UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 |
or
For the fiscal year ended December 31, 2018 or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ___________________ |
For the transition period from ______________________ to ______________________
Commission File Number 814-00991
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:
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Title of Each Class | Name of Each Exchange on which Registered |
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-knownwellknown 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 (1) has filed all reportssubmitted electronically and posted on its corporate website, if any, every Interactive Data File required to be filed by Section 13 or 15(d)submitted and posted pursuant to Rule 405 of the Securities Exchange ActRegulation S-T (§232.405 of 1934this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to filesubmit and post such reports), and (2) has been subject to such filing requirements for the past 90 days.xfiles). ⌧Yes¨◻ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratednonaccelerated filer, or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer,” “nonaccelerated filer,” and “smaller reporting company,” and emerging growth companycompany” in Rule 12b-212b2 of the Exchange Act. (Check one)
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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 ☐
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, 20182021 was approximately $1,196,091$20,272,879 based on the closing sales price of $0.59$4.30 per share as reported on the OTCQX.OTCQB. As of June 17, 2019,March 14th, 2022, there were 11,067,40210,790,413 shares of the registrant’sregistrant'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
2
PART I
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 development-stage company that focused on promoting and placing a proprietary poker game online and into casinosinvolved in the gaming and entertainment facilities nationwide. On December 13, 2012,industry. In 2013, we filedelected to become a Form N-8A with the Securities and Exchange Commissionbusiness development company (“SEC”BDC”), notifying the SEC of our intent to register as an internally managed, non-diversified, closed-end investment company under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election on December 27, 2019. Since 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 1940 Act, we generally seek to structure our transactions so they do not constitute “investment securities” for purposes of federal securities law, and we monitor our holdings as a whole to ensure that no more than 40% of our total assets may consist of investment securities.
The principal specialty finance solutions we provide are high-interest short-term lending arrangements. On February 7, 2013,occasion, these lending arrangements involve us obtaining collateral as security for the borrower’s repayment of funds to us. In some circles, short-term high-interest collateralized lending is referred to as “hard-money lending.”
We believe we filed Form N-54Aare generally able to becomecharge 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 development company (“BDC”)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 arrangements, guarantees, or other types of covenants that mitigate these risks.
In terms of regulatory risk, short-term lending permits us to avail ourselves of a court-recognized exception for treating promissory notes (evidencing a loan) as “investment securities” under federal securities law. In sum, this exception generally applies to promissory notes with short-term maturities of nine months. 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 “investment securities” under federal securities laws, is important to our ability to avoid once again becoming subject to regulation under the 1940 Act. Presently,Below we discuss 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 regulated as a BDCpresently exploring and intend to be taxed as a regulated investment company.
Business Model and Strategy
As a BDC, we primarily focus on investing in or lending to private and small-capitalization public companies and making managerial assistance available to such companies. A BDC generally provides shareholders with theevaluating our ability to retainenter into other kinds of short-term specialty finance transactions. Examples include the liquidityexpansion of a publicly traded stock, while sharingour 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 possible benefits of investing in emerging-growth or expansion-stage companies that are privately or publicly owned. As permitted by BDC regulations, we may acquire securities directly from private and small-cap public issuers, their affiliates, or from third parties, and may acquire securities issued by small-cap public issuers in open-market purchases effected through public exchanges and automated quotation systems.
Our revenues relate to the earnings we receive from our portfolio investments. Our objective is to obtain superior returns from investments in securities and other investment opportunities availablefinance sector, including the experience and contacts of our independent directors, should be sufficient to BDCs undercontinue attracting suitable prospective investment opportunities. To date, the 1940 Act. We intend to invest capitalnetwork of contacts of our management and directors has been successful thus far in portfolio companies for purposes of financing acquisitions, organic growth, recapitalizations, buyouts and working capital. In this regard, buyouts generally include transactions that involve the acquisition of a controlling interest in an entity, either by management or other investors. Organic growth refers to growth through the internal operationssourcing all of the company, whether through investmentstransactions in marketing initiatives, capital expenditures or other internal growth initiatives, rather than growth by means of acquisitions.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
We plan to identify potential investments through multiple sources, including without limitation private equity sponsors, investment bankers, brokers, professional contacts, and owners and operators of businesses. We expect to base our investment decisions on our analyses of actual and potential business operations, asset valuations and viable exit strategies to establish appropriate pricing and maximize our return on investment. Subject to regulations applicable to BDCs, we plan to invest in private companies, small-cap public stocks, notes and other forms of debt, investment contracts, and other investments commonly referred to as securities.
Competition
As a BDC, we compete with strategic buyers, private equity funds, subordinated debt funds and other buyers and financing sources, including traditional financial services companies such asThe market for specialty finance companies, commercial banks, investment banks and other equity and non-equity based investment funds. Some of our competitors will be substantially larger and have considerably greater financial resources than we do. Competitors may have a lower cost of funds and many have access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Competitive pressures may have a material adverse effect on our results of operations. In addition,is competitive, largely as a result of this competition,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 may be unable to take advantage of attractive investment opportunities and meet our investment goals.
Competitive Advantages
We believe that we are well positioned to secure appropriatecompete 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 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 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 targetways such that they are not properly considered “investment 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, forprivate businesses, start-up and development-stage businesses, and the following reasons: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.
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.
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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 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
Prospective Portfolio Company Characteristics
We have identified several criteria that we believe will proveare generally important in achievingguidelines for us to meet our investment objectives with respect to target portfolio companies.financial objectives. These criteria will provideare, however, only general guidelines for our investment decisions. Nevertheless, not all decisions and, in the case of some transactions in which we invest, fewer than all—or even none—of these criteria will be met by each prospective portfolio company in which we choose to invest.
met.
● | Collateral Value. We will often, but not always, seek |
● | Experienced and Capable Management. In transactions involving business borrowers, we seek businesses that have an experienced, knowledgeable and |
Competitive Position. |
Cash Flow |
Due Diligence
If we believe a target portfolio companypotential transaction generally meets the characteristics described above or if we believeotherwise determine that certain of the most important characteristics for that particular target portfolio company or the industry in which it operates are met, or if we have other reasonsa potential transaction may be desirable to believe in the potential profitability of an investment in a target portfolio company,enter into, we may perform initial due diligence ona 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 company.may serve as collateral security for the obligations that may be owing to us). Our due-diligence examination for each target portfolio companytransaction will differ based on a number of factorsnecessarily be unique and tailored to the specific transaction, but iswill generally likely to include our:
● | 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); |
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● | 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 potential 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 delineateddescribed above provideoutlines 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 an “investment 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 investment.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 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 our outside legal counsel, in particular in a case where we are considering the structure of a potential new transaction.
In general, our analysis starts with the length or duration of a potential new transaction. Although federal securities laws define “investment 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 investment 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; |
● | so-called “character loans” made to a bank customer; |
● | notes delivered or borrowings entered into through consumer finance; |
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● | commercial loans made to businesses; |
● | loans secured by accounts receivable (e.g., factoring); |
We expect to engage in various investment strategies in order to achieve our overall investment objectives. The particular type of investment strategy we select will depend, among other things, upon market opportunities, the skills and experience of our management and Board of Directors and our overall portfolio composition. Our strategies generally seek to provide (i) in the case of debt, current cash yields and favorable loan-to-value ratios, or other financial guarantees or credit enhancements with respect to loan collateral, and (ii) in the case of equity, favorable long-term growth and income potential together with viable exit or liquidity strategies.
Debt Investments
We intend to tailor the terms of each debt investment we makeIn addition to the types of financing arrangements noted above, court precedent indicates that there may be facts and circumstances surrounding the transaction that may cause other promissory notes to not be considered investment securities under federal securities laws. For example, it is presumed that a promissory note which matures in more than nine months is a “security,” but 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 transactionfollowing 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 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 prospective portfolio company, negotiatingthe proper manner of weighting them are unclear. As a structure that seeks to protect our rights and manage our risk while creating incentives forresult, the portfolio company to achieve its business plan. Our expected primary source of returnanalyses we periodically undertake focuses on debt investments is the monthly cash interest we collect on those investments. The particularmore bright-line types of debt investmentslending arrangements enumerated above—i.e., promissory notes maturing in nine months or less, etc.
Our Prior Business as a BDC
The analysis of our transactions and transactional holdings is undertaken with a view to ensuring that we may make include, but aredo not limitedbecome subject to the following:
Equity Investments
Like debt1940 Act. Generally from 2013 through 2019, we were governed by the 1940 Act. During that time, we were a business development company under the 1940 Act, or “BDC,” primarily focused on investing in or lending to private and small-cap public companies and making managerial assistance available to such companies. As a BDC, our investments included stock of or membership interests (typically referred to as units) in private companies, small-cap public company stocks, and promissory notes. In some cases, the stock or membership interests we intend to tailoracquired were preferred stock or units, and in other cases the terms of each equity investment we make to the facts and circumstances of the transaction and prospective portfolio company, negotiating a structure that seeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. As an equity holder, the rights we will generally seek to protectstock or obtain include minority rights, event-driven rights to “put” or sell our equity back to the portfolio company or certain affiliates or sponsors, and registration rights such as “demand” or “piggyback” registration rights. We may invest inmembership interests acquired were common stock and preferred stock, and may receive warrants inor units. In connection with our investments. Wheninvestments in promissory notes, we make a debt investment, we may also be granted equity participation in the form offrequently obtained warrants to purchase common equity in the company in the same class of security that the owners or equity sponsors receive upon funding. In addition to purchasing equity securities from the issuer or its affiliates, we may choose to purchase publicly traded equity securities of the issuer, if any, on the open market (i.e., the particular stock exchange or automated quotation system on which the issuer’s equity primarily trades).
