UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2022 or |
For the fiscal year ended December 31, 2019 or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________________ to ______________________
Commission File Number 814-00991001-41472
MILL CITY VENTURES III, LTD.
(Exact name of registrant as specified in its charter)
MILL CITY VENTURES III, LTD. | |
(Exact name of registrant as specified in its charter) |
Minnesota | 90-0316651 | |
(State of incorporation) | (I.R.S. Employer Identification No.) | |
1907 Wayzata Blvd #205 | ||
Wayzata, Minnesota | 55391 | |
(Address of principal executive offices) | (Zip Code) |
Former name, former address and former fiscal year, if changed since last report
Registrant’s telephone number, including area code: (952) 479-1923
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $0.001 par value per share
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value per share None
Indicate by check mark if the registrant is a well knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ ☐ Nox ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ ☐ Nox ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.x ☒ Yes¨ ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation STS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x ☒ Yes¨ ☐ No
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,“non-accelerated filer,” and “emerging growth“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨ ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to Section 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).¨ ☐ Yesx ☒ No
The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% shareholders of the registrant as of June 30, 20192022 was approximately $1,131,578$5,625,200 based on the closing sales price of $0.59$3.50 per share as reported on the OTCPK.OTCQB. As of March 30, 2020,31, 2023, there were 11,067,4026,185,255 shares of the registrant’s common stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
None.
Mill City Ventures III, Ltd.
Form 10-K
Table of Contents
Overview
Mill City Ventures III, Ltd., formerly known as Poker Magic, Inc. (the “Company” or “we”), is a Minnesota corporation that was incorporated in January 2006. UntilFrom our inception until December 13, 2012, we were a developmentstagedevelopment-stage company that focused on promoting and placing a proprietary poker game online and into casinosinvolved in the gaming and entertainment facilities nationwide. On February 7,industry. In 2013, we filed Form N-54Aelected to become a business development company (“BDC”) under the Investment Company Act of 1940 Act.(the “1940 Act”). We operated as a BDC until we withdrew our election to be treated as a BDC by filing a Form N-54C with SECelection on December 27, 2019. AsSince that time, we have engaged in the business of providing short-term specialty finance solutions primarily to private businesses, micro- and small-cap public companies and high-net-worth individuals. To avoid again becoming subject to regulation under the time of this filing,1940 Act, we remain a public reporting companygenerally seek to structure our short-term loans such that files periodic reports with the SEC,they do not constitute “securities” under federal securities law, and we are seeking opportunities to invest in or acquire one or more businesses. Nevertheless, any investment we make in business will be limited and structured in suchmonitor our holdings as a way aswhole to ensure that no more than 40% of our total assets may consist of investment“investment securities, to avoid inadvertent regulatory requirements” as that term is defined under the 1940 Act.
BusinessThe principal specialty finance solutions we provide are high-interest short-term lending arrangements. Typically, these lending arrangements involve us obtaining collateral as security for the borrower’s repayment of funds to us, or personal guarantees from the principals or affiliates of the borrower. In some circles, short-term high-interest collateralized lending is referred to as “hard-money lending.”
We believe we are generally able to charge high interest for our specialty finance solutions because: (i) banks and other traditional providers of credit may have neither the expertise nor the infrastructure needed to evaluate creditworthiness and risks in a timeframe suitable for a potential borrower, preferring instead to process transactions and structures that present few novel issues or risks; and (ii) we will often be able to devote time and attention to transactions involving a smaller dollar amount than an institutional lender will view as worthwhile. These beliefs essentially explain why we refer to our business as “specialty finance”— financing that may involve structures that are unique, creative, and often bespoke; and that may involve dollar amounts that are not suitable for institutional lenders.
We generally provide specialty finance solutions that are short-term in nature. By this, we mean lending arrangements that mature or come due within nine months of the lending date. We view the provision of short-term finance as desirable for two principal reasons: (i) it helps minimize the risk of non-performance; and (ii) it helps minimize regulatory risk.
In terms of non-performance risk, short-term lending requires us to focus upon, and a potential borrower to identify to us, us a near-term source of liquidity for repayment of the funds they borrow from us. This permits us to evaluate that source of repayment clearly and carefully, thus helping identify the potential risks involved in a particular transaction and how we may be able to include structural terms, such as specific collateral and collateral-related arrangements, guarantees, or other types of covenants or arrangements that mitigate these risks.
In terms of regulatory risk, we believe that short-term lending permits us to avail ourselves of a court-recognized exception for treating promissory notes (evidencing a loan) as “securities” under federal securities law. This exception generally applies to promissory notes with short-term maturities of nine months or less. Our ability to avail ourselves of this exception, and to more generally structure our transactions in such a way as to avoid them being properly considered as “securities” under federal securities laws, is important because we believe that it enables us to avoid once again becoming subject to regulation under the 1940 Act. Below we discuss in further detail our process for evaluating transactional terms and structures with a view to remaining outside of the regulatory regime of the 1940 Act (please refer to “Investment Process” below).
Examples of the kinds of the specialty finance solutions we have considered or provided to date, and may continue to provide in the future, include:
· | Short-term secured loans for real estate development; | |
· | Short-term unsecured loans (with an option to acquire collateral security) to a business; | |
· | Short-term secured loans to a business for operating capital; and | |
· | Short-term secured loans to an individual owed a forthcoming tax refund |
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In addition, we are presently exploring and evaluating our ability to enter into other kinds of short-term specialty finance transactions. Examples include the expansion of our efforts to purchase adjudicated settlements, the purchase (at discounted rates) of receivables owing to professionals on account of certain workers’ compensation claim, and short-term consumer finance lending.
Sourcing Transactions
We believe that our management’s strong combination of experience and contacts in the securities and investment finance sector, including the experience and contacts of our independent directors, should be sufficient to continue attracting suitable prospective investment opportunities. To date, the network of contacts of our management and directors has been successful thus far in sourcing all of the transactions in which we have participated. Accordingly, we presently do not have any plans to hire any business development professionals to assist us with transactional volume.
Competition
The market for specialty finance is competitive, largely as a result of the participation of various types of professionally managed pooled investment funds such as private equity funds, debt and mezzanine-debt funds, and other types of professional finance companies seeking the high returns that are possible in specialty finance and hard-money lending. Nevertheless, we believe we are well positioned to compete successfully in this market because of our entrepreneurial, creative and flexible approach to specialty finance opportunities, and our management’s experience in entrepreneurial ventures and finance.
Throughout our history and in particular after ceasing to be a BDC, we have approached investment opportunities flexibly and creatively in terms of transactional structures and terms. In part, we are able to be flexible and creative because we are not subject to many of the regulatory limitations that govern our other more traditional or institutional competitors. Those competitors are often subject to limitations on the type transactions they undertake, the amount that may be invested in a specific transaction or a particular type of transaction, the markets in which they operate, the maturity or time horizon of their investment, uses of proceeds, or otherwise. These limitations are often imposed by the agreements and documents governing the pooled investment vehicles, or otherwise self-imposed in order to facilitate the investment vetting and due-diligence process, and the documentation and structuring process. More rarely, these limitations may arise from governing regulations or interpretations thereof. For our part, we believe that approaching investment opportunities flexibly expands our overall transactional opportunities, diversifies our risk by avoiding dependence in any material way on a particular borrower, type of transaction, or market or industry niche, and permits us to avail ourselves of the maximum number of relationships from which we source investment opportunities. Moreover, we believe that this flexible approach to structuring our transactions and investments will facilitate the development of positive long-term relationships with our borrowers.
We believe that the only significant limitation on our ability to flexibly structure transactions arises from our desire to remain outside the regulation of the 1940 Act. In order to meet this goal, we intend and aim to structure the vast majority of our transactions (by dollar amount) in ways such that they are not properly considered “securities” under federal securities laws, including the 1940 Act.
For our investors, the freedom afforded to us through the lack of substantive regulation governing the types of transactions we enter into and our methods of operation permits us to allocate our resources, at any given point in time, to those types of transactions that we believe may lead to the highest risk-adjusted returns or the steadiest stream of such returns.
Our management team and Board of Directors has significant experience in a variety of entrepreneurial ventures, including service as management and directors for small and large public companies, private businesses, start-up and development-stage businesses, and the securities and finance industries. As a result of this diverse general experience and particular experience in transactional finance, we believe we are able to manage the evaluation and due-diligence process involved in our investment opportunities swiftly and efficiently, by collaborating with our professional advisers and focusing on high-level and material issues.
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Other Matters
We do not believe that we are dependent in any material way on any particular borrower, type of specialty finance transaction, or industry.
We do not own or use through license any patents, trademarks, or other intellectual properties and we do not believe that any such assets would be material to our business.
Sometimes the types of transactions we engage in are governed by particular laws, regulations, or rules. For example, lending transactions in which high-net-worth individuals (as opposed to entities) are the borrower will nearly always involve state law usury limitations. Transactions in which we seek and obtain collateral as security for obligations owed to us involve legal issues arising under the Uniform Commercial Code or its various state law iterations. To date, we have not engaged in transactions that require us to obtain licensure or a permit prior to entering into the transaction—e.g., brokering transactions or engaging in licensed consumer finance activities.
Pending the consummation of transactions and deployment of cash, we generally keep the majority of our assets in cash, cash equivalents such as money-market investments, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
Our Investment Process
We have identified several criteria that we believe are generally important guidelines for us to meet our financial objectives. These criteria are, however, only general guidelines for our investment decisions and, in the case of some transactions in which we invest, fewer than all—or even none—of these criteria will be met.
· | Existing Liquidity Source. Because the vast majority of our transactions involve short-term maturities, we typically seek to identify a liquidity source for the borrower to repay us. Examples of sources of potential liquidity may include accounts receivable, another valuable asset, or a pending payment (e.g., a tax refund, or a litigation judgment or settlement payment) that is reasonably expected to pay out prior to the maturity of the credit we provide. | |
· | Collateral Value. We will often, but not always, seek to collateralize the obligations owing to us. Our ability to identify valuable collateral is a significant factor in our credit analysis and determination of the attractiveness of a potential transaction. This analysis will often involve legal counsel, both to assist in the identification of potential collateral assets, and to better understand the ease with a security interest in the collateral may be granted, perfected and, if necessary, foreclosed upon and the relevant jurisdiction(s) involved. | |
· | Experienced and Capable Management. In transactions involving business borrowers, we seek businesses that have an experienced, knowledgeable and capable management team. | |
· | Competitive Position. In transactions involving business borrowers, we will seek to invest in transactions with businesses that have developed, or appear poised to develop, a strong competitive position within their respective industry sector or niche. | |
· | Cash Flow. In transactions involving business borrowers, we will seek to invest in businesses that are profitable or nearly profitable on an operating cash flow basis, principally so that the business’ operating cash flow may serve as another source of liquidity from which we may ultimately be repaid. |
If we believe a potential transaction generally meets the characteristics described above or if we otherwise determine that a potential transaction may be desirable to enter into, we may perform a more rigorous due-diligence examination of the prospective borrower, the likely source or sources of liquidity for their repayment to us, and other aspects of the borrower or its assets (e.g., assets of the borrower that may serve as collateral security for the obligations that may be owing to us). Our due-diligence examination for each transaction will necessarily be unique and tailored to the specific transaction, but will generally be undertaken in light of the following facts and circumstances:
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· | our familiarity with the borrower (or, in the case of a business borrower, our familiarity with management or other persons such as directors involved with the borrower); | |
· | in the case of a business borrower, our review and assessment of the potential borrower’s financing history, as well as the likely need for additional financings after our transaction; | |
· | the industry in which the borrower operates, our knowledge and familiarity with that industry, our assessment of the complexity of the business, any regulatory matters or other unique aspects presenting special risks, and the competitive landscape faced by the borrower; | |
· | the amount of dollars involved in the potential transaction; | |
· | where the borrower is located, how it is organized as an entity, as well as its management and ownership structure and profile; | |
· | whether we might have been involved with a transaction of the same or similar kind before; | |
· | the ease with which we can evaluate the borrower’s source or sources of liquidity; | |
· | the ease with which we can apprehend the process involved with taking collateral security in some or all of the borrower’s assets; and | |
· | the ease with which we could realize on that collateral if repayment were not otherwise forthcoming. |
The assessments described above outlines our general approach for our investment decisions, although not all of such activities will be followed in each instance, or some may be stressed moreso than others depending on facts and circumstances. Upon successful completion of this preliminary evaluation, we will typically (1) evaluate our own regulatory concerns (i.e., to what extent the potential transaction may properly be considered an investment in a “security” for purposes of the 1940 Act and, if necessary, consider alternative structures to alleviate any risks to our company relating thereto), and (2) decide whether to move forward towards negotiating a letter of intent and, thereafter, definitive documentation for our transaction. Depending on timing, we may not use a letter of intent and will instead proceed directly to definitive documentation.
