
Information Technology 300,000 2.1
Real Estate 7,600,000 53.9
Total $ 14,098,675 100.0 %
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as ofDecember 31, 2022 and 2021 may differ materially from values that would have been used had a readily available market for the securities existed. The following table presents the fair value measurements of our portfolio investments by major class, as ofDecember 31, 2022 , according to the fair value hierarchy: As of December 31, 2022 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ - $ -$ 15,285,932 $ 15,285,932 Preferred Stock - - 1,200,000 1,200,000 Warrants - - - - Other Equity - - 222,500 222,500 Total $ - $ -$ 16,708,432 $ 16,708,432 F-15 Table of Contents The following table presents the fair value measurements of our portfolio investments by major class, as ofDecember 31, 2021 , according to the fair value hierarchy: As of December 31, 2021 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ - $ -$ 11,650,000 $ 11,650,000 Preferred Stock - - 1,200,000 1,200,000 Common Stock 436,175 - - 436,175 Warrants - - - - Other Equity - - 812,500 812,500 Total$ 436,175 $ -$ 13,662,500 $ 14,098,675 The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year endedDecember 31, 2022 : For the year ended December 31, 2022 ST Non-banking Loans Preferred Stock Common Stock Warrants Other Equity Balance as of January 1, 2022$ 11,650,000 $ 1,200,000 $ -
$ -$ 812,500 Net change in unrealized depreciation (200,693 ) - - - (600,000 ) Purchases and other adjustments
to cost 23,548,458 - - - 10,000 Sales and redemptions (19,711,833 ) - - - - Balance as of December 31, 2022$ 15,285,932 $ 1,200,000 $ - $ -$ 222,500 The net change in unrealized depreciation for the year endedDecember 31, 2022 attributable to Level 3 portfolio investments still held as ofDecember 31, 2022 is$651,371 , and is included in net change in unrealized depreciation on investments on the statement of operations. The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year endedDecember 31, 2021 : For the year ended December 31, 2021 ST Non-banking Loans Preferred Stock Common Stock Warrants Other Equity Balance as of January 1, 2021$ 2,789,000 $ 300,000 $ -
$ -$ 278,897 Net change in unrealized appreciation - - - - - Purchases and other adjustments
to cost 24,765,333 900,000 - - 812,500 Sales and redemptions (15,904,333 ) - - - (278,897 ) Balance as of December 31, 2021$ 11,650,000 $ 1,200,000 $ - $ -$ 812,500 The net change in unrealized appreciation for the year endedDecember 31, 2021 attributable to Level 3 portfolio investments still held as ofDecember 31, 2021 is$0 , and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations. F-16 Table of Contents
The following table lists our Level 3 investments held as of
Valuation Unobservable
Security Type 12/31/22 FMV Technique Inputs Range
ST Non-banking Loans determining
private company
interest rate
discounted cash based on changes 12-33 %
flow in market rates
of instruments
with comparable
$ 15,285,932 creditworthiness
Other Equity last secured
funding known by
222,500 company
Preferred Stock last funding economic changes
secured by since last
1,200,000 company funding
$ 16,708,432
The following table presents a reconciliation of the beginning and ending fair
value balances for our Level 3 portfolio investment assets for the year ended
December 31, 2021 :
Valuation Unobservable
Security Type 12/31/21 FMV Technique Inputs Range
ST Non-banking Loans discounted cash determining
flow private company 12-44 %
$ 11,650,000 credit rating
Other Equity last secured economic changes
funding known by since last
812,500 company funding
Preferred Stock last funding economic changes
secured by since last
1,200,000 company funding
$ 13,662,500 There were no transfers between levels during the years ended
NOTE 8 - LINE OF CREDIT OnJanuary 3, 2022 , we entered into a Loan and Security Agreement (the "Loan Agreement") withEastman Investment, Inc. , aNevada corporation, and Lyle A. Berman, as trustee of theLyle A. Berman Revocable Trust (collectively, the "Lenders").Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a$5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets. As a Lender,Mr. Berman is obligated to furnish only one-half of the aggregate$5 million available under the Loan Agreement. The Loan Agreement has a five-year term ending onJanuary 3, 2027 , at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender's right, includingMr. Berman , to terminate the Loan Agreement, solely with respect to such Lender's obligation to provide further credit, at any time afterJanuary 3, 2023 . In the event that a Lender, includingMr. Berman , terminates its lending obligations, the Loan Agreement requires that we repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments. During the periodJanuary 3 to June 30, 2022 , the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. BeginningJuly 1, 2022 , we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash.