Ongoing Relationships with Portfolio Companies
We monitor our portfolio companies in order to determine whether they are meeting our financing criteria and their respective business plans. We may decline to make additional investments in portfolio companies that do not continue to meet our financing criteria or that fail to successfully execute their business plans. Of course, we may choose to make additional investments in portfolio companies that do not do so, but that we believe will nevertheless perform well in the future.
We expect to monitor the financial trends of each portfolio company and their respective industries to assess the appropriate course of action for each company and to evaluate our overall portfolio quality. In this regard, our management team will monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis.
We have several methods of evaluating and monitoring the performance and fair value of our debt and equity positions. By way of example, we may:
We expect that current and annual financial statements of portfolio companies will often be available to us to assist us in our fair value reporting obligations under the 1940 Act.
stock.
Managerial Assistance
As a BDC, we offer,Our Management and in some cases may provide, significant managerial assistance to those of our portfolio companies intended to qualify as “eligible portfolio companies” under the 1940 Act. We expect that this assistance, if any, will typically involve monitoring the operations of our portfolio companies, participating in their board and management meetings, consulting with and advising their officers and providing other organizational, financial, strategic and transactional guidance.
Our 2018 Portfolio
At December 31, 2018, we held investments in 24 eligible portfolio investments, which had an aggregate amortized cost of $6,193,461 and a fair value of $9,354,622, and our non-eligible portfolio holdings had an aggregate cost of $765,366 and a fair market value of $605,570. At December 31, 2017, we held 22 eligible portfolio investments, which had an aggregate amortized cost of $6,894,523 and a fair value of $7,133,860. Our eligible portfolio investments at December 31, 2018 were as follows:
BDC Regulation
The following discussion is a general summary of some of the material prohibitions and restrictions governing BDCs generally. It does not purport to be a complete description of all the laws and regulations affecting BDCs.
The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their directors and officers and principal underwriters and certain other related persons, and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of (i) 67% or more of such company’s shares present at a meeting or represented by proxy if more than 50% of the outstanding shares of such company are present or represented by proxy or (ii) more than 50% of the outstanding shares of such company.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than “qualifying assets” listed in Section 55(a) of the 1940 Act unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets. The principal categories of qualifying assets relevant to our business are the following:
Securities of an “ eligible portfolio company ” purchased from the issuer of such securities, from any person who is, or who was within the 13 months prior to the date of purchase, an affiliate of the issuer, or from any other person (subject to limitation by SEC rules), in any case in transactions not involving any public offering. The 1940 Act defines an “eligible portfolio company” as any issuer which:
Significant Managerial Assistance
A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described above. However, to count portfolio securities as qualifying assets for the purpose of the foregoing 70% test, the BDC must either control the issuer of the securities or offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, whether through its directors, officers or employees, offers to provide, and, if accepted, does in fact so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.
Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that at least 70% of our assets are qualifying assets. We plan to invest in money markets or cash equivalent instruments. We may, however, invest in repurchase agreements provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior Securities; Coverage Ratio
We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, but only if our “asset coverage,” as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must not make any dividend distribution to our shareholders or repurchase securities unless we meet the applicable asset-coverage ratios at the time of the dividend distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes.
We will be periodically examined by the SEC for compliance with the 1940 Act, the rules and regulations thereunder, and good governance practices. We will not “concentrate” our investments (i.e., invest 25% or more of our assets in any particular issuer, determined at the time of investment). We will be required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from indemnifying any director or officer against any liability to our shareholders arising from willful malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, and review these policies and procedures annually for their adequacy and the effectiveness of their implementation.
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. Our ability to achieveThese are also the only two persons who are employees of our investment objective will depend on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that meet our investment goals. Accomplishing this result in a cost-effective manner will largely be a function of managing the due-diligence and investment process, efficiently monitoring investments we make and, in some cases, accessing financing sources on acceptable terms.company.
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.
We have little operating history upon which to evaluate our current business.
Risks Related toWe withdrew our Business
Our management team has no prior experience managing a BDC.
On December 13, 2012, we changed our business to become an internally managed, closed-end investment company and subsequently electedelection to be treated as a BDC under the 1940 Act. WeAct at the end of 2019, and during the two years since that time have no prior experience managing a BDC, which may affectrefocused our abilitybusiness on providing short-term specialty finance to successfully manage and grow our business.
The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets in specified types of securities, primarily in private companies orbusinesses, small-cap traded U.S. public companies and high-net-worth individuals. Given that our current business has been developed and pursued over the two years prior to this filing, investors have little means to evaluate the likelihood of our future success.
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We may need to raise additional capital 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 cash equivalents, U.S. government securitiesis sufficient to continue operations for the foreseeable future, and other high quality debt investments that mature in one yearhas no potential or less. Our management team’s lack of experience in managing a portfolio of assets under such regulatory constraintsactual plans to seek additional financing. Nevertheless, various future developments may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. Furthermore, our failure to comply with the complex BDC requirements could cause the SEC to bring an enforcement action against us, expose us to private claims and/or cause us to loseseek or require additional financing. For instance, we may determine to seek additional financing to avail ourselves of additional opportunities to provide specialty finance solutions to borrowers. Alternatively, we may seek additional financing in the event that a material portion of our status asinvestments default, leaving us with little means to pay for our operations and continue making investments.
In any event, additional financing could be sought from a BDC.
number of sources, including but not limited to additional sales of equity or debt securities, or loans from financial institutions or our affiliates. We operate in a highly competitive market for portfolio investment opportunities.
We expectcannot, however, be certain that many entitiesany such financing will compete withbe available on terms favorable or acceptable to us to makeif at all. If additional funds are raised by the typesissuance of investments we plan to make in prospective portfolio companies. We will compete with privateour equity firms as well as other BDCs, investment funds, investment banks and other sources of financing, including traditional financial services companiessecurities, such as commercial banksthrough the issuance of stock, convertible securities, or the issuance and finance companies. Manyexercise of warrants, then the ownership interest of our competitorsexisting shareholders will be diluted. If additional funds are substantially largerraised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations, and have considerably greater financial, technical, marketing and other resources than we do. For example, some competitorssuch securities may have a lower costrights senior to the rights of our common shareholders. If adequate funds and access to funding sourcesare not available to us. These resources may enable our competitors to offeron acceptable terms, that we cannot match. We may lose prospective portfolio investments if we do not match our competitors’ pricing, terms and structure. If, on the other hand, we do match our competitors’ pricing, terms or structure, we may experience decreased net interest income and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Importantly, many of our potential competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act does impose on us as a BDC. If we are not able to compete effectively, our business and financial condition and results of operations will be adversely affected.
We may be unable to make distributions, which failure could materially and adversely affect your investment.
Although we intend to make periodic distributions to our shareholders, we may be unable to achieve operating resultsconsummate acquisitions or investments desired by our management and board.
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 unclear whether the pandemic may significantly worsen during the upcoming months, which may result in further restrictions on business, 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 allow us to make such distributions. For example,depend on future developments, which are highly uncertain and cannot be predicted. If the BDC asset-coverage requirements may limitdisruptions posed by COVID-19 or other matters of domestic or global concern continue for an extensive period of time, our ability to make distributions. In addition, restrictionsconsummate investments, or the operations of our potential and provisionsactual 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 any future credit facilities may limita timely manner.
Finally, our ability to make distributions. 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.
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 publicly traded securities.
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, including our ability to negotiate and complete our initial business combination, and results of operations. Any of these outcomes would likely adversely affect the trading price of our publicly traded securities.
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Although we intendhave 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 publicly traded securities 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 elect RIC taxationsatisfy 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 publicly traded securities.
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 publicly traded securities.
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 target business. The manifestation of any of these risks could adversely affect the trading price of our publicly traded securities.
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 publicly traded securities.
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 publicly traded securities.
If we are deemed to be an investment company under the Internal Revenue Code, if1940 Act, we failmay be required to meetinstitute 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; |
● | 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 “investment 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.
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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 United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company 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 income-distribution requirements,reports with the SEC, and (2) at other times when we could loseare considering how to structure a new transaction that is of a significant size—with “significance” largely based on the outcome of our RIC statusmost 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 corporate-level income tax. Any failurethe 1940 Act. 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 publicly traded securities.
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 distributionsinvestments 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 lossparticular 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 RIC status could materiallyindependent and adversely affect your investment.
disinterested directors. Any unrealized losses we experience may be an indicationsuch activity would involve actual or potential conflicts of future realized losses, which could reduce our income available for distribution.
As a BDC,interest. Although we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith by our Board of Directors andconfident 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 Company’s valuation policy. Decreases in the market values or fair valuespublicly traded securities less attractive and thereby reduce their trading prices.
A limited number of shareholders control substantially all of our investments will be recordedvoting stock and, as unrealized depreciation on our statementa result, control the election of operations. Any unrealized losses in our portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us (if a loan), or of its diminishing value (if equity). This could result in future realized losses and, ultimately, a decrease in income available for distribution in future periods.