As indicated above, to avoid becoming subject to the regulatory requirements of the 1940 Act, we monitor our investment holdings as a BDC, we primarily focusedwhole to ensure that investments and other holdings which may be considered “investment securities” do not comprise more than 40% of our total assets. We undertake this analysis (1) at least on investing in or lending to private and smallcapitalization public companies and making managerial assistance available to such companies. Our investments included stock of or membership interests (typically referred to as units) in private companies, smallcap public company stocks, and promissory notes. In some cases the stock or membership interests we acquired was preferred stock or units,a quarterly basis and in other cases the stock or membership interests acquired was common stock or units. In connection with the review and preparation of our investments in promissory notes, we also obtained warrants to purchase common stock.
A BDC generally provides shareholdersfinancial statements filed as part of our quarterly and annual reports with the abilitySEC, and (2) at other times when we are considering how to retain the liquiditystructure a new transaction that is of a publicly traded stock, while sharingsignificant size—with “significance” largely based on the outcome of our most recent quarterly review. This review is generally undertaken by our Chief Financial Officer and may involve our outside legal counsel, in particular in a case where we are considering the possible benefitsstructure of investing in emerginggrowth or expansion-stage companies that are privately or publicly owned. Revenues from our operations as a BDC relate to the earnings we received from our portfolio investments.
Our 2019 Portfolio
At December 31, 2019, we held investments in eight portfolio companies, which had an aggregate amortized cost of $1,976,370 and a fair value of $1,740,897.At December 31, 2018, we held 24 eligible portfolio investments, which had an aggregate amortized cost of $6,193,461 and a fair value of $9,354,622. Our portfolio investments at December 31, 2019 were as follows:
Dispositions of Investmentspotential new transaction.
In 2019, we disposedgeneral, our analysis starts with the length or duration of a substantial portionpotential new transaction. Although federal securities laws generally define “securities” in such a way as to include promissory notes, the U.S. Supreme Court held in Reves v. Ernst & Young, 110 S. Ct. 945 (1990), that certain kinds of promissory notes are not properly considered securities. Over time, court precedent has developed to identify these kinds of promissory notes as generally not constituting securities:
· | notes that mature in nine months or less; | |
· | notes secured by a mortgage or lien on a home; | |
· | notes secured by a small business or business assets; |
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· | so-called “character loans” made to a bank customer; | |
· | notes delivered or borrowings entered into through consumer finance; | |
· | commercial loans made to businesses; | |
· | loans secured by accounts receivable (e.g., factoring); |
In addition to the “types” of financing arrangements noted above, court precedent indicates that there may be facts and circumstances surrounding a transaction that may cause a promissory note to not be considered a “security” under federal securities laws. For example, while it is presumed that a promissory note that matures in more than nine months is a “security,” this presumption may be rebutted (with the conclusion that such a promissory note is not a properly considered a security) upon an evaluation of the investmentsfollowing factors:
· | whether the borrower’s motivation is to raise money for general business use, and whether the lender’s motivation is to make a profit, including interest; | |
· | whether the borrower’s plan of distribution for the promissory note resembles the plan of distribution of a security; | |
· | whether the investing public, or the parties to the transaction, reasonably expects that the note is a security; and | |
· | whether there is a regulatory scheme that protects the investor other than the securities laws (e.g., Federal Deposit Insurance). |
While the application of these factors can be helpful in some instances, often the factors and the proper manner of weighting them are unclear. As a result, the analyses we had earlier made as a BDC. These dispositions were effected by managementperiodically undertake focuses on the more bright-line types of lending arrangements enumerated above—i.e., promissory notes maturing in an orderly fashion, at prices management believed to be fair, and at times management believed to advantageous. In all, we disposed of $9,110,237 in investments, nearly all of which remains as cash as of the time of this report.nine months or less, etc.
Our Management and Employees
Currently, Mr. Douglas M. Polinsky, the Chief Executive Officer and Chairman of our Board of Directors, and Joseph A. Geraci, II, our Chief Financial Officer and a director of the Company, bothcompany, serve as our senior management team. These are also the only two persons employed by our company that have a management role. There are three persons in total employed by our company.
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You should consider the following risk factors, in addition to the other information presented or incorporated by reference into this Annual Report on Form 10-K, in evaluating our business and any investment decision relating to our securities.
Risks Related to our Business
Because we have not definitively settled on a particular line of business as of the date of this filing, investors in our common stock risk investing in a business or model in which they presently cannot identify and evaluate business risks.
On December 27, 2019, we withdrew our election to be treated as a business development company (BDC) after having received approval for such action from our shareholders. As a result of that action and the gradual disposition of investments we made earlier, fewer than 40% of our total assets are presently composed of investment securities. Accordingly, we are no longer subject to the provisions of the Investment Company Act of 1940.
After the date of the withdrawal of our BDC election and through the date on which this report was filed, we consummated one additional investment in a short-term promissory note issued by a real estate concern. We structured that investment, however, in such a way that it would not constitute an “investment security” for purposes of the Investment Company Act. For the time being, we expect to continue availing ourselves of suitable investment opportunities as they arise and structuring any such investments we do make so as to prevent the Company from being subject to the Investment Company Act. In this regard, we are presently industry agnostic and seeking to avoid concentrations of investments in any one company that would exceed 40% of our total assets. At the same time, we are seeking and considering one or more new lines of business, which we may pursue through acquisition or organic development. In sum, we are seeking new business opportunities that may involve an acquisition or our own development of a new business; but pending identifying and executing on any such opportunity, we intend to remain opportunistic with our cash assets in hopes of consummating investments that earn a return for the Company and our investors, while being careful to structure such investments in ways that avoid causing the Company to become an “investment company” regulated under the Investment Company Act of 1940.
Regardless of the strategic course our management and board eventually determine to take, for the time being our opportunistic approach to investment opportunities presents unique risks to investors in our common stock that are extremely difficult to quantify. As such, investors are practically unable to identify specific or general risks and evaluate those risks in light of their own risk tolerances. This makes an investment in our common stock particularly risky inasmuch as the strategic direction we eventually take may be inconsistent with an investor’s risk tolerance or interest as an investor. This fact, combined with the general illiquidity of our common stock (discussed below), presents significant and meaningful risk that an investor in our common stock may disagree or otherwise be uncomfortable with our strategic direction, and may have difficulty selling our stock at times and at prices they believe are desirable or appropriate. This could cause investors to experience significant losses in any investment in our common stock.
We have no relevanta short operating history upon which to evaluate our current business.
Given the recent withdrawal ofWe withdrew our election to be treated as a BDC under the Investment Company1940 Act at the end of 1940,2019, and during the three years since that time have refocused our determinationbusiness on providing short-term specialty finance solutions to not again become subject to the Investment Company Act of 1940, the financial results included in this report relate to business operations in which we are no longer engaged.private businesses, small-cap public companies and high-net-worth individuals. Given that fact,our current business has been developed and that we have not definitively settled upon a particular line of business,pursued over the three years prior to this filing, investors have littlelimited means to evaluate our performance, its evolution, and the likelihood of our future success.
We may need to raise additional capital in the near future to fund our operations, and such capital may not be available to us in sufficient amounts or on acceptable terms.
For the time being, management believes that our current cash is sufficient to continue operations for the foreseeable future. Nevertheless, various future and has not potentialdevelopments may cause us to seek or actual plansrequire additional financing. For instance, our letter of intent with Mustand Litigation Funding contemplates an additional financing, of some kind, being undertaken by us as a condition to the closing of that transaction. In addition, we may determine to seek additional financing. Nevertheless, if we determinefinancing in order to acquire an existing business, or make one or more significant investments,avail ourselves of additional opportunities to provide specialty finance solutions to borrowers. Alternatively, we may requireseek additional financing.financing in the event that a material portion of our investments default, leaving us with little means to pay for our operations and continue making investments.
AdditionalIn any event, additional financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities, or loans from banks, other financial institutions or affiliates of the Company.our affiliates. We cannot, however, be certain that any such financing will be available on terms favorable or acceptable to us if at all. If additional funds are raised by the issuance of our equity securities, such as through the issuance of stock, convertible securities, or the issuance and exercise of warrants, then the ownership interest of our existing shareholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations, and such securities may have rights senior to the rights of our common shareholders. If adequate funds are not available on acceptable terms, we may be unable to consummate acquisitions or investments desired by our management and board.
If we are unable to maintain diverse and robust sources of capital, our growth prospects, business, financial condition and results of operations could be adversely affected.
Our business depends on maintaining diverse and robust sources of capital to originate our short-term loans. In January 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 (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 on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. See “Certain Relationships and Related Transactions.” We cannot be sure that this funding source, or others, will continue to be available on reasonable terms or at all beyond its current maturity date.
Events of default or breaches of financial, performance or other covenants, or worse than expected performance of one or more of our short-term loans, could reduce or terminate our access to funding from the Loan Agreement. The availability and capacity of sources of capital also depends on many factors that are outside of our control, such as credit market volatility and regulatory reforms. In the event that we do not maintain adequate sources of capital, we may not be able to maintain the necessary levels of funding to retain current loan volume, which could adversely affect our business, financial condition and results of operations.
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Changes in laws or regulations, or a failure to comply with laws and regulations, may adversely affect our business, including our results of operations and ultimately the price of our common stock.
We are subject to various local, state and federal laws and regulations. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and manner of application or enforcement may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business and results of operations. Any of these outcomes would likely adversely affect the trading price of our common stock.
Changes in consumer finance and other applicable laws and regulations, as well as changes in government enforcement policies and priorities, may negatively impact the management of our business, results of operations, ability to offer certain kinds of specialty finance solutions or the terms and conditions upon which they are offered, and our ability to compete.
Consumer finance regulation is constantly changing, and new laws or regulations, or new interpretations of existing laws or regulations, could have a materially adverse impact on our ability to operate as currently intended or as we may intend to expand in the future, and cause us to incur significant expense in order to ensure compliance. Federal and state financial services regulators are also enforcing existing laws, regulations, and rules aggressively and enhancing their supervisory expectations regarding the management of legal and regulatory compliance risks. These regulatory changes and uncertainties make our business planning more difficult and could result in changes to our business model and potentially adversely impact our results of operations. Because we operate as a non-bank lender, we are sometimes subject to state licensing and usury laws. Furthermore, to the extent applicable, these laws can impose specific statutory liabilities upon creditors who fail to comply with their provisions and may affect the enforceability of a loan. If the application of consumer protection laws were to cause our loans, or any of the terms of our loans, to be unenforceable against the relevant borrowers, our business may be materially adversely affected. Even if we seek to comply with licensing and other requirements that we believe may be applicable to us, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain a license in one or more such jurisdictions, which may have an adverse effect on our business.
New laws, regulations, policy or changes in enforcement of existing laws or regulations applicable to our business, or reexamination of current practices, could adversely impact our profitability, limit our ability to continue existing or pursue new business activities, require us to change certain of our business practices, affect retention of key personnel, or expose us to additional costs, including compliance costs. These changes also may require us to invest significant resources, and devote significant management attention, to make any necessary changes and could adversely affect our business.
Although we have identified general guidelines that we believe are important in evaluating prospective investment opportunities, we may enter into transactions with borrowers that do not meet such guidelines, increasing the risk that the price of our common stock could be volatile.
Although we have identified general guidelines for evaluating prospective investment opportunities, it is possible that a borrower with which we enter into a transaction will not have all, or any, of the attributes outlined in those guidelines. If we complete transactions with borrowers that do not meet some or any of these guidelines, it is possible that such an investment may not be as successful as an alternative opportunity that were to satisfy some or all of those guidelines. Investments that do not perform as well as imagined, or as well as they otherwise might have, in combination with the public knowledge that we may stray, or have strayed, from strict implementation of our investment guidelines, could affect the volatility of the trading price of our common stock.
We may provide specialty finance solutions to early-stage companies, financially unstable businesses, or a borrower lacking an established record of revenue or earnings, which could adversely affect the price of our common stock.
While we believe that being entrepreneurial in our approach to specialty finance is a strength, we may complete investments with an early-stage company, a financially unstable business or an entity lacking an established record of revenues, cash flows or earnings. These kinds of transactions present numerous risks associated with investing in a business without a proven business model and with limited historical financial data, volatile revenues, cash flows or earnings and difficulties in obtaining and retaining key personnel. Although our management endeavors to evaluate the risks inherent in each particular investment we consider and make, we may not be able to properly ascertain or assess all of the significant risk factors and we may not have adequate time to complete a full evaluation of those risks. Furthermore, some of these risks may be outside of our control and leave us with no ability to control or reduce the chances that those risks will adversely impact a borrower or our likelihood of repayment. The manifestation of any of these risks could adversely affect the trading price of our common stock.
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Many of our specialty finance investment transactions involve borrowers about which little, if any, information is publicly available, which may impair our ability to identify borrowers able to repay our loans and adversely affect the price of our common stock.
In pursuing our business, we often interact with a privately held companies about which very little public information exists. As a result, we are often required to make our investment decision on the basis of limited information, nearly all of which is obtained from the business itself, which may result in our consummating an investment with a borrower that is not as solvent or profitable as we suspected, if at all. These risks could affect our results of operations and, ultimately, the trading price of our common stock.