At
NOTE 9 - RELATED-PARTY TRANSACTIONS
We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with theSEC . In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions:
· On
Zbikowski who, along with her husband
to own approximately 534,445 shares of our common stock. In the
transaction, we obtained a two-year promissory note in the principal
amount of
presently matures on
payable monthly at the rate of 10% per annum. The note is secured by the
debtors' pledge to us of 277,778 shares of our common stock. The pledged
shares are held in physical custody for us by
our custodial agent.
· On January 3, 2022 , we entered into a Loan and Security Agreement (the
"Loan Agreement") with
Lyle A. Berman, as trustee of the
(collectively, the "Lenders").
Under the Loan Agreement, the Lenders made available to us a
revolving line of credit for us to use in the ordinary course of our
short-term specialty finance business. See note 8 above for further
details.
F-17
Table of Contents
NOTE 10 - RETIREMENT SAVINGS PLANS
Our three full-time employees are eligible to participate in a qualified defined contribution 401(k) plan whereby they may elect to have a specified portion of their salary contributed to the plan. We will make a safe harbor match equal to 100% of their elective deferrals up to a maximum of 5% of eligible earnings in addition to our option to make discretionary contributions to the plan. We made aggregate contributions to the plan totaling$14,063 and$11,250 for the years ended 2022 and 2021, respectively. NOTE 11 - INCOME TAXES Presently, we are a "C-corporation" for tax purposes and have booked an income tax provision for the years endedDecember 31, 2022 and 2021. Income taxes as ofDecember 31, 2022 , and 2021 are described below. December 31 2022 2021 Current taxes Federal$ 406,700 $ 909,530 State 18,169 358,168 Deferred taxes Federal (246,000 ) (213,000 ) State - -
Provision for income taxes
A reconciliation of income tax provisions at the
2022 2021
Rate reconciliation:
Tax expense at
450 (8,796 )
Provision-to-return reconciliation (18,536 ) (14,743 )
Other 11,068 (1,976 )
Income tax provision $ 178,869 $ 1,054,698
F-18
Table of Contents
As of December 31, 2022 and 2021 we had a deferred tax asset of $201,000 and a
deferred tax liability of $45,000 , respectively. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of our deferred tax assets and
liabilities as of December 31, 2022 and 2021 were as follows:
December 31
2022 2021
Deferred tax components
Unrealized (gain) loss on marketable securities
1,781 2,458
R&D and foreign credits 43,828 -
Lease liability (39 ) -
Other (1,120 ) (798 )
Net deferred tax asset (liability) $ 201,000 $ (45,000 ) NOTE 12 - FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the years endedDecember 31, 2022 through 2018: Year Ended December 31, 2022 2021 2020 2019 2018 Per Share Data (1) Net asset value at beginning of period$ 2.80 2.44 2.05 2.30 1.96
Net
investment
gain (loss) 0.23 0.27 0.11 (0.14 ) (0.11 ) Net realized and unrealized gains (0.11 ) 0.54 0.41 0.00 0.45
Provision
for income taxes (0.03 ) (0.23 ) (0.05 ) 0.00 0.00
Stock-based
compensation 0.05 0.00 (0.02 )
0.00 0.00 Repurchase of common stock 0.00 0.00 0.05 0.00 0.00 Other changes in equity 0.03 0.00 0.00 0.00 0.00 Payment of common stock dividend 0.00 (0.22 ) (0.11 ) (0.11 ) 0.00 Net asset value at end of period$ 2.97 2.80 2.44 2.05 2.30 Ratio / Supplemental Data Per share market value of investments at end of period$ 2.73 2.95 1.40 0.36 2.03
Shares
outstanding
at end of period 6,185,255 4,795,739 4,793,739 4,918,845 4,918,845 Average weighted shares outstanding for the period 5,333,028 4,795,242 4,830,691 4,918,845 4,918,845 Net assets at end of period$ 18,342,339 13,414,049 11,640,887 10,068,533 11,278,889 Average net assets (2)$ 15,733,550 13,155,207 10,504,563 11,473,535 10,341,702 Total investment return 3.57 % 24.07 % 23.08 % (5.88 )% 17.24 % Portfolio turnover rate (3) 128.80 % 168.67 % 61.11 % 7.63 % 26.93 % Ratio of operating expenses to average net assets (3) (17.53 )% (10.30 )% (7.16 )% (7.27 )% (6.59 )% Ratio of net investment income (loss) to average net assets (3) 9.16 % 9.89 % 5.35 %
(5.86 )% (5.13 )%
(1) Per-share data was derived using the weighted-average number of shares
outstanding for the period. (2) Based on the monthly average of net assets as of the beginning and end of
each period presented.
(3) Ratios are annualized.
NOTE 13 - SUBSEQUENT EVENTS
On
F-19
Table of Contents© Edgar Online, source