Many of our portfolio investments will be recorded at fair value as determined in good faith by our Board of Directors. As a result, therethese shareholders may be uncertainty as to the ultimate valueexert an influence on actions requiring a shareholder vote, potentially in a manner that you do not support.
Five shareholders own shares representing approximately 63.42% of our investments.
Our investments are expectedissued and outstanding common stock. As a result, investors in our common stock cannot reasonably expect to consist in material part of securities issued by privately held companies,have any influence over the fair value of which is not readily determinable. In addition, we will not be permitted to maintain a general reserve for anticipated loan losses. Instead, we will be required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. Our Board of Directors will value these securities at fair value as they determine in good faith and consistent with the written policies and procedures that we have adopted for this purpose. Where appropriate, our board may utilize the services of an independent valuation firm to assist in the determination of fair value. Because valuations, and particularly valuations of private investments, are inherently uncertain and may be based on estimates, our fair value determinations may differ materially from those that would be assessed if a liquid market for these securities existed. Our net asset value could be adversely affected if we determine the fair valueelection of our investmentsdirectors or other matters submitted to be materially higher thana vote of our shareholders. Instead, our existing significant shareholders will exert a substantial influence on the values we ultimately realize from those investments.
If we are unableelection of our directors and any actions requiring or otherwise put to source investments effectively, we may be unable to achieve our investment objectives.
Our ability to achieve our investment objective will depend on our senior management team’s ability to identify, evaluate, finance and invest in suitable companies that meet our investment criteria. Accomplishing this resulta shareholder vote, potentially in a cost-effective manner will largely be a functionthat you do not support. Examples of such voting matters, apart from the election of our management of the investment process, our ability to provide efficient services and our access to financing sources on acceptable terms. In addition to monitoring the performance of our investments, our management team must offer managerial assistancedirectors, includes amendments to our portfolio companies. These demands on their time may distract them, slowingarticles 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 rate of overall investment. To grow, we expect that we will need to hire, train, supervise and manage new employees and to implement computer and other systems capable of effectively accommodating our growth. Our failure to effectively manage our future growth could materially and adversely affect our business, financial condition and results of operations.
We will be exposed to risks associated with changes in interest rates.
General interest rate fluctuations may have a substantial and negative impact on our investments, the valueattractiveness or liquidity of our common stock, and our rate of return on invested capital. A reduction in interest spreads on new investments could also have an adverse impact on our net interest income. An increase in interest rates could decrease the value ofthereby depress its trading price.
Our ability to identify and consummate investment opportunities, and any investments we hold which earn fixed interest rates. Also, an increase in interest rates could make investment in our common stock less attractive if we are unable to increase our dividend rate, which could reduce the value of our common stock.
If we incur additional debt, it could increase the risk of investing in our Company.
We expect, in the future, thatneed we may borrow from, and issue senior debt securities to, banks, insurance companies and other lenders. In such a case, lendershave for additional capital, will have fixed-dollar claims on our assets that are superior to the claims of our shareholders, and we may grant a security interest in our assets in connection with our borrowings. In the case of a liquidation event, those lenders would receive proceeds before our shareholders. In addition, borrowings generally magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage; and any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds, and could negatively affectalmost certainly be affected by general economic conditions.
General economic conditions will almost certainly impact our ability to make distributions(i) identify and pursue and consummate investment opportunities, and (ii) if necessary, seek and obtain additional financing on our common stock. Our abilityterms acceptable or favorable to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.
As a BDC, we will be required to meet an asset-coverage ratio, calculated as total assets (less all liabilities and indebtedness not represented by senior securities) to total indebtedness represented by senior securities, of at least 200%. If this ratio declines below 200%, we will be unable to incur additional debt and may need to sell a portion of our investments to repay debt when it is otherwise disadvantageous to do so, and we may be unable to make distributions.
Because we intend to distribute substantially all of our income and net realized capital gains to our shareholders once we make a RIC election, we will likely need additional capital to finance our growth.
To qualify for RIC taxation and avoid payment of excise taxes and minimize or avoid payment of income taxes, we intend to distribute to our shareholders substantially all of our net ordinary income and realized net capital gains except for certain net long-term capital gains (which we may retain, pay applicable income taxes with respect thereto, and elect to treat as deemed distributions to our shareholders). As described elsewhere, as a BDC we will be required to meet a 200% asset-coverage ratio limiting the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may require us, to raise additional equity at a time when it may be disadvantageous to do so. While we expect to be able to borrow and issue additional debt and equity securities, debt and equity financing may not be available to us on favorable terms, if at all. In addition, asTherefore, a BDC, we will generally not be permitted to issue equity securities below our net asset value without shareholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our net asset value could decline.
Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or shareholder approval.
Our Board of Directors has the authority from time to time to modify or waive certain of our operating policies and strategies without prior notice (except as required by the 1940 Act) and without shareholder approval. Under Section 58 of the 1940 Act, our Board of Directors may not, however, choose to withdraw our status as a BDC, or change its operations so as to cease to be a BDC, without the prior approval of our shareholders. The effects of any such exercise of authoritydeterioration in general economic conditions may adversely affect our business andor slow the value of your investment.
Failure to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports. Nevertheless, all internal control systems, no matter how well designed, have inherent limitations. Even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our most recent evaluationgrowth of our internal controls resulted in our conclusion that our disclosure controls and procedures were effective. Our inability to maintain an effective control environment may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price.business.
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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 certainour senior management and other key 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. On January 28, 2019our company. Although we entered into newcurrently have employment agreements with Messrs. Polinskythese individuals, these agreements will not necessarily 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 Geraci. Each new employment agreement has a term of three years. We do not have any key-man insurance in place with respectadverse effect on our operations and ability to Messrs. Geraci and Polinsky.execute our business plans.
Our articles of incorporation grant our Board of Directors the power to designate and issue additional shares and classes of common and preferred stock.
Our authorized capital consists of 250,000,000 shares of capital stock. Unless otherwise specifically so designated upon issuance, all shares of capital issued we issue will be common stock. Pursuant to authority granted by our articles of incorporation, our Board of 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 othernew 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 (commonstock—common or preferred) preferred—will dilute the percentage of ownership interest of then-current holders of our capitalcommon stock and may dilute our book value per share.
Our stock is thinly traded, which may make it difficult to sell sharesIf social unrest, acts of our common stock.
Our common stock is thinly traded on the OTCQBterrorism, regime changes, changes in laws and we expect that our common stock will generally remain thinly traded for 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 shares of our common stock publicly at the time and prices that they feel are fairregulations, political upheaval or appropriate.
Our common stock qualifies as a “penny stock,” which may make it difficult to sell shares of our common stock.
Our common stock is categorized as a “penny stock” subject to the requirements of Rule 15g-9 under the Securities and Exchange Act of 1934. Under this rule, broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. Under applicable regulations, our common stock will generally remain a “penny stock” until and for such time as its per-share price is $5.00policy changes or more (as determined in accordance with SEC regulations), or until we meet certain net asset or revenue thresholds. These thresholds include the possession of net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2,000,000 in the event we have been operating for at least three years or $5,000,000 in the event we have been operating for fewer than three years, and the recognition of average revenues equal to at least $6,000,000 for each of the last three years. We do not anticipate meeting any of the foregoing thresholds in the foreseeable future.
The penny-stock rules severely limit the liquidity of securities in the secondary market, and many brokers choose not to participate in penny-stock transactions. As a result, there is generally less trading in penny stocks. If you become a holder of our common stock, you may not always be able to resell shares of our common stock in public broker’s transaction, if at all, at the times and prices that you feel are fair or appropriate.
Risks Related to our Investments
Our investments may involve significant risks, which could ultimately materially and adversely affect our results of operation, financial condition and the value of our common stock. You could lose all of your investment.
We expect to invest primarily in senior secured term loans, mezzanine debt and selected equity investments issued by privately held and public “small- and micro-capitalization” companies, and may also use short sales and options in connection with our business.
Senior Secured Loans. When we extend senior secured term loans, we will generally take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries, which we expect to help mitigate the risk of default. However, there is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sellenactments occur in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions. In some circumstances, our lien could be subordinate to claims of other creditors. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.
Mezzanine Debt. Any mezzanine debt investments will generally be unsecured and subordinated to senior loans. We expect this will result in above-average risk and volatility, which could adversely affect our investment returns. Because mezzanine debt generally does not receive any cash prior to maturity of the debt, the investment will be of greater risk. To the extent interest payments associated with such debt are deferred, such debt will necessarily be subject to greater fluctuations in value based on changes in interest rates, and such debt could subject us to phantom income.
Equity Investments. We expect to make equity investments. In addition, when we invest in senior loans or mezzanine debt, we may acquire warrants in connection with such investments. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. Nevertheless, the equity interests we receive may not appreciate in value and may in fact decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Short Sales. We may engage in short selling. In certain circumstances, short sales can substantially increase the impact of adverse price movements in our investment positions. A short sale involves the theoretically unlimited increase in the market price of the security and uncertainty as to the availability of such security for purchase—theoretically an unlimited loss.