If we are deemed to be an investment company under the 1940 Act, we may be required to institute burdensome compliance requirements and our activities may be restricted. In such an event, our business would likely be materially and adversely affected.
If we are deemed to be an investment company under the 1940 Act, then our activities may be restricted, including:
· | restrictions on the nature of our investments; | |
· | restrictions on the issuance of securities; | |
· | a requirement to register as an investment company; | |
· | adoption of a specific form of corporate structure and changes in corporate governance; | |
· | the hiring of a chief compliance officer, and adoption and implementation of various policies and requirements; and | |
· | additional reporting, record-keeping, voting, proxy and disclosure requirements, together with other rules and regulations. |
In order not to be regulated as an investment company under the 1940 Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of “securities” and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.
We do not believe that our principal activities will subject us to the 1940 Act. To this end, we hold reserve un-invested assets in cash and United States “government securities” within the meaning of Section 2(a)(16) of the Act having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act, which invest only in direct U.S. government treasury obligations. Furthermore, we monitor our investment holdings as a whole to ensure that investments and other holdings which may be considered “investment securities” do not comprise more than 40% of our total assets. We undertake this analysis (1) on a quarterly basis and in connection with the review and preparation of our financial statements filed as part of our quarterly and annual reports with the SEC, and (2) at other times when we are considering how to structure a new transaction that is of a significant size—with “significance” largely based on the outcome of our most recent quarterly review. This review is generally undertaken by our Chief Financial Officer and may involve outside legal counsel, in particular in a case where we are considering the structure of a potential new transaction.
If, however, we do not invest as discussed above or are otherwise unsuccessful in ensuring that no more than 40% of our total assets consist of “investment securities,” then we may be deemed to be subject to the 1940 Act. It is also possible that regulatory authorities, such as the SEC, may disagree with our analysis of whether certain investment holdings constitute “investment securities” and may more broadly disagree with our position that the short-term promissory notes we receive in exchange for our short-term loans are not properly considered “securities” under federal securities law and the 1940 Act in particular. If that were to be the case, compliance with the additional regulatory burdens imposed under the 1940 Act would require additional expenses for which we have not allotted funds, and would surely hinder our ability to operate as profitably as we have since the withdrawal of our BDC election. This outcome would of course adversely affect the trading price of our common stock.
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We may engage in transactions with businesses that may be affiliated with our officers, directors or significant shareholders, and which may involve actual or potential conflicts of interest.
We may decide to make investments in one or more businesses affiliated with our officers, directors or significant shareholders. Such investment opportunities may compete with other opportunities for our investment dollars. Although we are not specifically focusing on, or targeting, any particular transaction with any affiliates or affiliated entities, we would pursue such a transaction if we determined that such an affiliated investment were attractive from a risk-adjusted return perspective, and such transaction were approved by a majority of our independent and disinterested directors. Any such activity would involve actual or potential conflicts of interest. Although we are confident that we can navigate these conflicts consistent with best practices and applicable law, the existence or appearance of such conflicts of interest could make our common stock less attractive and thereby reduce its trading price.
A limited number of shareholders control a significant majority of our voting stock and, as a result, control the election of our Board of Directors. As a result, these shareholders may exert an influence on actions requiring a shareholder vote, potentially in a manner that you do not support.
Nine shareholders (five of whom are presently officers and directors) beneficially own shares representing approximately 54.01% of our issued and outstanding common stock. As a result, investors in our common stock cannot reasonably expect to have any influence over the election of our directors or other matters submitted to a vote of our shareholders. Instead, our existing significant shareholders will exert a substantial influence on the election of our directors and any actions requiring or otherwise put to a shareholder vote, potentially in a manner that you do not support. Examples of such voting matters, apart from the election of our directors, includes amendments to our articles of incorporation, bylaws, and approval of major corporate transactions. The concentrated amount of control over our affairs held by a relatively few number of significant investors could serve to reduce the attractiveness or liquidity of our common stock, and thereby depress its trading price.
Our ability to avail ourselves of future acquisitionidentify and consummate investment opportunities, as they arise, and any need we may have for additional capital, will almost certainly be affected by general economic conditions.
General economic conditions will almost certainly impact our ability to (i) identify, pursue and pursue acquisition andconsummate investment opportunities, and (ii) if necessary, seek and obtain additional financing on terms acceptable or favorable to us, if at all. Therefore, a deterioration in general economic conditions may adversely affect our business or slow the reorientationgrowth of our strategic direction.business.
Our reputation and brand are important to our success, and if we are unable to continue developing our reputation and brand, our ability to retain existing capital sources, our ability to attract borrowers could be adversely affected.
We believe that maintaining a strong brand and trustworthy reputation is critical to our success and our ability to attract borrowers, attract new capital sources and maintain existing capital sources. Factors that affect our brand and reputation include:
· | the non-bank lending industry generally; | |
· | our company specifically, including the quality and reliability of our investment process, our ability to effectively manage and resolve issues with our borrowers, our collection practices, our privacy and security practices, any litigation in which we may become involved; any regulatory activity to which we may become involved; and the overall experience of our borrowers. |
Negative publicity or negative public perception of these factors, even if inaccurate, could adversely affect our brand and reputation. Any negative publicity or negative public perception of the loans we make, or similar loans made by similar lenders or our competitors, may also result in negative publicity that is adverse to our reputation. If we are unable to protect our reputation, our business, financial condition and results of operations could be adversely affected.
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We are highly dependent on the services provided by certain executives and key personnel.
Our success depends in significant part upon the continued service of our senior management personnel. In particular, the Company iswe are materially dependent upon the services of Douglas M. Polinsky, our Chief Executive Officer and Chairman, and Joseph A. Geraci, II, our Chief Financial Officer and a director of the Company. Althoughour company. Practically, we currently have employment agreements with these individuals, these agreements will not necessarilycannot prevent the departure of these executives, whether due to death, disability, retirement or otherwise. Any loss of the services provided by these executives would likely have a material and adverse effect on our operations and ability to execute our business plans.
Our articles of incorporation grant our boardBoard of directorsDirectors the power to designate and issue additional shares and classes of common and preferred stock.
Our authorized capital consists of 250,000,000111,111,111 shares of capital stock. Pursuant to authority granted by our articles of incorporation, our boardBoard of directors,Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series of preferred stock) as it deems appropriate, and may establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. The rights of holders of new classes or series of stock that may be so designated and issued could be superior to the rights of holders of our common shares. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore, any issuances of additional stock—common or preferred—will dilute the ownership interest of then-current holders of our capitalcommon stock and may dilute our book value per share.
OurWe may issue additional common stock is thinly traded, which may make it difficult to sellor preferred shares without the approval of our common stock.shareholders. Any such issuances would dilute the interest of our shareholders and likely present other risks.
Our articles of incorporation authorize the issuance of up to 111,111,111 shares of capital stock. Because we have only 6,185,255 shares of common stock issued and outstanding, our Board of Directors has the power and authority to issue a substantial number of additional shares of common stock or preferred shares. The issuance of additional common stock or preferred shares:
· | may significantly dilute the equity interest of our then-current shareholders; | |
· | may subordinate the rights of holders of common stock if preferred shares are issued with rights senior to those afforded our common stock; | |
· | could cause a change in control if a substantial number of common stock are issued, which could result in the resignation or removal of our present officers and directors; and | |
· | may adversely affect prevailing market price for our common stock. |
Our search for and ability to consummate specialty finance investment opportunities may be materially and adversely affected by COVID-19.
The global spread of the strain of coronavirus known as COVID-19 and its variants, declared a global pandemic by the World Health Organization on March 11, 2020, has resulted in governmental impositions of mandatory closures, quarantines and other restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions. It is thinly tradedunclear whether the pandemic may significantly worsen during the upcoming months, which may result in further restrictions on Pink Sheetsbusiness, travel, and other activities.
The COVID-19 pandemic has adversely affected the domestic and global economies and financial markets, and the business of our potential borrowers could be materially and adversely affected, decreasing our appetite to consummate transactions that we might have otherwise concluded were attractive. Furthermore, we may be unable to complete an investment if continued concerns relating to COVID-19 continue to restrict travel, limit the ability to have meetings or access a potential borrower’s personnel. The extent to which COVID-19 impacts our search for new investment opportunities will depend on future developments, which are highly uncertain and cannot be predicted. If the disruptions posed by COVID-19 or other matters of domestic or global concern continue for an extensive period of time, our ability to consummate investments, or the operations of our potential and actual borrowers, may be materially adversely affected. Of course, materially adverse effects upon the operations of our actual borrowers could impair their ability to pay us all of the amounts owing to us, or to pay us in a timely manner.
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Finally, our ability to consummate additional transactions may be dependent on our ability to raise equity and debt financing. This ability may be impacted by COVID-19 and other events, including as a result of increased market volatility, decreased market liquidity and third-party financing being unavailable on terms acceptable to us or at all. Overall, the COVID-19 pandemic may generally have the effect of heightening many of the other risks described in this “Risk Factors” section by increasing their likelihood or amplifying their magnitude.
Cyber incidents or attacks directed at us could result in information theft, data corruption, operational disruption and/or financial loss.
We depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those belonging to third parties with whom we deal. Sophisticated and deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties or the cloud, could lead to corruption or misappropriation of our assets, proprietary information and sensitive or confidential data. We have not made a significant investment in data security protection, and we expectmay not be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or to investigate and remediate any vulnerability to, cyber incidents. It is possible that any of these occurrences, or a combination of them, could have adverse consequences on our business and lead to financial loss.
Our stock price may be volatile, or may decline regardless of our operating performance, and you could lose all or part of your investment as a result.
You should consider an investment in our common stock will remain thinly traded forto be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuation in the foreseeable future. A low trading volume will generally make it difficult for our shareholders to sell their shares as and when they choose. Furthermore, low trading volumes are generally understood to depress market prices. As a result, our shareholders may not always be able to resell sharesvalue of your investment. The market price of our common stock publicly atcould be subject to significant fluctuations in response to the timefactors described in this section and pricesother factors, many of which are beyond our control. Among the many factors that they feel are faircould affect our stock price are:
· | Actual or anticipated variations in our quarterly and annual operating results or those of companies perceived to be similar to us; | |
· | Changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors, or differences between our actual results and those expected by investors and securities analysts; | |
· | Fluctuations in the market valuations of companies perceived by investors to be comparable to us; | |
· | The public’s response to our or our competitors’ filings with the SEC or announcements regarding, significant transactions, acquisitions, strategic investments, litigation, or other significant matters; | |
· | Speculation about our business in the press or the investment community; | |
· | Future sales of our shares; | |
· | Actions by our competitors; | |
· | Additions or departures of members of our senior management or other key personnel; and | |
· | The passage of legislation or other regulatory developments affecting us or our industry. |
In addition, the securities markets have experienced significant price and volume fluctuations that have affected and continue to affect market price of equity securities of many companies. These fluctuations have often been unrelated or appropriate.disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, or international currency fluctuations, may negatively affect the market price of our shares.
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to securities class action litigation that, even if unsuccessful, could be costly to defend and a distraction to management.
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We maydo not intend to pay dividends on our common stock.
We mayintend to retain all of our earnings, if any, for the foreseeable future to finance the operation and expansion of our business and do not anticipate paying cash dividends. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, subject to compliance with applicable law and any contractual provisions, and will depend on, among other factors, our common stockresults of operations, financial condition, capital requirements and have onlyother factors that our Board of Directors deems relevant. As a limited history of paying dividends, which history relates to the period of time during which we operated as a BDC. Accordingly,result, investors in our common stock may only obtainshares should expect to receive a return on their investment only if the market price of the common shares increases, which may never occur.
One of the manners in which we may seek to grow our company is through acquisition or combination transactions. It is possible that, even after our announcement of a potential acquisition or combination transaction, such transactions may not ultimately close and occur. Our announcement of these potential transactions, and the occasional failure of them to occur, may cause the price of our common stock to be volatile.
In prior reports, we have publicly announced our intention to grow our company both organically, including by expanding our specialty finance operations into new markets or niches, and through acquisition or combination transactions such as mergers. In the past, we have announced our execution of non-binding letters of intent for these kinds of acquisition or combination transactions. These announcements may create volatility in the trading volume and price of our common stock, in particular when there is not significant publicly available information about the counterparty to such a transaction. Moreover, the failure of the transactions contemplated in these announcements to close could similarly create volatility in the trading volume and price of our common stock. This volatility could ultimately mean that there are fewer buyers or sellers of our common stock at particular times, which creates the risk that you might not be able to sell any uponcommon stock of our company that you own at a subsequent saletime or a price that you believe is fair or desirable.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of shares.our company, the trading price for our stock may be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price may decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
On January 1, 2019 we adopted ASU No. 2016-2, Leases (Topic 842),Our executive offices are located at 1907 Wayzata Boulevard, Suite 205, Wayzata, Minnesota 55391, and its amendments and elected the effective date transition method.