Options. We may buy or sell (write) both call options and put options, and may do so on a “covered” or an “uncovered” basis. Any options transactions may be part of a hedging tactic (i.e., offsetting the risk involved in another securities position) or as a form of leverage,country in which we have the right to benefit from price movements in a large number of securities with a small commitment of capital. These activities involve risks that can be large, depending on the circumstances under which a particular transaction or position is entered into. Whenmay operate after we buy an option, a decrease (or inadequate increase) in the price of the underlying security in the case of a call, or an increase (or inadequate decrease) in the price of the underlying security in the case of a put, couldeffect our initial business combination, it may result in a total lossnegative impact on our business.
Social unrest, acts of our investmentterrorism, changes in the option. When we sell (write) an option, the risk can be substantially greater. The seller of an uncovered call option bears the risk of an increase in the market price of the underlying security above the exercise price. This risk is theoretically unlimited unless the option is “covered.” If it is covered, an increase in the market price of the security above the exercise price would cause us to lose the opportunity for gain on the underlying security—assuming it bought the security for less than the exercise price.
Middle-Market Companies. Investments in middle-market companies also involve a number of additional significant risks, including:
The lack of liquidity in our investments may adversely affect our business.
We may invest in private companies and certain public companies. These securities may be subject to legal and other restrictions on resalepolicy changes or otherwise be less liquid than other publicly traded securities. The relative illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve near-term liquidity in our investments. Our investments may occasionally be subject to contractual or legal restrictions on resale or will be otherwise illiquid due to the fact that there is no established trading market for such securities, or such trading market is thinly traded. The relative illiquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of collateral securing our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
Defaults by our portfolio companies could harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other debt holders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets. Such events could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.
We anticipate making both debt and minority equity investments in our portfolio companies. Therefore, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and may take risks or otherwise act in ways that do not immediately or ultimately serve our interests and that could decrease the value of our portfolio holdings. We will not be in a position to control any portfolio company, and mitigate these risks, by investing in its debt securities or minority equity positions.
The prepayment of our debt investments could adversely impact our results of operations and reduce our return on equity.
We will be subject to the risk that our portfolio investments may be repaid prior to maturity. When this occurs, we generally expect to reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt that has been prepaid, and we could experience significant delays in reinvesting these prepaid amounts. Any future investment in a new portfolio company may also be at lower yields than the prepaid debt. As a result, our results of operations could be materially and adversely affected if one or more of our portfolio companies were to prepay amounts owed to us. Additionally, prepaymentsenactments could negatively impact our return on equity, which could result in a decline inbusiness. These negative impacts would likely adversely affect the markettrading price of our common stock.
Minnesota law does not require us to hold an annual meeting of shareholders, which could delay the opportunity for our shareholders to elect directors.
Our portfolio companies may incur debt that ranks equally with or seniorWe are not required under Minnesota law to hold an annual meeting of shareholders each year. If, however, we have not held an annual meeting within the prior 15 months, shareholders holding 3% of our investments.
In some cases, portfolio companiesthen-issued and outstanding shares of common stock will have other debt ranking equalthe power to cause us to call and hold an annual meeting. Unless and until we hold an annual meeting of shareholders, our shareholders may not be afforded the opportunity to elect directors and to discuss company affairs with management.
We may issue additional common stock or senior topreferred shares without the debt securities in which we invest. By their terms, such debt instruments may provide that holders thereof are entitled to receive payment of interest or principal on or before us. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, senior debt holders will typically be entitled to receive full payment before we receive distributions in respectapproval of our investment, if any. Inshareholders. Any such issuances would dilute the case of debt ranking equal to our investment, we would have to share distributions on a pro rata basis with other creditors holding such debt upon any insolvency, liquidation, dissolution, reorganization or bankruptcy.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender-liability claims.
Even though we may structure investments as senior loans, if oneinterest of our portfolio companies goes bankrupt,shareholders and likely present other risks.
Our articles of incorporation authorize the issuance of up to 250,000,000 shares of capital stock. Because we have only 10,790,413 shares of common stock issued and outstanding, our Board of Directors has the power and authority to issue a bankruptcy court might recharacterize our debt investment and subordinate allsubstantial number of additional shares of common stock or a portionpreferred shares. The issuance of our claim to that of other creditors. In addition, lenders such as us can be subject to lender-liability claims when they become too involved in the borrower’s businessadditional common stock or exercise control over the borrower.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. |
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InvestmentsCyber incidents or attacks directed at us could result in equity securities involve a substantial degree of risk.
information theft, data corruption, operational disruption and/or financial loss.
We may purchase common stock and other equity securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment will depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those of third parties with which we may deal. Sophisticated and deliberate attacks on, or security breaches in, our portfolio company’s success. Investments in equity securities involve a numbersystems or infrastructure, or the systems or infrastructure of significant risks, includingthird parties or the risk of dilution as a result of additional issuances. Even investments in preferred securities involve unique risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights.
Risks Relatedcloud, could lead to Our Operation as a BDC
Our ability to enter into transactions with our affiliates will be restricted.
The 1940 Act prohibits us from participating in certain transactions with certaincorruption or misappropriation of our directors, officersassets, proprietary information and affiliates without the prior approval of our independent directors and,sensitive or confidential data. We have not made a significant investment in some cases, the SEC. In this regard, any person owning, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include co-investments in a portfolio company, without prior approval of our independent directors and, in some cases, the SEC. In this regard, if a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling anydata security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons absent the prior approval of the SEC. As a result of these restrictions, the scope of investment opportunities that would otherwise be available to us may be materially limited.
BDC regulations affect our ability to raise additional capital.
We will likely require additional capital. We may acquire additional capital by issuing senior securities or indebtedness, by issuing additional common shares or from securitization transactions. Nonetheless, we may be unable to raise additional capital on favorable terms, if at all. We may issue debt securities or preferred securities, which we refer to collectively as “senior securities,”protection, and we may borrow money from banksnot be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or other financial institutions, up to the maximum amount permitted by the 1940 Act. Our abilityinvestigate and remediate any vulnerability to, pay dividendscyber incidents. It is possible that any of these occurrences, or issue additional senior securities would be restricted if our asset-coverage ratio were not at least 200%. If the valuea combination of our assets declines, we may be unable to satisfy this test. In such a case, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous.
Changes in the laws or regulations governing our business, or in the interpretations thereof, and any failure by us to comply with these laws or regulations,them, could negatively affect the profitability of our operations.
Changes in the laws, regulations or the interpretations thereof that govern BDCs, RICs or non-depository commercial lenders, could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements, we may have to incur significant compliance expenses or we might have to restrict our operations. If we fail to comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct ofadverse consequences on our business and be subjectlead to civil fines or criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.
If our primary investments are not deemed to be qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
To maintain qualification as a BDC, we must not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we fail to meet this “qualifying assets test,” we could be forced to dispose of certain investments, be precluded from investing in the manner described in this Form 10K, or lose our status as a BDC, any of which would have a material adverse effect on our business, financial condition and results of operations. The disposition of such investments may need to occur quickly, which would make it difficult to dispose of such investments on favorable terms. In addition, because these types of investments will generally be illiquid, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss.
If we are unable to qualify for RIC tax treatment, we will be subject to corporate-level income tax, which will adversely affect our results of operations and financial condition.
In the event we qualify for tax treatment as a RIC, we can generally avoid corporate-level federal income taxes on income distributed to our shareholders as dividends. We will not qualify for this pass-through tax treatment, and thus will be subject to corporate-level federal income taxes, if we are unable to comply with the source of income, diversification and distribution requirements contained in the Internal Revenue Code, or if we fail to maintain our registration under the 1940 Act. If we fail to qualify for RIC tax treatment, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to shareholders and the actual amount of our distributions. As such, any such failure would have a material adverse effect on us, the net asset value of our common stock and the total return obtainable from your investment in our common stock.
On June 6, 2013, we entered into an agreementOur executive offices are located at 1907 Wayzata Boulevard, Suite 205, Wayzata, Minnesota 55391, and our telephone number is: (952) 479-1923. We are parties to lease approximately 1,917 square feet of commercialtwo operating leases for office space and two parking spots, for a period of 62 months. The leased space became available for occupancy on September 23, 2013. The 62-month lease term began on October 1, 2013 and expired on November 30, 2018.
On October 17, 2018, we entered into a 12-month lease agreement to lease approximately 183 square feet of commercial space and one parking spot for the use of Mr. Geraci at the amount of $2,408 per month. The leased space became available for occupancy on December 1, 2018.
On October 24, 2018, we entered into a 39-month lease agreement to lease approximately 1,247 square feet of commercial space and one parking spot for the use of Mr. Polinsky. The 39-month lease term began on January 3, 2019 and expires onexpiring March 31, 2022.
These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses; and they do not contain contingent-rent provisions. The total base rent expenseleases do not include options to renew. We consider our current office space adequate for the year ended December 31, 2018 and December 31, 2017 was $41,597 and $45,378, respectively.our current operations.
The following is a schedule of the aggregate required annual minimum lease payments.
Year | Amount | |||
2019 | $ | 41,447 | ||
2020 | 20,551 | |||
2021 | 21,162 | |||
2022 | 5,396 | |||
TOTAL | $ | 88,556 |
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.
During the second quarter of 2018 we settled the amount owed to us by Mix 1 and Messrs. Larson and Robb at a discount. We agreed to release Mix 1 and the former principals from the obligation in exchange for $150,000 in cash which we received during the second quarter.
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PART II
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 OTCQB 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 2020 through September, and the OTCQB in 2018 and 2017.from October, 2020 through present. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions. Trading in our common stock during the period represented was 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 | | 2021 |
| 2020 | ||
First Quarter | | $ | 6.45 2.42 | | $ | 0.63 0.50 |
Second Quarter | | $ | 6.25 3.60 | | $ | 0.65 0.43 |
Third Quarter | | $ | 5.50 3.50 | | $ | 0.84 0.44 |
Fourth Quarter | | $ | 4.15 2.66 | | $ | 3.03 0.66 |
Market Price | Market Price | |||||||
(High/Low) | (High/Low) | |||||||
For the Fiscal Year/Quarter | 2018 | 2017 | ||||||
First Quarter | $ | 0.75 - 0.50 | $ | 0.75 - 0.75 | ||||
Second Quarter | $ | 0.61 - 0.40 | $ | 0.75 - 0.62 | ||||
Third Quarter | $ | 0.60 - 0.45 | $ | 0.75 - 0.55 | ||||
Fourth Quarter | $ | 0.60 - 0.25 | $ | 0.80 - 0.50 |
Holders
As of the date of this filing, we had approximately 183253 holders of record of our common stock.
Dividends
On February 15, 2019,December 8, 2020, our Board of Directors declared a cash dividend of $0.05 per share to all of our shareholders of record as of March 8, 2019.December 21, 2020. The dividend was paid on MarchJanuary 4, 2021.
On September 17, 2021, our Board of Directors declared a cash dividend of $0.10 per share to our shareholders of record as of October 15, 2019.2021. The dividend was paid on October 29, 2021.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2018,2021, 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 S-K. 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 required by applicable state law or the listing standards of any self-regulatory 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 securities of the Company. Nevertheless, there
In August 2020, the Compensation Committee approved, and the Company issued, 50,000 shares of restricted stock to each of Mr. Douglas M. Polinsky and Joseph A. Geraci, II. The shares vested on the one-year anniversary of their issuance and until such time are restrictions and limitations under the 1940 Act on our abilitysubject to grant options and warrants to members of our management and our non-interested, non-employee directors that, in our case, generally prohibit any such grants in the absence of prior SEC approval.forfeiture.
Recent Sales of Unregistered Securities
None.
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Recent Purchases of Securities
During 2020, the Company engaged in the following repurchases of its common stock, all of which were consummated in private transactions:
● | 100,000 shares on May 6, 2020, at a per-share price of $0.50; |
● | 270,667 shares on May 19, 2020, at a per-share price of $0.40; and |
● | 10,822 shares in the aggregate on December 1, 2020, at a per-share price of $0.43. |
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 Forward-Looking Statements
Some of theCertain statements made in this sectionreport may constitute “forward-looking statements” for purposes of our report arefederal securities laws. Our forward-looking statements. These 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 forward-looking statements are reasonable. Nevertheless, all forward-looking 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:
statement is not forward-looking.
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 forward-looking statements included in this filing may ultimately prove to be inaccurate―even materially inaccurate. Because of the significant uncertainties inherent in such forward-looking 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 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. |
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Should one or more of these risks or uncertainties materialize, or should any specified time frame, if ever.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, | ||||
| | 2021 |
| 2020 | ||
Investment Income: | |
| | |
| |
Interest Income | | $ | 2,656,201 | | $ | 1,282,175 |
Dividend Income | |
| — | |
| 15,462 |
| | | | | | |
Operating Expenses: | |
|
| |
|
|
General Operating Expenses | |
| 116,714 | |
| 83,447 |
Legal and Accounting Expenses | |
| 453,440 | |
| 175,612 |
Executive Management Compensation | |
| 556,432 | |
| 301,494 |
Insurance Expense | |
| 108,165 | |
| 85,237 |
Director's Fees | |
| 120,000 | |
| 90,000 |
| | | | | | |
Net Investment Gain | | $ | 1,301,450 | | $ | 561,847 |
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
Item | 2018 | 2017 | ||||||
Investment Income: | ||||||||
Interest Income | $ | 109,795 | $ | 130,463 | ||||
Dividend Income | 40,927 | 43,600 | ||||||
Operating Expenses: | ||||||||
General Operating Expenses | 106,150 | 111,348 | ||||||
Legal and Accounting Expenses | 186,477 | 221,598 | ||||||
Executive Management Compensation | 248,101 | 217,275 | ||||||
Insurance Expense | 80,318 | 78, 865 | ||||||
Director’s Fees | 60,000 | 60,000 | ||||||
Net Investment Loss | $ | (530,324 | ) | $ | (515,023 | ) |
For the year ended December 31, 2018, the Company2021, we earned $99,088$11,480 in interest payments from twoone eligible portfolio companies―company- DBR Enclave US Investors, LLC and Bravo Financial, LLC―- an aggregate of $2,099,684 from twenty-six promissory note investments; 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; and Taitron Components, Inc., and $3,772an additional $52,500 in non-eligible portfolio company dividends. late fee penalties.
For the year ended December 31, 2017, the Company2020, we earned $129,900$44,026 in interest payments from three eligible portfolio companies―one investment- DBR Enclave US Investors, LLC, Dala Petroleum, Inc. and Bravo Financial, LLC―LLC; - an additional $563aggregate of $993,795 from six promissory note investments; an aggregate of $26,994 in bank interest on cash balances and note receivable; an aggregate of $38,439$217,360 in origination fees; and an aggregate of $15,462 in dividend payments from five eligible portfolio companies—OTC Markets Group Cl A, Simulations Plus,four investments-Manning & Napier, Inc., Tessco Technologies,Educational Development Corp., Manhattan Bridge Capital, Inc., Escalade Inc.,; and National American UniversityWindstream Holdings, Inc., and $5,161 in non-eligible portfolio company dividends.
As the table above indicates, we incurred general and administrativeoperating expenses aggregating $681,046$1,354,751 for the year ended December 31, 2018,2021, and $689,086$735,790 for the year ended December 31, 2017.2020. A discussion of the various components of our general and administrativeoperating expenses for these periods is set forth below.
General Operating Expenses. Our general operating expenses which primarily include rent occupancy expense, bad debt expense and miscellaneous office supply expenses, were $106,150$116,714 for the year ended December 31, 2018. Our general operating expenses were $111,3482021 and $83,447 for the year ended December 31, 2017.
2020. The increase in the current period is primarily related to an increase in corporate franchise taxes.
Legal and Accounting Expenses. Our legal and accounting expenses were $186,477$453,440 for the year ended December 31, 20182021 and $221,598$175,612 for the year ended December 31, 2017.2020. The decreaseincrease in the current period is primarily related to increased costs we incurred to initiateon consulting and prosecute legal proceedings on investment loan defaultsunderwriting endeavors, as well as an increased cost in 2017.
our audit and tax services.
Executive Management Compensation. ForOur executive management compensation was $556,432 for the year ended December 31, 20182020 and $301,494 for the year ended December 31, 2017, executive management compensation aggregated $248,101 and $217,275, respectively, in cash payments.2020. The increase in the current period is primarily due to the payment of executive health insurance benefits beginning in 2017 in additionrelated to a one-time bonus payment paid in 2018.
made during the year 2021.
For the year ended December 31, 2018 and December 31, 2017,2021 our net investment lossgain was $530,324 and $515,023, respectively.$1,301,450. For the year ended December 31, 2020, our net investment gain was $561,847. The increased net investment loss isgain during 2021 was primarily the result of lowerhigher interest income received on our investment portfolio.earned during 2021 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, than we were able to obtain when operating as a BDC.
15
Financial Condition
For the year ended December 31, 2018,2021, we had an increase in net assets of $1,649,674.$1,773,162. This increase in net assets was primarily due to the appreciationincrease in value on our portfolio positions in Bitesquad.com LLC and HemaCare Corporation.interest income earned from short-term specialty financing. Our net assets increased by $675,443$1,572,354 for the year ended December 31, 2017,2020, primarily due to the gains realized on the saleappreciation of several investmentour portfolio positions.holdings.
Liquidity and Capital Resources
Summary cash flow data is as follows:
| | | | | | |
|
| For the Year Ended December 31, | ||||
| | 2021 |
| 2020 | ||
Cash flows used by: | |
| | |
| |
Operating activities | | $ | (1,886,094) | | $ | (2,463,157) |
Financing activities |
| | (1,618,337) |
| | (162,920) |
Net decrease in cash |
| | (3,504,431) |
| | (2,626,077) |
Cash, beginning of period |
| | 5,440,579 |
| | 8,066,656 |
Cash, end of period | | $ | 1,936,148 | | $ | 5,440,579 |
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Cash flows provided (used) by: | ||||||||
Operating activities | $ | (1,192,193 | ) | $ | 247,199 | |||
Investing activities | — | — | ||||||
Financing activities | — | (433,636 | ) | |||||
Net decrease in cash | (1,192,193 | ) | (186,437 | ) | ||||
Cash, beginning of period | 2,158,314 | 2,344,751 | ||||||
Cash, end of period | $ | 966,121 | $ | 2,158,314 |
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 will accrue 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 comprises 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 2022. Accordingly, at present we have no definitive plans to obtain other sources of liquidity through 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 we intend to distribute to our shareholders as a dividend, and weup to 2,697,603 shares of our common stock purchasable upon the exercise of the warrants. The warrants are contemplated to be exercisable at a price of $4.00 per share of common stock. We intend to apply to have the warrants listed for trading on the OTC Markets.