The Company is subjectour telephone number is: (952) 479-1923. We are parties to two operating leases for office space expiring March 31, 2022.April 2, 2023. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leasesclauses; and they do not contain contingent rentcontingent-rent provisions. The leases do not include options to renew.
Because We consider our lease does not provide an implicit rate, we usecurrent office space adequate for 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 of September 30, 2019 was 4.5% and the weighted average remaining lease term is 3 years.current operations.
Under ASC 840, rent expense for office facilities for the year ended December 31, 2019 was $73,685.
None.There is no material litigation, arbitration or governmental proceeding currently pending against us or any members of our management team in their capacity as such.
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ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed for trading on the OTC Pink SheetsNasdaq under the symbol “MCVT”. The transfer agent and registrar for our common stock is Pacific Stock Transfer Company, 6725 Via Austi Parkway, Suite 300, Las Vegas, NV 89119. The following table sets forth the high and low bid prices for our common stock as reported by the OTCPK in 2019OTCQB from January 1, 2021 through August 30, 2022 and 2018. Theseas reported on the Nasdaq Capital Market from September 1, 2022 through December 31, 2022. The quotations for prices during our listing on the OTCQB reflect interdealerinter-dealer prices, without retail markup,mark-up, markdown, or commission, and may not represent actual transactions. Trading in our common stock during our listing on the period representedOTCQB was generally infrequent, exemplified by low trading volume and many days during which no trades occurred.
Market Price | Market Price | |||||||
(High/Low) | (High/Low) | |||||||
For the Fiscal Year/Quarter | 2019 | 2018 | ||||||
First Quarter | $ 1.70 0.47 | $ 0.75 0.50 | ||||||
Second Quarter | $ 0.70 0.58 | $ 0.61 0.40 | ||||||
Third Quarter | $ 0.59 0.46 | $ 0.60 0.45 | ||||||
Fourth Quarter | $ 0.70 0.41 | $ 0.60 0.25 |
|
| Market Price |
|
| Market Price |
| ||
|
| (High/Low) |
|
| (High/Low) |
| ||
Period |
| 2022 |
|
| 2021 |
| ||
First Quarter |
| $ | 5.00 – 2.00 |
|
| $ | 6.45 – 2.42 |
|
Second Quarter |
| $ | 4.55 - 2.20 |
|
| $ | 6.25 – 3.60 |
|
Third Quarter |
| $ | 4.32 - 1.84 |
|
| $ | 5.50 – 3.50 |
|
Fourth Quarter |
| $ | 2.73 - 1.81 |
|
| $ | 4.15 – 2.66 |
|
Holders
As of the date of this filing, we had approximately 186253 holders of record of our common stock.
Dividends
On February 15, 2019,September 17, 2021, our Board of Directors declared a cash dividend of $0.05$0.10 per share to all of our shareholders of record as of March 8, 2019.October 15, 2021. The dividend was paid on March 15, 2019.October 29, 2021. The company does not expect that the Board of Directors will declare any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
|
| Weighted-average exercise price of outstanding options, warrants and rights |
|
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| |||
|
| (a) |
|
| (b) |
|
| (c) |
| |||
Equity compensation plans approved by security holders |
|
| — |
|
|
| — |
|
|
| — |
|
Equity compensation plans not approved by security holders |
|
| 870,000 |
|
| $ | 2.11 |
|
|
| 30,000 |
|
Total |
|
| 870,000 |
|
| $ | 2.11 |
|
|
| 30,000 |
|
As
The securities reflected in column (a) above were issued pursuant to the company’s 2022 Stock Incentive Plan. These securities were not approved by security holders as of December 31, 2019, we had no outstanding options, warrants or other rights to purchase any equity securities of the Company under any equity compensation plan or “individual compensation arrangement,” as defined in Item 201 of Regulation SK. Furthermore, as of the date of this filing, we are not a party to any equity compensation plan, nor are we obligated under any “individual compensation arrangement” to issue any options, warrants, rights or other securities. We are not required2022; but were subsequently approved by applicable state law or the listing standards of any selfregulatory agency (e.g., the OTCQX, NASD, AMEX or NYSE) to obtain the approval of our security holders prior to issuing any such compensatory options, warrants or other rights to purchase securitieson January 20, 2023. See below “Recent Sales of the Company. Nevertheless, there are restrictions and limitations under the 1940 Act on our ability to grant options and warrants to members of our management and our noninterested, nonemployee directors that, in our case, generally prohibit any such grants in the absence of prior SEC approval.Unregistered Securities” for further information.
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Recent Sales of Unregistered Securities
In August 2020, the company issued 22,223 shares of restricted stock to executive officers. Under their terms, the shares vested on the one-year anniversary of their issuance and, until such time, were subject to forfeiture. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933. No proceeds were received in connection with the issuance of these restricted shares, as they were issued for compensatory purposes.
In April 2022, the company issued an aggregate of 28,889 shares of restricted stock to directors and executive officers. Under their terms, the shares vest on the one-year anniversary of their issuance and, until such time, remain subject to forfeiture. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933. No proceeds were received in connection with the issuance of these restricted shares, as they were issued for compensatory purposes.
In September 2022, the company issued an aggregate of 25,448 shares of restricted stock to certain directors and executive officers. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933, and were issued for in lieu of cash compensation owing to such individuals.
In September 2022, the company issued an aggregate of 6,667 shares of restricted stock to certain employees of the company. Under their terms, the shares vest on the three-year anniversary of their issuance and, until such time, are subject to forfeiture. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933. No proceeds were received in connection with the issuance of these restricted shares, as they were issued for compensatory purposes.
In November and December 2022, the company issued options for the purchase of an aggregate of 870,000 shares of common stock to officers, directors and employees of, and consultants to, the company contemporaneously with the adoption of a 2022 Stock Incentive Plan. These option grants were made subject to subsequent shareholder approval of the 2022 Stock Incentive Plan in accordance with Nasdaq rules. The options were granted pursuant to Section 4(a)(2) of the Securities Act of 1933 and other applicable exemptions. The shareholders of the company subsequently approved the 2022 Stock Incentive Plan on January 20, 2023 at a special meeting of shareholders called for that purpose.
Recent Purchases of Securities
None.
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ForwardLookingForward-Looking Statements
Some of theCertain statements made in this sectionreport may constitute “forward-looking statements” for purposes of our report are forwardlooking statements. These forwardlookingfederal securities laws. Our forward-looking statements generally relate to and are based upon our current plans, expectations, assumptions and projections about future events. Our management currently believes that the various plans, expectations, and assumptions reflected in or suggested by these forwardlooking statements are reasonable. Nevertheless, all forwardlooking statements involve risks and uncertainties and our actual actions or future results may be materially different from the plans, objectives or expectations, or our assumptions and projections underlying our present plans, objectives and expectations, which are expressed in this report. An example of specific factors that might cause our actual results to differ from our current expectations include, but are not limited to: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.
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The foregoing list is not exhaustive, and readers are urged to read carefully and consider the risk factors described elsewhere in this report. In light of the foregoing, prospective investors are cautioned that the forwardlookingforward-looking statements included in this filing may ultimately prove to be inaccurate―even materially inaccurate. Because of the significant uncertainties inherent in such forwardlooking statements, the inclusion of such information should not be regarded as a representation or warranty by the Company or any other person that our objectives, plans, expectations or projections that are contained in this filingreport 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 achievedthose 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 any specified time frame, if ever.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 |
|
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
Item | 2019 | 2018 | ||||||
Investment Income: | ||||||||
Interest Income | $ | 109,795 | $ | 130,463 | ||||
Investment Income: | ||||||||
Interest Income | $ | 112,189 | $ | 109,795 | ||||
Dividend Income | 49,473 | 40,927 | ||||||
Operating Expenses: | ||||||||
General Operating Expenses | 111,757 | 106,150 | ||||||
Legal and Accounting Expenses | 209,897 | 186,477 | ||||||
Executive Management Compensation | 340,003 | 248,101 | ||||||
Insurance Expense | 82,773 | 80,318 | ||||||
Director’s Fees | 90,000 | 60,000 | ||||||
Net Investment Loss | $ | (672,768 | ) | $ | (530,324 | ) |
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For the year ended December 31, 2019, the Company2022, we earned $78,264 in interest payments$3,397,443 from one eligible portfolio company― DBR Enclave US Investors, LLC ― an additional $33,925 in bank interest on cash balances31 different short-term loans; and note receivable, an aggregate of $46,293$802,010 in dividend payments from five eligible portfolio companies—Manning & Napier, Inc., Simulations Plus, Inc., Tessco Technologies, Inc., Educational Development Corp., and Taitron Components, Inc., and $3,180 in non-eligible portfolio company dividends.related origination fees.
For the year ended December 31, 2018, the Company2021, we earned $99,088$11,480 in interest payments from two eligible portfolio companies― DBR Enclave US Investors, LLC and Bravo Financial, LLC―one equity investment company, an aggregate of $2,099,684 from 26 short-term loans; an additional $10,707$25,037 in bank interest on cash balances and note receivable,receivable; an aggregate of $37,155$467,500 in dividend payments from five eligible portfolio companies—OTC Markets Group Cl A, Simulations Plus, Inc., Tessco Technologies, Inc., Educational Development Corp.,origination fees relating to our short-term loans; and Taitron Components, Inc., and $3,772an additional $52,500 in non-eligible portfolio company dividends.late fee penalties.
As the table above indicates, we incurred operating expenses aggregating $834,430$2,758,877 for the year ended December 31, 2019,2022, and $681,046$1,354,751 for the year ended December 31, 2018.2021. A discussionsummary of the various components of our operating expenses for these periods is set forth below.
Director’s Fees.General Operating Expenses. Our director’s feesgeneral operating expenses were $90,000$140,993 for the year ended December 31, 20192022 and $60,000$107,203 for the year ended December 31, 2018.2021. The increase in the current period is dueprimarily related to an increasefees incurred during 2022 in director compensation approved during 2019.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 $209,897$1,592,218 for the year ended December 31, 20192022 and $186,477$453,440 for the year ended December 31, 2018.2021. The increase in the current period is primarily related to legal, consulting and underwriting fees and costs we incurred in connection with our public offering and listing on the processNasdaq Capital Market tier of planning for, seeking, and obtaining authority for, the withdrawal of our BDC election.Nasdaq exchange.
Executive Management Compensation. ForDirector’s Fees. Our director’s fees were $177,073 for the year ended December 31, 20192022 and $120,000 for the year ended December 31, 2018, executive management compensation aggregated $340,003 and $248,101, respectively, in cash payments.2021. The increase in the current period is primarily due to the payment of a one-time director’s stock bonus payment paid in 2019.April, 2022.
Interest Expense. Our interest expense was $195,893 for the year ended December 31, 2022 and $9,511 for the year ended December 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 ended December 31, 2019 and December 31, 2018,2022 our net investment lossgain was $672,768 and $530,324, respectively.$1,440,576. For the year ended December 31, 2021, our net investment gain was $1,301,450. The increased net investment loss isgain during 2022 was primarily the result of higher expenses as discussed above.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 ended December 31, 2019,2022, we had a decreasean increase in net assets of $1,210,356.$4,928,290. This decreaseincrease in net assets was primarily due to the payment of a dividendcapital we raised during 2019.our August 2022 public offering and an increase in our interest income earned from the short-term loans we provided. Our net assets increased by $1,649,674$1,773,162 for the year ended December 31, 2018,2021, primarily due to the appreciationincrease in value on our portfolio positions in Bitesquad.com, LLC and HemaCare Corporation.interest income earned from the short-term loans we provided.
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Liquidity and Capital Resources
Summary cash flow data is as follows:
Year Ended | Year Ended |
| For the Year Ended December 31, |
| ||||||||||||
December 31, | December 31, |
| 2022 |
| 2021 |
| ||||||||||
2019 | 2018 | |||||||||||||||
Cash flows provided (used) by: | ||||||||||||||||
Cash flows used by: |
|
|
|
|
| |||||||||||
Operating activities | $ | 7,653,905 | $ | (1,192,193 | ) |
| $ | (4,888,302 | ) |
| $ | (1,886,094 | ) | |||
Financing activities | (553,370 | ) |
| 4,041,795 |
| (1,618,337 | ) | |||||||||
Net increase (decrease) in cash | 7,100,535 | (1,192,193 | ) | |||||||||||||
Net decrease in cash |
| (846,507 | ) |
| (3,504,431 | ) | ||||||||||
Cash, beginning of period | 966,121 | 2,158,314 |
| 1,936,148 |
| 5,440,579 |
| |||||||||
Cash, end of period | $ | 8,066,656 | $ | 966,121 |
| $ | 1,089,641 |
|
| $ | 1,936,148 |
|
WeOn 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 notsecured by a partygrant 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 any credit facilities orfund its operations through the entirety of fiscal 2023. Accordingly, at present we have no definitive plans to obtain other sources of liquidity and we have no present plans to become party to any credit facility. As a result, our $8,066,656 of cash at the end fiscal 2019 and our $966,121 of cash at the end of fiscal 2018 constituted our sole source of liquidity. Management believes cash on hand is sufficient to fund our anticipated operational and financing activities through fiscal 2020.borrowing.
On February 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 the August 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 20192022 and we do not anticipate any such capital expenditures for fiscal 2020.2023.
OffBalanceOff-Balance Sheet Arrangements
We do not have any offbalanceoff-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.
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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 the Valuation Committee of 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 Companycompany investments.
Interest and Dividend Income Recognition
Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any.
Loans are generally placed on nonaccrual 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. Accrued and unpaid interest is generally reversed when a loan is placed on nonaccrual status. Interest payments received on nonaccrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Nonaccrual 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 this if the 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 exdividend date for publicly traded portfolio companies.
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 revenueinvestment 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.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders’ of Mill City Ventures III, Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Mill City Ventures III, Ltd. (the Company) as of December 31,
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 the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities 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
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
Boulay PLLP
We have served as the Company’s auditor since 2019
Minneapolis, Minnesota
Mill City Ventures III, Ltd. Balance Sheets
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, Ltd.
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, Ltd. Statements of Shareholders’ Equity For the years ended December 31,
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, Ltd. Statements of Cash Flows
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, Ltd.
As of December 31,
The accompanying notes are an integral part of these financial statements.
Mill City Ventures III, Ltd. Investment Schedule As of December 31, 2021
The accompanying notes are an integral part of these financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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 developmentstagedevelopment-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. On February 7,In 2013, we filed Form N-54Aelected to become a business development company (“BDC”) under the Investment Company Act of 1940 Act.(the “1940 Act”). We operated as a BDC until we withdrew our BDC election to be treated as a BDC by filing a Form N-54C with SEC onat the end of December 27, 2019. As of theSince that time, of this filing, we remainhave remained a public reporting company that filesfiling periodic reports with the SEC,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 are seeking opportunities to invest in or acquire one or more businesses. Nevertheless, any investment we make in business will be limited and structured in suchmonitor our investments as a way aswhole to ensure that no more than 40% of our total assets consist of investment securities.“investment securities” as defined under the 1940 Act.
Because we operated as a BDC or investment company from 2013 through December 27, 2019, the financial statements in this report reflect our operations as a business development company, or “BDC,” under the Investment Company Act of 1940 (the “1940 Act”) including the December 31, 2019 balance sheet. During that time, we were primarily focused on investing in or lending to privately held and small capitalization publicly traded U.S. companies, and making managerial assistance available to such companies. A majority of our investments by dollar amount were structured as purchases of preferred or common stock or loans evidenced by promissory notes that may have been convertible into stock by their terms or that may have been accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investment objective was to generate income and capital appreciation that ultimately became realized gains.
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 ispresents 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 ended December 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 of FDIC 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 the Financial 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 Valuation Committee of 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.
Income taxes:
Due to our change in business model, we now accounts 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 amount and tax basis of assets and liabilities using enacted tax rates in effect for the 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 in the period that includes the enactment date.
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 considers 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 be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. Based on its evaluation, the Company believes it has no significant unrecognized tax positions. The Company’s evaluation was performed for the tax years ended December 31, 2016 through 2019, which are the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2019. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
Prior to the business model change in 2019, we operated as a BDC under the 1940 Act. As such, we planned to be taxed as a regulated investment company, or “RIC”. Compliance with the requirements of the Internal Revenue Code applicable to RICs required us to distribute at least 90% of our investment company taxable income to shareholders. Our intention was to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain, therefore we have made no provision for income taxes prior to 2019. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences were reclassified to paid-in capital. For more information of the current year provision, see Note 11, “Income Taxes”.
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. 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.
Recently Adopted Accounting Pronouncements:
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Leases (Topic 840). Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The guidance requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted.
Effective January 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets. The Company elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, the Company did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of $57,523 each, as of January 1, 2019, with no impact on accumulated deficit. Financial position for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.
Additional information and disclosures required by this new standard are contained in Note 10, 'Operating Leases'.
NOTE 3 — NET GAIN (LOSS) 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 weightedaverage number of vested 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, | ||||||||
2019 | 2018 | |||||||
Numerator: Net increase (decrease) in net assets resulting from operations | $ | (656,986 | ) | $ | 1,649,674 | |||
Denominator: Weighted-average number of common shares outstanding | 11,067,402 | 11,067,402 | ||||||
Basic and diluted net gain (loss) per common share | $ | (0.06 | ) | $ | 0.15 |
At December 31, 2019 and 2018, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares.
NOTE 4—LEASES
On January 1, 2019 we adopted ASU No. 2016-2, Leases (Topic 842), and its amendments and elected the effective date transition method.
The Company is subject to two non-cancelable operating leases for office space expiring March 31, 2022. 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 of December 31, 2019 was 4.5% and the weighted average remaining lease term is 2 years.
Under ASC 840, rent expense for office facilities for the year ended December 31, 2019 and December 31, 2018 was $73,685 and $78,180, respectively.
The components of our operating lease were as follows for the three and twelve months ended December 31, 2019:
Three-Month | Year | |||||||
Ended | Ended | |||||||
December 31, 2019 | December 31, 2019 | |||||||
Operating lease costs | $ | 4,779 | $ | 19,008 | ||||
Variable lease cost | $ | 4,223 | 16,654 | |||||
Short-term lease cost | $ | 7,433 | 29,660 | |||||
Total | $ | 16,435 | $ | 65,322 |
The following is a schedule of the aggregate required annual minimum lease payments.
Year | Amount | |||
2020 | $ | 20,551 | ||
2021 | 21,162 | |||
2022 | 5,396 | |||
TOTAL | $ | 47,109 |
NOTE 5—SHAREHOLDERS’ EQUITY
At December 31, 2019 and 2018, a total of 11,067,402 shares of common stock were issued and outstanding.
NOTE 6—INVESTMENTS
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2019 (together with the corresponding percentage of total portfolio investments):
As of December 31, 2019 | ||||||||||||||||
Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
Senior Secured Loans | $ | — | — | % | — | — | % | |||||||||
Preferred Stock | 150,000 | 7.6 | 300,000 | 17.2 | ||||||||||||
Common Stock | 805,472 | 40.8 | 906,697 | 52.1 | ||||||||||||
Warrants | 679 | — | — | — | ||||||||||||
Other Equity | 1,020,219 | 51.6 | 534,200 | 30.7 | ||||||||||||
Total | $ | 1,976,370 | 100.0 | % | 1,740,897 | 100.0 | % |
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2018 (together with the corresponding percentage of total portfolio investments):
As of December 31, 2018 | ||||||||||||||||
Investments at Amortized Cost | Percentage of Amortized Cost | Investments at Fair Value | Percentage of Fair Value | |||||||||||||
Preferred Stock | $ | 1,032,057 | 14.8 | % | 1,046,706 | 10.5 | % | |||||||||
Common Stock | 4,775,072 | 68.6 | 7,899,857 | 79.3 | ||||||||||||
Warrants | 679 | — | — | — | ||||||||||||
Other Equity | 1,151,019 | 16.6 | 1,013,629 | 10.2 | ||||||||||||
Total | $ | 6,958,827 | 100.0 | % | 9,960,192 | 100.0 | % |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2019:
As of December 31, 2019 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Consumer | $ | 15,000 | 0.9 | % | ||||
Financial | 150,858 | 8.7 | ||||||
Information Technology | 300,000 | 17.2 | ||||||
Leisure & Hospitality | 369,200 | 21.2 | ||||||
Oil & Gas | 150,000 | 8.6 | ||||||
Publishing | 755,839 | 43.4 | ||||||
Total | $ | 1,740,897 | 100.0 | % |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2018:
As of December 31, 2018 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Advertising | — | —% | ||||||
Business Services | $ | 226,226 | 2.3 | |||||
Consumer | 426,361 | 4.3 | ||||||
Education | 9,370 | 0.1 | ||||||
Financial | 319,780 | 3.2 | ||||||
Healthcare | 1,339,009 | 13.4 | ||||||
Industrial Goods | 187,601 | 1.9 | ||||||
Information Technology | 1,525,770 | 15.3 | ||||||
Leisure & Hospitality | 4,350,690 | 43.7 | ||||||
Oil & Gas | 488,629 | 4.9 | ||||||
Publishing | 1,086,756 | 10.9 | ||||||
Total | $ | 9,960,192 | 100.00 | % |
We do not “control,” and we are not an “affiliate” (as each of those terms is defined in the 1940 Act), of any of our portfolio companies as of December 31, 2019 and 2018. Under the 1940 Act, we would generally be presumed to “control” a portfolio company if we owned more than 25% of its voting securities, and be an “affiliate” of a portfolio company is we owned at least 5% and up to 25% of its voting securities.
NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS
General information: 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 present valuediscounted 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 the Valuation Committee of our Board of Directors, pursuant to our written Valuation Policy and Procedures. These policies and procedures generally require thatDirectors. In general, we value our Level 3 equity investments at cost plus any accrued interest, unless circumstances warrant a different approach. Our Valuation Policy and Procedures provide examplesExamples of these circumstances such as whenincludes a situation in which a portfolio company has engaged in a subsequent financing of more than ade 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 situations identified in our Valuation Policyfacts and Procedurescircumstances 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 Policyvaluation policy and Proceduresprocedures 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 securitiesinstruments with a residual maturity less than or equal to 60 days, the valuewe will generally bevalue such instruments based on a present valuediscounted 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 Valuation CommitteeBoard of Directors with (i) valuation reports for each portfolio investment (which reports include our cost,, the most recent prior valuation andrecommendations, if any, current proposed valuation, and an indication of the valuation methodology used, together with any other supporting materials); (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments; and (iv) recommendations 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. The committeeIn such a case, the Board of Directors would then discussesdiscuss 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 Policyvaluation policy and Proceduresprocedures 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 |
|
| $ | 2,831,050 |
|
Denominator: Weighted-average number of common shares outstanding |
|
| 5,333,028 |
|
|
| 4,795,242 |
|
Basic and diluted net gain per common share |
| $ | 0.11 |
|
| $ | 0.59 |
|
F-12 |
Table of Contents |
At December 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, at December 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 on January 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 expiring April 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 of December 31, 2022 and December 31, 2021 was 4.5% and the weighted-average remaining lease term is one year.
Rent expense for office facilities for the year ended December 31, 2022 and 2021 was $73,146 and $66,459, respectively.