The offering is subject to the effectiveness of the S-1 registration statement. Accordingly, no present plans to become party to any credit facility. As a result, our $966,121record date has been established for the associated dividend contemplated as part of cash at the end fiscal 2018offering. The warrants will not be issued until the registration statement is declared effective, and our $2,158,314 of cash at the end of fiscal 2017 constituted our sole source of liquidity. Management believes cash on handwarrants will not be exercisable unless such registration statement remains effective. If the offering is sufficient to fund our anticipated operational and financing activities through fiscal 2019.
Presently,consummated, we expect that our $966,000 in cash as of December 31, 2018 will be substantially invested withinto use net proceeds from the next 12 months.offering for general corporate purposes, including but not limited to extending specialty finance solutions and credit to borrowers and repaying credit facility borrowings.
Capital Expenditures
We did not have any material commitments for capital expenditures in fiscal 20182021 and we do not anticipate any such capital expenditures for fiscal 2019. Given our business model, investment in capital resources is not required beyond investments in certain securities.2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, nor are we a party to any contract or other obligation not included on its balance sheet that has, or is reasonably likely to have, a current or future effect on our financial condition.
Critical Accounting Policies
Critical accounting policies are policies that are both most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about
16
the effect of matters that are inherently uncertain. Our critical accounting policies relate to investment valuation and interest and dividend income as a BDC.an investment company.
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, Audit Committee and independent third party valuation expert that may be engaged by management to assist in the valuation of our portfolio investments. Valuation determinations are in all cases made in conformity with the written valuation policies and procedures respecting the valuation of Company investments.
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 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 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 ex-dividend 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 revenue 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.
17
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
18
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 sheetsheets of Mill City Ventures III, Ltd. (the Company) as of December31, 2018,2021 and 2020, including the schedule of investments as of December 31, 2018,investment schedules and the related statements of operations, shareholders’shareholders’ equity, and cash flows for each of the yearyears in the two-year period ended December 31, 2018,2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December31, 2018,2021 and 2020, and the results of its operations and its cash flows for the yearyears then ended, December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany’s management. Our responsibility is to express an opinion on the Company’sCompany’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 auditaudits 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 audit,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’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits 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 auditaudits 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 audit providesaudits 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 $5,164,319,$13,662,500 and $3,367,897 for 2021 and 2020, respectively, whose fair values have been estimated by the validationvaluation committee and management in the absence of readily determinable fair values. Such estimates are based on financial and other information provided by management in the absence of readily determinable fair values. Such estimates are based on financial and other information provided by management of its portfolio companies and pertinent market and industry data. These investments are valued in accordance with FASB ASC 820, “Fair“Fair Value Measurement”, which requires the Company to assume that the portfolio investments are sold in a principal market to market participants. The Company has considered its principal market as the market in which the Company exists its portfolio investments with the greatest volume and level of activity. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to these valuation techniques are observable or unobservable. As of December 31, 2018, $5,164,319 of the investments are valued based on unobservable inputs. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate significantly over short periods of time. These determinations of fair value could differ materially from the values that would have been utilized had a ready market for these investments existed.
We have served as the Company’s auditor since 2019
Minneapolis, Minnesota
June 17, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Mill City Ventures III, Ltd:
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Mill City Ventures III, Ltd. (the "Company") as of December 31, 2017, including the schedule of investments as of December 31, 2017, the related statements of operations, shareholders’ equity and cash flows, for the year ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with 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 audit 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. Our audit 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. Such procedures also included confirmation of investments as of December 31, 2017. Our audit 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 audit 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 $3,833,855, whose fair values have been estimated by the valuation committee and management in the absence of readily determinable fair values. Such estimates are based on financial and other information provided by management of its portfolio companies and pertinent market and industry data. These investments are valued in accordance with FASB ASC 820, “Fair Value Measurement”Measurement”, which requires the Company to assume that the portfolio investments are sold in a principal market to market participants. The Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to these valuation techniques are observable or unobservable. As of December 31, 2017, $3,833,855 ofThe investments are valued based on unobservable inputs.inputs as of December 31, 2021 and 2020 of $13,662,500 and $3,367,897, respectively. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate significantly over short periods of time. These determinations of fair value could differ materially from the values that would have been utilized had a ready market for these investments existed.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
19
Valuation of investments which utilize significant unobservable inputs
Description of the Matter | At December 31, 2021, the balances of the Company’s investments, at fair value, categorized as Level 3 within the fair value hierarchy totaled $13,663,500. The fair value of these investments is determined by management using the valuation techniques and significant unobservable inputs described in Notes 6 and 7 to the financial statements. Auditing the fair value of the Company’s investments categorized as Level 3 within the fair value hierarchy was complex and involved a high degree of auditor subjectivity due to the estimation uncertainty resulting from the unobservable nature of the inputs used in the valuations and the limited number of comparable market transactions for the same or similar investments. |
How We Addressed the Matter in Our Audit | |
We obtained an understanding and evaluated the design of controls over the Company’s valuation process, including management’s assessment of the significant inputs and estimates used in the fair value measurements. We performed the following procedures, among others, for the Company’s Level 3 investments: · We evaluated the valuation techniques used by the Company and considered the consistency in application of the valuation techniques to each subject investment and investment class. · We involved senior, more experienced audit team members to perform audit procedures. · We evaluated the reasonableness of the significant unobservable inputs by comparing the inputs used by the Company to third-party sources, if available, such as market indexes or other market data. · We considered other information obtained during the audit that corroborated or contradicted the Company’s inputs or fair value measurements. · For investments sold during the year, we compared the transaction price to the Company’s fair value estimate to assess the reasonableness of management’s fair value estimates. |
Boulay PLLP
We have served as the Company’s auditor since 2019
Minneapolis, Minnesota
March 14, 2022
20
Mill City Ventures III, Ltd.
Balance Sheets
December 31, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Investments, at fair value: | $ | 9,960,192 | $ | 7,240,860 | ||||
Non-control/non-affiliate investments (cost: $6,958,827 and $7,000,745 respectively) | ||||||||
Cash | 966,121 | 2,158,314 | ||||||
Note receivable from shareholder (Note 9) | 250,000 | — | ||||||
Prepaid expenses | 47,156 | 62,549 | ||||||
Receivable for sale of investments | 18,999 | 267,119 | ||||||
Interest and dividend receivables | 72,901 | 39,574 | ||||||
Leasehold improvements, net | — | 7,557 | ||||||
Property and equipment, net | 4,645 | 7,218 | ||||||
Total Assets | $ | 11,320,014 | $ | 9,783,191 | ||||
LIABILITIES | ||||||||
Accounts payable | $ | 41,125 | $ | 37,091 | ||||
Payable for purchase of investments | — | 106,222 | ||||||
Deferred rent | — | 10,663 | ||||||
Total Liabilities | 41,125 | 153,976 | ||||||
Commitments and Contingencies (Note 4) | ||||||||
SHAREHOLDERS EQUITY (NET ASSETS) | ||||||||
Common Stock, par value $0.001 per share (250,000,000 authorized; | 11,067 | 11,067 | ||||||
11,067,402 and 11,067,402 outstanding) | ||||||||
Additional paid-in capital | 10,774,653 | 10,774,653 | ||||||
Accumulated deficit | (1,159,665 | ) | (1,159,665 | ) | ||||
Accumulated undistributed investment loss | (1,725,097 | ) | (1,194,773 | ) | ||||
Accumulated undistributed net realized gains on investment transactions | 376,566 | 957,818 | ||||||
Net unrealized appreciation in value of investments | 3,001,365 | 240,115 | ||||||
Total Shareholders' Equity (net assets) | 11,278,889 | 9,629,215 | ||||||
Total Liabilities and Shareholders' Equity | $ | 11,320,014 | $ | 9,783,191 | ||||
Net Asset Value Per Common Share | $ | 1.02 | $ | 0.87 |
| | | | | | |
|
| | |
| | |
|
| December 31, 2021 |
| December 31, 2020 | ||
ASSETS | |
| | |
| |
Investments, at fair value: | | $ | 14,098,675 | | $ | 6,667,897 |
Non-control/non-affiliate investments (cost: $13,933,057 and $4,968,576 respectively) | |
|
| |
|
|
Cash | |
| 1,936,148 | |
| 5,440,579 |
Note receivable | |
| 250,000 | |
| 250,000 |
Prepaid expenses | |
| 83,674 | |
| 43,838 |
Receivable for sale of investments | |
| — | |
| 19,313 |
Interest and dividend receivables | |
| 324,350 | |
| 65,911 |
Right-of-use lease asset | |
| 4,984 | |
| 23,345 |
Total Assets | | $ | 16,697,831 | | $ | 12,510,883 |
| | | | | | |
LIABILITIES | |
|
| |
|
|
Accounts payable | | $ | 64,028 | | $ | 32,917 |
Dividend payable | |
| 100 | |
| 539,296 |
Payable for purchase of investments | | | 1,900,000 | | | — |
Lease liability | |
| 5,654 | |
| 26,061 |
Accrued income tax expense | |
| 1,269,000 | |
| 13,722 |
Deferred taxes | |
| 45,000 | |
| 258,000 |
Total Liabilities | |
| 3,283,782 | |
| 869,996 |
Commitments and Contingencies | |
|
| |
|
|
| | | | | | |
SHAREHOLDERS EQUITY (NET ASSETS) | |
|
| |
|
|
Common stock, par value $0.001 per share (250,000,000 authorized; 10,790,413 and 10,785,913 outstanding) | |
| 10,790 | |
| 10,786 |
Additional paid-in capital | |
| 10,694,163 | |
| 10,673,014 |
Accumulated deficit | |
| (1,159,665) | |
| (1,159,665) |
Accumulated undistributed investment loss | |
| (1,877,667) | |
| (2,124,419) |
Accumulated undistributed net realized gains on investment transactions | |
| 5,580,810 | |
| 2,541,850 |
Net unrealized appreciation in value of investments | |
| 165,618 | |
| 1,699,321 |
Total Shareholders' Equity (Net Assets) | |
| 13,414,049 | |
| 11,640,887 |
Total Liabilities and Shareholders' Equity | | $ | 16,697,831 | | $ | 12,510,883 |
Net Asset Value Per Common Share | | $ | 1.24 | | $ | 1.08 |
The accompanying notes are an integral part of these financial statements.