The components of our operating leases were as follows for the years ended December 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 at December 31:
Operating Lease |
| 2022 |
|
| 2021 |
| ||
Right-of-use assets |
| $ | 16,398 |
|
| $ | 4,984 |
|
|
|
|
|
|
|
|
|
|
Operating Lease Liability |
| $ | 16,562 |
|
| $ | 5,654 |
|
Less: short term portion |
|
| (16,562 | ) |
|
| (5,654 | ) |
Long term portion |
| $ | — |
|
| $ | — |
|
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 |
| $ | 16,562 |
|
| $ | 5,654 |
|
Supplemental cash flow information related to leases for the years ended December 31:
|
| 2022 |
|
| 2021 |
| ||
Operating cash outflow from operating leases |
| $ | 75,146 |
|
| $ | 66,459 |
|
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 of December 31, 2022 (together with the corresponding percentage of total portfolio investments):
|
| As of December 31, 2022 |
| |||||||||||||
|
| Investments at Amortized Cost |
|
| Percentage of Amortized Cost |
|
| Investments at Fair Value |
|
| Percentage of 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 of December 31, 2021 (together with the corresponding percentage of total portfolio investments):
|
| As of December 31, 2021 |
| |||||||||||||
|
| Investments at Amortized Cost |
|
| Percentage of Amortized Cost |
|
| Investments at Fair Value |
|
| Percentage of 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 December 31, 2022:
|
| As of December 31, 2022 |
| |||||
|
| Investments at Fair Value |
|
| Percentage of 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 December 31, 2021:
|
| As of December 31, 2021 |
| |||||
|
| Investments at Fair Value |
|
| Percentage of 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 of December 31, 20192022 and 20182021 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 of December 31, 2019,2022, 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 |
|
As of December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Preferred Stock | $ | — | $ | — | $ | 300,000 | $ | 300,000 | ||||||||
Common Stock | 906,697 | — | — | 906,697 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||
Other Equity | — | — | 534,200 | 534,200 | ||||||||||||
Total | $ | 906,697 | $ | — | $ | 834,200 | $ | 1,740,897 |
F-15 |
Table of Contents |
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2018,2021, 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 |
|
As of December 31, 2018 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Preferred Stock | $ | — | $ | 32,448 | $ | 1,014,258 | $ | 1,046,706 | ||||||||
Common Stock | 4,763,425 | — | 3,136,432 | 7,899,857 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||
Other Equity | — | — | 1,013,629 | 1,013,629 | ||||||||||||
Total | $ | 4,763,425 | $ | 32,448 | $ | 5,164,319 | $ | 9,960,192 |
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, 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 ended December 31, 2022 attributable to Level 3 portfolio investments still held as of December 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 ended December 31, 2019:2021:
For the year ended December 31, 2019 | ||||||||||||||||||||
Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of January 1, 2019 | $ | — | $ | 1,014,258 | $ | 3,136,432 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation (depreciation) | — | 12,478 | (2,848,275 | ) | — | (348,629 | ) | |||||||||||||
Purchases and other adjustments to cost | — | — | — | — | — | |||||||||||||||
Sales and redemptions | — | (726,691 | ) | (3,341,639 | ) | (128,775 | ) | (130,800 | ) | |||||||||||
Net realized gain (loss) | — | (45 | ) | 3,053,482 | 128,775 | — | ||||||||||||||
Balance as of December 31, 2019 | $ | — | $ | 300,000 | $ | — | $ | — | $ | 534,200 | ||||||||||
Net change in unrealized appreciation for the year ended 12/31/19 on securities still held | $ | — | $ | — | $ | — | $ | — | $ | (348,629 | ) |
|
| 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 depreciationappreciation for the year ended December 31, 20192021 attributable to Level 3 portfolio investments still held as of December 31, 20192021 is $348,629,$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 levelLevel 3 investments held as of December 31, 20192022 and the unobservable inputs used to determine their valuation:
Security Type | 12/31/19 FMV | Unobservable Inputs | ||||||
Tzfat Spirits of Israel, LLC | Other Equity | $ | 15,000 | last known funding secured by company | ||||
Kwikbit Inc. (fka MAX 4G) | Preferred Stock | 300,000 | last funding secured by company | |||||
DBR Enclave US Investors, LLC | Other Equity | 369,200 | cost | |||||
Northern Capital Partners I, LP | Other Equity | 150,000 | analysis of issuer provided financials and management commentary | |||||
$ | 834,200 |
Security Type |
| 12/31/22 FMV |
|
| Valuation Technique |
| Unobservable Inputs |
| Range | ||
ST Non-banking Loans |
| $ | 15,285,932 |
|
| discounted cash flow |
| determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness |
| 12-33 | % |
Other Equity |
|
| 222,500 |
|
| last secured funding known by company |
|
|
|
| |
Preferred Stock |
|
| 1,200,000 |
|
| last funding secured by company |
| economic changes since last 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, 2018:2021:
As of December 31, 2018 | ||||||||||||||||||||
Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of January 1, 2018 | $ | 500,000 | $ | 1,026,736 | $ | 1,293,490 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation | 750,000 | (12,478 | ) | 1,842,942 | — | — | ||||||||||||||
Purchases and other adjustments to cost | — | — | — | — | — | |||||||||||||||
Sales and redemptions | (550,000 | ) | — | — | — | — | ||||||||||||||
Net realized gain (loss) | (700,000 | ) | — | — | — | — | ||||||||||||||
Balance as of December 31, 2018 | $ | — | $ | 1,014,258 | $ | 3,136,432 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation for the year ended 12/31/18 on securities still held | $ | — | $ | (12,478 | ) | $ | 1,842,942 | $ | — | $ | — |
The net change in unrealized appreciation for the year ended December 31, 2018 attributable to Level 3 portfolio investments still held as of December 31, 2018 was $1,830,464, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
The following table lists our level 3 investments held as of December 31, 2018 and the unobservable inputs used to determine their valuation:
Security Type | 12/31/18 FMV | Unobservable Inputs | ||||||
Insite Software Solutions, Inc | Warrants | $ | — | intrinsic value of warrants | ||||
Tzfat Spirits of Israel, LLC | Other Equity | 25,000 | last funding secured by company | |||||
MAX 4G, Inc. | Preferred Stock | 300,000 | last funding secured by company | |||||
Bitesquad.com LLC | Preferred Stock | 714,258 | announced merger of company | |||||
Bitesquad.com LLC | Common Stock | 3,136,432 | announced merger of company | |||||
DBR Enclave US Investors, LLC | Other Equity | 500,000 | cost | |||||
Northern Capital Partners I, LP | Other Equity | 488,629 | issuer provided financials | |||||
Southern Plains Resources, Inc. | Common Stock | — | company has substantially ceased operations | |||||
$ | 5,164,319 |
Security Type |
| 12/31/21 FMV |
|
| Valuation Technique |
| Unobservable Inputs |
| Range | ||
ST Non-banking Loans |
| $ | 11,650,000 |
|
| discounted cash flow |
| determining private company credit rating |
| 12-44 | % |
Other Equity |
|
| 812,500 |
|
| last secured funding known by company |
| economic changes since last funding |
|
| |
Preferred Stock |
|
| 1,200,000 |
|
| last funding secured by company |
| economic changes since last funding |
|
| |
|
| $ | 13,662,500 |
|
|
|
|
|
|
|
There were no transfers between levels during the years ended December 31, 20192022 and 2018.2021.
NOTE 8 — MINIMUM ASSET COVERAGE– LINE OF CREDIT
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 (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 BDC,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 on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. In the event that a Lender, including Mr. Berman, terminates its lending obligations, the Loan Agreement requires that we were requiredrepay such Lender, prior to meet various regulatory tests. Among other things, these tests requiredthe five-year maturity date, with the proceeds derived from specified investments.
During the period January 3 to June 30, 2022, the Loan Agreement provided for us to invest at least 70%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 total assetscommon 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. Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in private or smallcap public U.S.based companies, and to maintain an asset coverage ratio of total assets (less all liabilities and indebtedness not represented by senior securities) to total indebtedness represented by senior securities and borrowings (including accrued interest payable) of at least 200%. As ofcash.
At December 31, 2019, approximately 99% of our investments (by fair value at that date) were in private or smallcap public U.S.based companies and we did not carry any debt.2022, the balance outstanding on the line was $0.
NOTE 9 – RELATED-PARTY TRANSACTIONS
We maintain a Code of Ethics and certain other policies relating to conflicts of interest and related-party transactions as well as policies and procedures relatingpolicy requiring (i) certain disclosures be made to what regulations applicable to BDCs generally describe as “affiliate transactions.” Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors orin relation to situations where officers, directors, significant shareholders, or any of ours, are also directly or indirectly invested. Our Board of Directors has adopted a policy to require our disclosure of these instancestheir affiliates may enter into transactions with us, and (ii) certain disclosures appear in our periodic filingsthe reports we prepare and file with the SEC. OurIn this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions requiring disclosure under this policy are:transactions:
· |
On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, | ||
· | 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 (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. See note 8 above for further details. |
F-17 |
Table of Contents |
NOTE 10 — RETIREMENT SAVINGS PLANS
Our twothree full-time employees Messrs. Geraci and Polinsky, 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 $10,000$14,063 and $11,250 to the plans for the years ended 20192022 and 2018,2021, respectively.
NOTE 11 — INCOME TAXES
Prior to December 27, 2019, before we withdrew our election to be treated as a Business Development Company, we planned to be taxed as a regulated investment company (RIC). Compliance with the requirements of the Internal Revenue Code applicable to RICs requiredus to distribute at least 90% of our investment company taxable income to shareholders. Our intention wasto distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain, therefore we have made no provision for income taxes prior to December 27, 2019.Now that the election to be an RIC has passed and as of December 27, 2019Presently, we are a C-Corporation“C-corporation” for tax purposes.purposes and have booked an income tax provision for the years ended December 31, 2022 and 2021. Income taxes as of December 31, 20192022, 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 |
| $ | 178,869 |
|
| $ | 1,054,698 |
|
The Company has not reflected any benefit
A reconciliation of suchincome tax provisions at the U.S. statutory rate for fiscal year 2022 and 2021 is as follows:
|
| 2022 |
|
| 2021 |
| ||
Rate reconciliation: |
|
|
|
|
|
| ||
Tax expense at U.S. statutory rate |
| $ | 185,887 |
|
| $ | 1,080,213 |
|
Change in deferred tax rate |
|
| 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 operating loss carry-forwards intax effects of temporary differences between the accompanyingcarrying amounts of assets and liabilities for financial statements. Our current taxes due are not material toreporting purposes and the financial statements. Therefore, we do not have a provisionamounts used for income tax expense (benefit). The income tax expense benefit differed from the amount computed by applying the U.S. federal income tax ratepurposes. Significant components of 21% to income before income taxes as a result of the following:
The tax effect of temporary differences that give rise to significant portions of theour deferred tax assets for the period ended December 31, 2019 is presented below:
2019 | ||||
Deferred tax assets: | ||||
Net operating loss carryforward | $ | 356,000 | ||
Unrealized losses | 56,000 | |||
R&D and foreign tax credit | 34,000 | |||
Total gross deferred tax assets | $ | 446,000 | ||
Valuation allowance | (446,000 | ) | ||
Net deferred tax assets | $ | — |
The Company had Federal net operating loss carryforwards of approximately $978,000 at December 31, 2019 expiring from 2036-2037. The Company had Minnesota net operating loss carryforwards of approximately $1,922,000 at December 31, 2019 expiring from 2021 through 2023. The Company also has insignificant net operating loss carryforwards from other states.
The Company concluded that it was no longer more likely than not that it would realize a portion of its deferred tax assets due to the uncertainty of profitability after implementing the new business model. As such, the Company maintained a full valuation allowance against its net deferred tax assetsand liabilities as of December 31, 2019. 2022 and 2021 were as follows:
|
| December 31 |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Deferred tax components |
|
|
|
|
|
| ||
Unrealized (gain) loss on marketable securities |
| $ | 156,550 |
|
| $ | (46,660 | ) |
Depreciation |
|
| 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 ended December 31, 20192022 through 2015:2018:
Year Ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Per Share Data(1) | ||||||||||||||||||||
Net asset value at beginning of period | $ | 1.02 | 0.87 | 0.77 | 0.72 | 0.94 | ||||||||||||||
Net investment income (loss) | (0.06 | ) | (0.05 | ) | (0.05 | ) | (0.02 | ) | — | |||||||||||
Net realized and unrealized gains (losses) | — | 0.20 | 0.11 | 0.07 | (0.22 | ) | ||||||||||||||
Repurchase of common stock | — | — | 0.04 | — | — | |||||||||||||||
Payment of common stock dividend | (0.05 | ) | — | — | — | — | ||||||||||||||
Net asset value at end of period | $ | 0.91 | 1.02 | 0.87 | 0.77 | 0.72 | ||||||||||||||
Ratio / Supplemental Data | ||||||||||||||||||||
Per share market value of investments at end of period | $ | 0.16 | 0.90 | 0.65 | 0.57 | 0.47 | ||||||||||||||
Shares outstanding at end of period | 11,067,402 | 11,067,402 | 11,067,402 | 12,151,493 | 12,151,493 | |||||||||||||||
Average weighted shares outstanding for the period | 11,067,402 | 11,067,402 | 11,863,392 | 12,151,493 | 12,151,493 | |||||||||||||||
Net assets at end of period | $ | 10,068,533 | 11,278,889 | 9,629,215 | 9,387,408 | 8,741,288 | ||||||||||||||
Average net assets(2) | $ | 11,473,535 | 10,341,702 | 9,444,440 | 8,651,742 | 10,520,199 | ||||||||||||||
Total investment return | (5.88 | )% | 17.24 | % | 7.79 | % | 6.94 | % | (23.40 | )% | ||||||||||
Portfolio turnover rate (3) | 7.63 | % | 26.93 | % | 35.03 | % | 24.94 | % | 26.26 | % | ||||||||||
Ratio of operating expenses to average net assets(3) | (7.27 | )% | (6.59 | )% | (7.30 | )% | (7.15 | )% | (6.08 | )% | ||||||||||
Ratio of net investment income (loss) to average net assets(3) | (5.86 | )% | (5.13 | )% | (5.45 | )% | (2.66 | )% | (0.68 | )% | ||||||||||
Ratio of realized gains (losses) to average net assets(3) | 28.35 | % | (5.62 | )% | 5.71 | % | (2.12 | )% | 1.74 | % |
|
| 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 January 6, 2020,26, 2022, we made a loan in the Company loaned $254,000 to the buyerprincipal amount of a residential real estate property in St. Louis Park, Minnesota,$2,500,000 and obtained in return a 12-month180-day promissory note accruingbearing interest at the rate of 15%18% per annum (paying interest only for the first 11 months, and with accrued interest and all principal being due on January 6, 2021), together with a mortgage on the purchased real estate and a pledge of all of the equity interests in the buyer.annum.
On January 29, 2020, we invested $3.0 million in a real estate development project and acquired in return a $3.0 million promissory note accruing interest at the per annum rate of 15%, and maturing on October 31, 2020. The obligations under the promissory note are secured by personal guarantees delivered by the principals involved in the project, as well as a pledge of membership interests in the management company that manages the project.
On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) a pandemic. As a result, economic uncertainties and market volatility have arisen which are likely to negatively impact our investment valuations and net increase or decrease in net assets resulting from operations. Other financial impacts could occur though such potential impact is unknown at this time.
F-19 | |
Table of Contents |
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
As of December 31, 2019,2022, our Chief Executive Officer and Chief Financial Officer in conjunction with our Chief Compliance Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of December 31, 2019.2022.