21
Statements of Operations
Year Ended | ||||||||
December 31, 2018 | December 31, 2017 | |||||||
Investment Income | ||||||||
Interest income | $ | 109,795 | $ | 130,463 | ||||
Dividend income | 40,927 | 43,600 | ||||||
Total Investment Income | 150,722 | 174,063 | ||||||
Operating Expenses | ||||||||
Professional fees | 186,477 | 221,598 | ||||||
Payroll | 248,101 | 217,275 | ||||||
Insurance | 80,318 | 78,865 | ||||||
Occupancy | 78,180 | 86,814 | ||||||
Director's fees | 60,000 | 60,000 | ||||||
Depreciation and amortization | 10,130 | 10,836 | ||||||
Other general and administrative | 17,840 | 13,698 | ||||||
Total Operating Expenses | 681,046 | 689,086 | ||||||
Net Investment Loss | $ | (530,324 | ) | $ | (515,023 | ) | ||
Realized and Unrealized Gain (Loss) on Investments | ||||||||
Net realized gain (loss) on investments | (581,252 | ) | 539,445 | |||||
Net change in unrealized appreciation on investments | 2,761,250 | 651,021 | ||||||
Net Realized and Unrealized Gain on Investments | 2,179,998 | 1,190,466 | ||||||
Net Increase in Net Assets Resulting from Operations | $ | 1,649,674 | $ | 675,443 | ||||
Net Increase in Net Assets Resulting from Operations per share: | ||||||||
Basic and diluted | $ | 0.15 | $ | 0.06 | ||||
Weighted-average number of common shares outstanding | 11,067,402 | 11,863,392 |
| | | | | | |
| | Year Ended | ||||
| | December 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Investment Income |
| |
|
| |
|
Interest income | | $ | 2,656,201 | | $ | 1,282,175 |
Dividend income | |
| — | |
| 15,462 |
Total Investment Income | |
| 2,656,201 | |
| 1,297,637 |
| | | | | | |
Operating Expenses | |
|
| |
|
|
Professional fees | |
| 453,440 | |
| 175,612 |
Payroll | |
| 556,432 | |
| 301,494 |
Insurance | |
| 108,165 | |
| 85,237 |
Occupancy | |
| 66,459 | |
| 66,307 |
Director's fees | |
| 120,000 | |
| 90,000 |
Depreciation and amortization | |
| — | |
| 2,071 |
Other general and administrative | |
| 50,255 | |
| 15,069 |
Total Operating Expenses | |
| 1,354,751 | |
| 735,790 |
Net Investment Gain | |
| 1,301,450 | |
| 561,847 |
| | | | | | |
Realized and Unrealized Gain (Loss) on Investments | |
|
| |
|
|
Net realized gain on investments | |
| 4,118,001 | |
| 5,330 |
Net change in unrealized appreciation (depreciation) on investments | |
| (1,533,703) | |
| 1,934,794 |
Net Realized and Unrealized Gain (Loss) on Investments | |
| 2,584,298 | |
| 1,940,124 |
Net Increase in Net Assets Resulting from Operations Before Taxes | | | 3,885,748 | | | 2,501,971 |
Provision For Income Taxes | |
| 1,054,698 | |
| 288,401 |
Net Increase in Net Assets Resulting from Operations | | $ | 2,831,050 | | $ | 2,213,570 |
| | | | | | |
Net Increase in Net Assets Resulting from Operations per share: | |
|
| |
|
|
Basic and diluted | | $ | 0.26 | | $ | 0.20 |
Weighted-average number of common shares outstanding - basic and diluted | |
| 10,789,294 | |
| 10,869,054 |
The accompanying notes are an integral part of these financial statements.
22
Statements of Shareholders’ Equity
For the years ended December 31, 20182021 and 20172020
Accumulated | ||||||||||||||||||||||||||||||||
Accumulated | Undistributed | Net | ||||||||||||||||||||||||||||||
Undistributed | Net Realized | Unrealized | ||||||||||||||||||||||||||||||
Additional | Net | Gain on | Appreciation | Total | ||||||||||||||||||||||||||||
Common Stock | Paid In | Accumulated | Investment | Investments | in value of | Shareholders' | ||||||||||||||||||||||||||
Shares | Amount | Capital | Defiicit | Loss | Transactions | Investments | Equity | |||||||||||||||||||||||||
Balance as of January 1, 2017 | 12,151,493 | $ | 12,151 | $ | 11,857,660 | $ | (1,159,665 | ) | $ | (1,330,205 | ) | $ | 418,373 | $ | (410,906 | ) | $ | 9,387,408 | ||||||||||||||
Repurchase of common stock for cash of $0.40 per share on September 25, 2017 | (1,084,091 | ) | (1,084 | ) | (1,083,007 | ) | — | 650,455 | — | — | (433,636 | ) | ||||||||||||||||||||
Undistributed net investment loss | — | — | — | (515,023 | ) | — | — | (515,023 | ) | |||||||||||||||||||||||
Undistributted net realized gain on investment transactions | — | — | — | — | 539,445 | — | 539,445 | |||||||||||||||||||||||||
Appreciation in value of investments | — | — | — | — | — | 651,021 | 651,021 | |||||||||||||||||||||||||
Balance as of December 31, 2017 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,194,773 | ) | $ | 957,818 | $ | 240,115 | $ | 9,629,215 | |||||||||||||||
Undistributed net investment loss | — | — | — | (530,324 | ) | — | — | (530,324 | ) | |||||||||||||||||||||||
Undistributted net realized gain on investment transactions | — | — | — | — | (581,252 | ) | — | (581,252 | ) | |||||||||||||||||||||||
Appreciation in value of investments | — | — | — | — | — | 2,761,250 | 2,761,250 | |||||||||||||||||||||||||
Balance as of December 31, 2018 | 11,067,402 | $ | 11,067 | $ | 10,774,653 | $ | (1,159,665 | ) | $ | (1,725,097 | ) | $ | 376,566 | $ | 3,001,365 | $ | 11,278,889 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | Net | | | | |||
| | | | | | | | | | | | | Accumulated | | Undistributed | | Unrealized | | | | |||
| | | | | | | Additional | | | | | Undistributed | | Net Realized Gain | | Appreciation | | Total | |||||
| | Common | | | | Paid In | | Accumulated | | Net Investment | | on Investments | | in value of | | Shareholders' | |||||||
Year Ended December 31, 2021 |
| Shares |
| Par Value |
| Capital |
| Deficit |
| Loss |
| Transactions |
| Investments |
| Equity | |||||||
Balance as of December 31, 2020 | | 10,785,913 | | $ | 10,786 | | $ | 10,673,014 | | $ | (1,159,665) | | $ | (2,124,419) | | $ | 2,541,850 | | $ | 1,699,321 | | $ | 11,640,887 |
Common shares issued in consideration for expense payment |
| 4,500 |
| | 4 |
| | 21,149 |
| | — |
| | — |
| | — |
| | — |
| | 21,153 |
Dividend declared |
| — |
| | — |
| | — |
| | — |
| | — |
| | (1,079,041) |
| | — |
| | (1,079,041) |
Undistributed net investment gain | | — | | | — | | | — | | | — | | | 246,752 | | | — | | | — | | | 246,752 |
Undistributed net realized gain on investment transactions |
| — |
| | — |
| | — |
| | — |
| | — |
| | 4,118,001 |
| | — |
| | 4,118,001 |
Depreciation in value of investments |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,533,703) |
| | (1,533,703) |
Balance as of December 31, 2021 |
| 10,790,413 | | $ | 10,790 | | $ | 10,694,163 | | $ | (1,159,665) | | $ | (1,877,667) | | $ | 5,580,810 | | $ | 165,618 | | $ | 13,414,049 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | | Accumulated | | Undistributed | | Net Unrealized | | | | |||
| | | | | | | Additional | | | | | Undistributed | | Net Realized Gain | | Appreciation | | Total | |||||
| | Common | | | | | Paid In | | Accumulated | | Net Investment | | on Investments | | in value | | Shareholders' | ||||||
Year Ended December 31, 2020 |
| Shares |
| Par Value |
| Capital |
| Deficit |
| Loss |
| Transactions |
| of Investments |
| Equity | |||||||
Balance as of December 31, 2019 | | 11,067,402 | | $ | 11,067 | | $ | 10,774,653 | | $ | (1,159,665) | | $ | (2,397,865) | | $ | 3,075,816 | | $ | (235,473) | | $ | 10,068,533 |
Repurchase of shares | | (381,489) | | | (381) | | | (162,539) | | | — | | | — | | | — | | | — | |
| (162,920) |
Stock based compensation | | 100,000 | | | 100 | | | 60,900 | | | — | | | — | | | — | | | — | | | 61,000 |
Dividends declared | | — | | | — | | | — | | | | | | — | | | (539,296) | | | — | | | (539,296) |
Undistributed net investment gain |
| — |
| | — |
| | — |
| | — |
| | 273,446 |
| | — |
| | — |
| | 273,446 |
Undistributed net realized gain on investment transactions |
| — |
| | — |
| | — |
| | — |
| | — |
| | 5,330 |
| | — |
| | 5,330 |
Appreciation in value of investments |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,934,794 |
| | 1,934,794 |
Balance as of December 31, 2020 |
| 10,785,913 | | $ | 10,786 | | $ | 10,673,014 | | $ | (1,159,665) | | $ | (2,124,419) | | $ | 2,541,850 | | $ | 1,699,321 | | $ | 11,640,887 |
The accompanying notes are an integral part of these financial statements.