Report of Management on Internal Control Over Financial Reporting
Board of Directors and Shareholders Mill City Ventures III, Ltd.:
The management of Mill City Ventures III, Ltd. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, the Company’s management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 20192022 based on the framework set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.2022. Boulay PLLP, an independent registered public accounting firm, is not required to issue, and thus has not issued, an attestation report on the Company’s internal control over financial reporting as of December 31, 2019.2022.
/s/ Douglas M. Polinsky
Chairman, President and Chief Executive Officer
/s/ Joseph A. Geraci, II
Chief Financial Officer
Changes in Internal ControlsControl
There were no changes in our internal control over financial reporting during the year ended December 31, 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
/s/ Douglas M. Polinsky
Chairman, President and Chief Executive Officer
/s/ Joseph A. Geraci, II
Chief Financial Officer
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PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers, Promoters, and Control Persons
Name | Age | Positions | ||
Douglas M. Polinsky | 63 | Chairman, Chief Executive Officer and President | ||
Joseph A. Geraci, II | 53 | Director and Chief Financial Officer | ||
Howard Liszt | 77 | Director | ||
Lyle Berman | 81 | Director | ||
Laurence Zipkin | 83 | Director |
Douglas M. Polinsky co-founded the Company in January 2006 and since that time has been the Chairman and Chief Executive Officer of the Company. Since 1994, Mr. Polinsky has been the President of Great North Capital Consultants, Inc., a financial advisory and investment company that he founded. Great North Capital Consultants, Inc. primarily engages in the business of investing in hard money lending with collateral on the loans being first or second mortgages in both residential and commercial properties. In addition, Great North Capital Consultants, Inc. makes direct investments into public and private companies. Since 2007, Mr. Polinsky has been an independent director of FAB Universal, Inc., a Colorado corporation based in Pennsylvania which did specialize in digital content distribution but is now dormant. Mr. Polinsky is a member of the Audit and Compensation Committees of the Board of Directors. Since 2012, Mr. Polinsky has been an independent director of Future Healthcare of America, Inc., a Wyoming Corporation with headquarters in Pennsylvania. Future Healthcare of America is an in-home healthcare company with operations in Wyoming and Montana. Mr. Polinsky is a member of the Audit and Compensation Committees of the Board of Directors. Since 2015, Mr. Polinsky has been an independent director of Liberated Syndication, Inc., a Nevada corporation with its operations in Pennsylvania. Liberated Syndication, Inc. is a host and publisher of podcasts. Mr. Polinsky is a member of the Audit and Compensation committeesCommittees of the Board of Directors.Directors of Liberated Syndication. Mr. Polinsky earned a Bachelor of Science degree in hotel administration at the University of Nevada, at Las Vegas in 1981.
Joseph A. Geraci, II cofoundedco-founded the Company in January 2006 and has been a director and the Chief Financial Officer of the
Company since that time. Since February 2002 through the present time, Mr. Geraci has been managing member of Isles Capital, LLC, an advisory and consulting firm that assists small businesses, both public and private, in business development. In March 2005, Mr. Geraci also became the managing member of Mill City Advisors, LLC, the general partner of Mill City Ventures, LP, and Mill City Ventures II, LP, each a Minnesota limited partnership that invested directly into both private and public companies. From January 2005 until August 2005, Mr. Geraci served as the Director of Finance for Gelstat Corporation, a purveyor of homeopathic remedies, based in Bloomington, Minnesota. Mr. Geraci provided investment advice to clients as a stockbroker and Vice President of Oak Ridge Financial Services, Inc., a MinneapolisbasedMinneapolis-based broker-dealer firm, from June 2000 to December 2004. While at Oak Ridge Financial Services, Mr. Geraci’s business was focused on structuring and negotiating debt and equity private placements with both private and publicly held companies. From his career and investment experiences, Mr. Geraci has established networks of colleagues, clients, coinvestors, and the officers and directors of public and private companies. Mr. Geraci was employed at other Minneapolis brokerage firms from July 1991 to June 2000. From his career and investment experiences, Mr. Geraci has established networks of colleagues, clients, co-investors, and the officers and directors of public and private companies. These networks offer a range of contacts across a number of sectors and companies that may provide opportunities for investment, including many that meet the Company’s screening criteria.
In August 2003, the National Association of Securities Dealers (NASD) found in an administrative hearing that Mr. Geraci, while employed by and affiliated with a NASD member, had violated NASD Conduct Rule 2110 and SEC Rule 10b-5 in August 1999, and barred him from associating with any NASD member in the future.
Howard Liszt served as Chief Executive Officer of Campbell Mithun, a national marketing communications agency he joined in 1976, until 2001. Under his leadership, Campbell Mithun grew to be one of the 20 largest agencies in the world. He currently serves on the board of the following companies:: Eggland’s Best,Best. Mr. Liszt has served as a branded egg company;Board member for several industry-leading companies including Land O’O' Lakes, the second largest cooperative in the United States;ShuffleMaster, Ocular Sciences, and OCO Holdings, an independent marketing communications company;Coleman Natural Foods. Mr. Liszt holds a Bachelor of Arts in Journalism and Marketing and a Masters of Science in Marketing from the University of Minnesota, Minneapolis.
22 |
Lyle Berman is a 1964 graduate of the University of Minnesota with a degree in Business Administration. Mr. Berman began his career with Berman Buckskin, his family's leather business. He helped grow the business into a major specialty retailer with 27 outlets. In 1990, Mr. Berman participated in the founding of Grand Casinos, Inc. Mr. Berman is credited as one of the early visionaries in the development of casinos outside of the traditional gaming markets of Las Vegas and Atlantic City. In less than five years, the company opened eight casino resorts in four states. In 1994, Mr. Berman financed the initial development of Rainforest Cafe. He served as the Chairman and CEO from1994 until2000. In October 1995, Mr. Berman was honored with the B'nai B'rith "Great American Traditions Award." In April 1996, he received the Gaming Executive of the Year Award; in 2004, Mr. Berman was inducted into the Poker Hall of Fame; and in 2009, he received the Casino Lifetime Achievement Award from Raving Consulting & Casino Journal. In 1998, Lakes Entertainment, Inc. was formed. In 2002, as Chairman of the Board and CEO of Lakes Entertainment, Inc., Mr. Berman was instrumental in creating the World Poker Tour. Since January 2005, Mr. Berman has also served as Chairman of the Board of Pokertek, Inc.
Laurence Zipkin is nationally recognized for his expertise in the gaming industry, restaurants, and emerging small growth companies. From 1996 to 2006, Mr. Zipkin owned Oakridge Securities, Inc. where, as an investment banker, he successfully raised capital for various early growthstagegrowth-stage companies and advising clients with regard to private placements, initial public offerings, mergers, debt offerings, bridge and bank financings, developing business plans and evaluating cash needs and resources. He has extensive experience in the merger and acquisition field and has represented companies on both the buy and sell side. Since 2006, Mr. Zipkin has been selfemployed,self-employed, engaging in various consulting activities, owning and operating two restaurant properties, and purchasing distressed real estate. Mr. Zipkin is a licensed insurance agent for both life and health insurance. Mr. Zipkin attended the University of Pennsylvania Wharton School of Finance.
Under the Company’s bylaws, the directors serve for indefinite terms expiring upon the next annual meeting of the Company’s shareholders.
When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the
Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director. With regard to Messrs. Polinsky and Geraci, the Board of Directors considered their significant experience, expertise and background with regard to investing in general and the Company in particular. With regard to Mr. Berman, the Board of Directors considered his background and experience with the public securities markets and his former employment and experience in operational capacities. With regard to Mr. Liszt, the Board of Directors considered his experience on other boards of public companies, his past experience in the communications and advertising fields, and his organizational experience. With regard to Mr. Zipkin, the Board of Directors considered his knowledge, experience and skills in the finance, public securities and investment banking fields.
Code of Ethics
Our Board of Directors adopted a Code of Ethics on August 5, 2008, and revised March 6, 2013.2013 in connection with the Company’s election to become a BDC. The Code of Ethics includes our Company’s principal executive officer and principal financial officer, or persons performing similar functions, as required by Sections 406 and 407 of the SarbanesOxleySarbanes-Oxley Act of 2002. The Company formally revised the Code of Ethics again in March 2021, to reflect the Company’s withdrawal of its BDC election. Our Code of Ethics is available at our website, www.millcityventures3.com, or without charge, to any shareholder upon written request made to Mill City Ventures III, Ltd., Attention: Chief Executive Officer, 1907 Wayzata Blvd., Suite 205, Wayzata, MN 55391.
Changes to Board of Director Nomination Procedures
We have not had any material changes toIn March 2021, the procedures for shareholder nominations of candidates to serve on our Board of Directors duringformally created a Nominating and Governance Committee and adopted and associated charter. The charter alters the fiscal year ended December 31, 2019.
manner in which candidates for service as directors will be nominated for election or re-election and delegates that authority to the committee in lieu of the entire Board of Directors.
Communication with Board Members
Our Board of Directors has provided the following process for shareholders and interested parties to send communications to our board and/or individual directors. All communications should be addressed to Mill City Ventures III, Ltd., 1907 Wayzata Boulevard, Ste. 205, Wayzata, MN 55391, Attention: Chief Executive Officer. Communications to individual directors may also be made to such director at our company’s address. All communications sent to any individual director will be received directly by such individuals and will not be screened or reviewed by any company personnel. Any communications sent to the board in the care of the Chief Executive Officer will be reviewed by that officer to ensure that such communications relate to the business of the Company before being reviewed by the board.
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Committees of the Board of Directors; Audit Committee Financial Expert
The Board of Directors has an Audit Committee, a Compensation Committee, and a ValuationNominating and Governance Committee. The members of the Audit Committee are Laurence Zipkin, Howard Liszt and Lyle Berman., each of whom is independent for purposes of the Securities Exchange Act of 1934 and “noninterested” directors for purposes of the 1940 Act.1934. Mr. Bermancurrently serves as chair of the Audit Committee. The board has adopted a charter for the Audit Committee a copy of which is available at the Company’s website at www.millcityventures3.com. The Audit Committee is responsible for approving the Company’s independent accountants and recommending them to the board (including a majority of the independent directors) for approval and submission to the shareholders for ratification, if any, reviewing with its independent accountants the plans and results of the audit engagement, approving professional services provided by its independent accountants, reviewing the independence of its independent accountants and reviewing the adequacy of its internal accounting controls. The Audit Committee is also responsible for discussing with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company's risk assessment and risk management policies. The board has determined that Mr. Berman is an “audit committee financial expert” within the meaning of the rules of the Commission. Mr. Berman’s relevant experience is detailed in his biography above. The Board of Directors has determined that each of the Audit Committee members is able to read and understand fundamental financial statements and that at least one member of the Audit Committee has past employment experience in finance or accounting.
The members of the Compensation Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934 and “noninterested” directors for purposes of the 1940 Act.1934. Mr. Liszt currently serves as chair of the Compensation Committee. The compensation committee is responsible for approving the Company’s compensation arrangements with its executive management, including bonusrelatedbonus-related decisions and employment agreements with respect to such individuals. The board has adopted a charter for the Compensation Committee, a copy of which is available at www.millcityventures3.com.
The members of the ValuationNominating and Corporate Governance Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934 and “noninterested” directors for purposes of the 1940 Act.1934. Mr. ZipkinLiszt currently serves as chair of the ValuationNominating and Corporate Governance Committee. The Valuation CommitteeNominating and Corporate Governance committee is responsible for approvingadvising the fair valueBoard on a broad range of debtissues surrounding the composition and equity securities comprisingoperation of the Company’s investment portfolio pursuantBoard of Directors and its committees, specifically including identifying criteria for suitable board candidates, identifying individuals suited to the Company’s written valuation policy and procedures.
Of the directors presently servingservice on the board Messrs. Berman, Liszt and Zipkin are “independent” as that term is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards, and “noninterested” persons as that term is defined in the 1940 Act. Our company is not, however, subject(consistent with those criteria), recommending director candidates to the Nasdaq listing standards becauseboard and to the shareholders, conducting annual reviews of corporate governance matters and making related recommendations to the Board of Directors and its common stockcommittees. The board has adopted a charter for the Nominating and Corporate Governance Committee, a copy of which is not listed for trading on any Nasdaq market tier.available at www.millcityventures3.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the SEC certain reports regarding their ownership of common stock or any changes in such ownership. Based on our own review, we believe that there were no late filings during 2018.2022 other than: Form 4s filed by directors and officers on May 19 and 20, 2022, reporting Compensation Committee- and board-approved stock grants made on April 11, 2022; a Form 4 filed by Mr. Polinsky on August 22, 2022, reporting open-market purchases of common stock on August 18 and 19, 2022.
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ITEM 11 EXECUTIVE AND DIRECTOR COMPENSATION
Executive Compensation — Summary Compensation Table
The following table sets forth the total compensation paid by the Company during its two most recent fiscal years ended December 31, 20192022 and 20182021 to those persons who served as the Company’s President or Chief Executive Officer and Chief Financial Officer during such periods (collectively, the “named executives”).
Salary | Stock Awards | All Other Compensation | Total | |||||||||||||||||||||||||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) |
| Year |
| Salary |
|
| Cash Bonus |
|
| Stock Awards |
|
| Option Awards (1) |
|
| All Other Compensation |
|
| Total |
| |||||||||||||||||||||
Douglas M. Polinsky, | 2019 | $ | 100,000 | $ | $ | 0 | $ | 31,831 | * | $ | 131,831 |
| 2022 |
| $ | 100,000 |
| $ | 50,000 |
| $ | 12,683 |
| $ | 530,000 |
| $ | 35,045 |
| $ | 727,728 |
| ||||||||||||||
Chief Executive Officer | 2018 | $ | 60,000 | $ | $ | 0 | $ | 27,685 | * | $ | 87,685 |
| 2021 |
| $ | 100,000 |
| $ | 100,000 |
| $ | - |
| $ | - |
| $ | 34,984 |
| $ | 234,984 |
| ||||||||||||||
Joseph A. Geraci, II, | 2019 | $ | 150,000 | $ | $ | 0 | $ | 35,702 | * | $ | 185,702 |
| 2022 |
| $ | 150,000 |
| $ | 50,000 |
| $ | 12,683 |
| $ | 530,000 |
| $ | 44,042 |
| $ | 786,725 |
| ||||||||||||||
Chief Financial Officer | 2018 | $ | 110,000 | $ | $ | 0 | $ | 26,101 | * | $ | 136,101 | |||||||||||||||||||||||||||||||||||
Chief Executive Officer |
| 2021 |
| $ | 150,000 |
| $ | 100,000 |
| $ | - |
| $ | - |
| $ | 41,197 |
| $ | 291,197 |
|
*includes additional compensation of payment of health insurance premiums and 401(k) matching contributions under the employment retirement program.
On February 20, 2023, we entered into new executive employment agreements with Mr. Douglas M. Polinsky, our Chief Executive Officer, and Mr. Joseph A. Geraci, II, our Chief Financial Officer. Those two executives have been executive officers of our company since its founding.
Each employment agreement was effective as of January 1, 2023, and has a term that lasts for two full years thereafter, ending on December 31, 2024 (subject to extension by mutual agreement of the parties). Each employment agreement provides the executive with a base annual salary of $200,000. Each executive is also entitled to have health insurance provided by us and the ability to contribute to our 401(k) plan.
Each employment agreement contains two-year non-competition and non-solicitation covenants, as well as a customary covenants relating to the confidentiality of our company information. In the event that an executive is terminated for cause, as defined in the employment agreements, or in the event that an executive’s services are terminated due to death or disability, the terminated executive will be entitled to receive only his base annual salary through the date of termination. In the event of other non-cause terminations, we will be obligated to pay the terminated executive’s base annual salary through the remainder of the employment term.
Outstanding Equity Awards at Fiscal Year End
We had no outstanding options, warrants, unvested stock awards or equity incentive plan awards as ofAt December 31, 2019 held by any named executive. In addition,2022, we have no options, warrants, unvested stock awards or equity incentive plan awards outstanding and held by anyhad issued to our named executive, asand there were outstanding, an aggregate of 500,000 non-statutory ten-year stock options to purchase common stock at the datepurchase price of this filing.$2.12 per share, under our 2022 Stock Incentive Plan. These stock options and the plan itself were, at that time, subject to the approval of our shareholders. Subsequently, our shareholders did approve the plan on January 20, 2023, at a special shareholder meeting called for that purpose.
Director Compensation
For 2019,2022, we paid a total of $90,000$177,072 in director fees to our independent directors. Presently, each such director receives an annualized cash fee of $30,000.$40,000, generally paid in quarterly installments.
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Name | Year | Compensation | Total |
| Year |
| Option Awards (1) |
|
| Compensation |
|
| Bonus |
|
| Total |
| |||||||||||||
Joseph A. Geraci, II | 2019 | — | — |
| 2022 |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| ||||||||||||
Douglas M. Polinsky | 2019 | — | — |
| 2022 |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| ||||||||||||
Lyle Berman | 2019 | $ | 30,000 | $ | 30,000 |
| 2022 |
| $ | 212,000 |
| $ | 40,000 |
| $ | 19,024 |
| $ | 59,024 |
| ||||||||||
Howard P. Liszt | 2019 | $ | 30,000 | $ | 30,000 |
| 2022 |
| $ | 212,000 |
| $ | 40,000 |
| $ | 19,024 |
| $ | 59,024 |
| ||||||||||
Laurence S. Zipkin | 2019 | $ | 30,000 | $ | 30,000 |
| 2022 |
| $ | 212,000 |
| $ | 40,000 |
| $ | 19,024 |
| $ | 59,024 |
|
(1) Amount represents the grant date fair value in accordance with FASB ASC Topic 718.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table below sets forth certain information, as of the date of this report, with respect to any person (including any “group,” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who is known to us to be the beneficial ownershipowner of more than 5% of any class of our common stockvoting securities, and as to those shares of March 29, 2019
(on whichour equity securities beneficially owned by each of our directors and executive officers and all of our directors and executive officers as a group. As of the date there were 11,067,402of this report, we had 6,185,255 shares of common stock outstanding), by:outstanding.
Unless otherwise indicated in the table or its footnotes, the business address of each of the following persons or entities is 1907 Wayzata Blvd., Suite 205, Wayzata, Minnesota 55391, and each such person or entity has sole voting and investment power with respect to the shares of common stock set forth opposite their respective name.
|
| Number of Shares Beneficially Owned (1) |
|
| Percentage of Outstanding Shares (1) |
| ||
Douglas M. Polinsky (2) |
|
| 676,981 |
|
|
| 10.52 | % |
Joseph A. Geraci, II (3) |
|
| 712,518 |
|
|
| 11.07 | % |
Howard Liszt (4) |
|
| 125,434 |
|
|
| 2.00 | % |
Lyle Berman (5) |
|
| 315,556 |
|
|
| 5.02 | % |
Laurence Zipkin (6) |
|
| 156,761 |
|
|
| 2.49 | % |
Neal Linnihan SEP/IRA (8) |
|
| 1,088,036 |
|
|
| 17.59 | % |
Scott and Elizabeth Zbikowski (9) |
|
| 768,445 |
|
|
| 12.42 | % |
David Bester (10) |
|
| 444,445 |
|
|
| 7.19 | % |
Patrick Kinney (11) |
|
| 418,794 |
|
|
| 6.77 | % |
All current directors and executive officers as a group (7) (five persons) |
|
| 1,858,335 |
|
|
| 26.60 | % |
Number of Shares Beneficially Owned(1) | Percentage of Outstanding Shares(1) | |||||||
Douglas M. Polinsky(2) | 476,833 | 4.31 | % | |||||
Joseph A. Geraci, II(3) | 608,092 | 5.49 | % | |||||
Howard Liszt(4) | 20,000 | 0.18 | % | |||||
Lyle Berman(5) | 20,000 | 0.18 | % | |||||
Laurence Zipkin(6) | 20,000 | 0.18 | % | |||||
Neal Linnihan SEP/IRA | 2,500,000 | 22.59 | % | |||||
Scott and Elizabeth Zbikowski(7) | 1,865,000 | 16.85 | % | |||||
Donald Schreifels | 1,060,001 | 9.58 | % | |||||
David Bester | 1,000,000 | 9.04 | % | |||||
Patrick Kinney(8) | 929,547 | 8.540 | % | |||||
William Hartzell | 650,000 | 5.87 | % | |||||
All current directors and executive officers as a group(9) (five persons) | 1,144,925 | 10.35 | % |
(1) | The number of shares of common stock beneficially owned by each person is determined |
(2) | Mr. Polinsky is |
(3) | Mr. Geraci is a director our company and |
(4) | Mr. Liszt is a director of our Company. The reported figures include a presently exercisable non-statutory stock option for the |
(5) | Mr. Berman is a director of our Company. The reported figures include a presently exercisable non-statutory stock option for the |
(6) | Mr. Zipkin is a director of our Company. The reported figures include a presently exercisable non-statutory stock option for the purchase of up to 100,000 shares of common stock. |
(7) | Consists of Messrs. Polinsky, Geraci, Liszt, Berman and Zipkin. |
(8) | Based upon a Schedule 13G filed by Mr. Linnihan, and subsequent information obtained by the Company. |
(9) | Based upon a Schedule 13G filed by Mr. and Mrs. Zbikowski, and subsequent information obtained by the Company. |
(10) | Based upon a Schedule 13G filed by Mr. |
(11) | Based upon a Schedule 13G filed by Mr. Kinney |
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Table of |
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons and Certain Conflict Disclosures
Our Board of Directors has adopted a policy to require our disclosure of instances in our periodic filings with the SEC. Our related-party transactions requiring disclosure under this policy are:are as follows:
· | On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately 534,445 shares of our | |
· | On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a |
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 on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and | ||
The Loan Agreement provides 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 |
RelatedPartyRelated-Party Transaction Policy
The Board of Directors has adopted a written Conflict of Interest and Related Party Transaction Policy. That policy governs the approval of all relatedpartyrelated-party transactions, subject only to certain customary exceptions (e.g., compensation, certain charitable donations, transactions made available to all employees generally, etc.). The policy contains a minimum dollar threshold of $5,000.
The entire Board of Directors administers the policy and approves any relatedparty transactions, subject to conflicting requirements of the 1940 Act or the Company’s written Code of Ethics.related-party transactions. In general, after full disclosure of all material facts, review and discussion, the board approves or disapproves relatedpartyrelated-party transactions by a vote of a majority of the directors who have no direct or indirect interest in such transaction, direct or indirect.transaction. Procedurally, no director is allowed vote in any approval of a relatedpartyrelated-party transaction for which he or she is the related party, except that such a director may otherwise participate in a related discussion and shall provide to the board all material information concerning the relatedpartyrelated-party transaction and the director’s interest therein. If a relatedpartyrelated-party transaction will be ongoing, the board may establish guidelines for management to follow in its ongoing dealings with the related party.
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Table of Contents |
Director Independence
The Company currently has five directors, and our Board of Directors has determined that three of whom—our directors—Messrs. Liszt, Berman and Zipkin, are “independent”Zipkin—qualify as independent directors in accordance with the published listing requirements of the Nasdaq Capital Market. The Nasdaq independence definition includes a series of objective tests, such as that termthe director is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards. Nonenot, and has not been for at least three years, one of our independent directors are “interested persons”employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board of Directors has made a subjective determination as to each director that term is definedno relationships exist which, in the 1940 Act. The Company is not subject to those listing standards, however, because its common stock is not listed for trading on a Nasdaq market. Based upon information requested from each such director concerning his background, employment and affiliations, the board has affirmatively determined that noneopinion of the independent directors has a material business or professional relationshipour Board of Directors, would interfere with the Company, other thanexercise of independent judgment in his or her capacity ascarrying out the responsibilities of a member of the board or any committee thereof.director.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the fees for professional audit services provided by (i) Boulay PLLP for the audit of the Company’s annual financial statements for the year ended December 31, 20192022 and December 31, 2018,2021, as well as the fees billed for other services rendered by Boulay PLLP during year ended December 31, 2019.
2022.
2019 | 2018 | |||||||
Audit Fees | $ | 56,310 | $ | 30,000 | ||||
AuditRelated Fees | — | — | ||||||
Tax Fees | 8,660 | — | ||||||
Total | $ | 58,810 | $ | 30,000 |
|
|
| 2022 |
|
|
| 2021 |
|
Audit Fees |
| $ | 136,803 |
|
| $ | 89,031 |
|
Audit-Related Fees |
|
| 91,940 |
|
|
| 11,150 |
|
Tax Fees |
|
| — |
|
|
| 18,975 |
|
Total |
| $ | 228,743 |
|
| $ | 119,156 |
|
Audit Fees. The fees identified under this caption were for professional services rendered by Boulay PLLP for the years ended 20192022 and 20182021 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered accounting firm in connection with statutory and regulatory filings and engagements for the years identified.
AuditRelatedAudit-Related Fees. The fees identified under this caption were for assurance and related services that were related to the performance of the audit or review of our financial statements and were not reported under the caption “Audit Fees.” This category may include fees related to the performance of audits and attestation services not required by statute or regulations, and accounting consultations about the application of generally accepted accounting principles to proposed transactions.
Tax Fees. The fees identified under this caption were for tax compliance and corporate tax services. Corporate tax services encompass a variety of permissible services, including technical tax advice related to tax matters; assistance with state and local taxes.
Approval Policy. The Audit Committee of our Board of Directors approves in advance all services provided by our independent registered public accounting firm. All engagements of our independent registered public accounting firm in years ended 20192022 and 20182021 were preapprovedpre-approved by the Audit Committee.
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PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
Exhibit |
Exhibits
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* Filed electronically herewith.
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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