23
Mill City Ventures III, Ltd.
Statements of Cash Flows
Year Ended | ||||||||
December 31, 2018 | December 31, 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net increase in net assets resulting from operations | $ | 1,649,674 | $ | 675,443 | ||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) in operating activities: | ||||||||
Net change in unrealized appreciation on investments | (2,761,250 | ) | (651,021 | ) | ||||
Net realized gain or loss on investments | 581,252 | (539,445 | ) | |||||
Payments for purchases of investments | (3,097,109 | ) | (3,307,939 | ) | ||||
Payments for purchases of investments sold short | (477,442 | ) | (111,913 | ) | ||||
Proceeds from sales of investments | 2,579,072 | 4,270,524 | ||||||
Proceeds from sales of investments sold short | 456,145 | 85,936 | ||||||
Depreciation & amortization | 10,130 | 10,836 | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivable from sale on investments | 248,120 | (267,119 | ) | |||||
Note receivable from shareholder | (250,000 | ) | — | |||||
Interest and dividends receivable | (33,327 | ) | (34,721 | ) | ||||
Prepaid expenses | 15,393 | (888 | ) | |||||
Accounts payable | 4,034 | 11,994 | ||||||
Deferred rent | (10,663 | ) | (710 | ) | ||||
Payable for purchase of investments | (106,222 | ) | 106,222 | |||||
Net cash provided (used) in operating activities | (1,192,193 | ) | 247,199 | |||||
Cash flows from financing activities: | ||||||||
Payments for repurchase of common stock | — | (433,636 | ) | |||||
Net cash used by financing activities | — | (433,636 | ) | |||||
Net decrease in cash | (1,192,193 | ) | (186,437 | ) | ||||
Cash, beginning of period | 2,158,314 | 2,344,751 | ||||||
Cash, end of period | $ | 966,121 | $ | 2,158,314 |
| | | | | | |
|
| Year Ended | ||||
| | December 31, 2021 |
| December 31, 2020 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net increase in net assets resulting from operations | | $ | 2,831,050 | | $ | 2,213,570 |
| | | | | | |
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: | |
|
| |
|
|
Net change in unrealized (appreciation) depreciation on investments | |
| 1,533,703 | |
| (1,934,794) |
Net realized gain on investments | |
| (4,118,001) | |
| (5,330) |
Purchases of investments | |
| (27,029,292) | |
| (9,405,802) |
Proceeds from sales of investments | |
| 22,188,562 | |
| 6,418,926 |
Stock-based compensation | | | — | | | 61,000 |
Depreciation & amortization expense | |
| — | |
| 2,071 |
Income taxes payable | |
| 1,255,278 | |
| — |
Deferred income taxes | | | (213,000) | | | 271,722 |
Common shares issued as consideration for expense payment | |
| 15,403 | |
| — |
| | | | | | |
Changes in operating assets and liabilities: | |
|
| |
|
|
Prepaid expenses and other assets | |
| (21,475) | |
| 5,197 |
Interest and dividends receivable | |
| (258,439) | |
| (59,411) |
Receivable for investment sales | |
| 19,313 | |
| (19,313) |
Accounts payable and other liabilities | |
| 10,804 | |
| (10,993) |
Payable for investment purchase | |
| 1,900,000 | |
| — |
Net cash used in operating activities | |
| (1,886,094) | |
| (2,463,157) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Payments for repurchase of common stock | |
| — | |
| (162,920) |
Payments for common stock dividend | |
| (1,618,337) | |
| — |
Net cash used by financing activities | |
| (1,618,337) | |
| (162,920) |
Net decrease in cash | |
| (3,504,431) | |
| (2,626,077) |
Cash, beginning of period | |
| 5,440,579 | |
| 8,066,656 |
Cash, end of period | | $ | 1,936,148 | | $ | 5,440,579 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for income taxes | | $ | 32,398 | | $ | 16,679 |
| | | | | | |
Non-cash financing activities: | |
|
| |
|
|
Common shares issued as consideration for investment | | $ | 5,750 | | $ | — |
Dividend declared to common stock shareholders | | | — | |
| 539,296 |
The accompanying notes are an integral part of these financial statements.
24
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 20182021
Investments(1) | Investment Type | Interest Rate(2) | Maturity Date | Principal Amount | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||
Equity Investments | ||||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Warrants(8) | n/a | 12/28/2020 | 35,714 | $ | — | $ | — | 0.00 | % | $ | — | $ | — | $ | — | ||||||||||||||||||
Business Services | ||||||||||||||||||||||||||||||||||
Park City Group Inc. | Common Stock | n/a | n/a | 10,000 | 68,222 | 59,700 | — | 8,522 | (8,522 | ) | ||||||||||||||||||||||||
Qualstar Corp. | Common Stock | n/a | n/a | 11,299 | 61,455 | 59,320 | — | 2,135 | (2,135 | ) | ||||||||||||||||||||||||
Spar Group Inc. | Common Stock(8) | n/a | n/a | 200,012 | 284,592 | 107,206 | — | 177,386 | (177,386 | ) | ||||||||||||||||||||||||
414,269 | 226,226 | 2.01 | % | — | 188,043 | (188,043 | ) | |||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||
Famous Daves of America, Inc. | Common Stock | n/a | n/a | 38,963 | 154,409 | 178,840 | 24,431 | — | 24,431 | |||||||||||||||||||||||||
Gaia, Inc. | Common Stock | n/a | n/a | 10,000 | 157,047 | 103,600 | — | 53,447 | (53,447 | ) | ||||||||||||||||||||||||
HG Holdings, Inc. | Common Stock(8) | n/a | n/a | 200,000 | 199,118 | 87,000 | — | 112,118 | (112,118 | ) | ||||||||||||||||||||||||
NTN Buzztime Inc. | Common Stock | n/a | n/a | 16,370 | 46,437 | 31,921 | — | 14,516 | (14,516 | ) | ||||||||||||||||||||||||
Tzfat Spirits of Israel, LLC | LLC Membership Units(8) | n/a | n/a | 55,000 | 101,019 | 25,000 | — | 76,019 | (76,019 | ) | ||||||||||||||||||||||||
658,030 | 426,361 | 3.78 | % | 24,431 | 256,100 | (231,669 | ) | |||||||||||||||||||||||||||
Education | ||||||||||||||||||||||||||||||||||
Nat'l Amer. Univ. Holdings, Inc. | Common Stock | n/a | n/a | 52,053 | 59,123 | 9,370 | 0.08 | % | — | 49,753 | (49,753 | ) | ||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||
OTC Markets Group Cl A | Common Stock | n/a | n/a | 7,000 | 118,889 | 203,280 | 84,391 | — | 84,391 | |||||||||||||||||||||||||
Ladenburg Thalmn | Common Stock(9) | n/a | n/a | 50,000 | 145,364 | 116,500 | — | 28,864 | (28,864 | ) | ||||||||||||||||||||||||
264,253 | 319,780 | 2.84 | % | 84,391 | 28,864 | 55,527 | ||||||||||||||||||||||||||||
Healthcare | ||||||||||||||||||||||||||||||||||
Reshape Life Sciences Inc Pfd Conv Ser B | Preferred LLC Units(4) (8) | n/a | n/a | 156 | 155,321 | 32,448 | — | 122,873 | (122,873 | ) | ||||||||||||||||||||||||
Reshape Life Sciences Inc Pfd Conv Ser B | Warrants(8) | n/a | 8/16/2024 | 67,860 | 679 | — | — | 679 | (679 | ) | ||||||||||||||||||||||||
HemaCare Corp. | Common Stock(8) | n/a | n/a | 134,697 | 416,222 | 1,306,561 | 890,339 | — | 890,339 | |||||||||||||||||||||||||
572,222 | 1,339,009 | 11.87 | % | 890,339 | 123,552 | 766,787 | ||||||||||||||||||||||||||||
Industrial Goods | ||||||||||||||||||||||||||||||||||
CPI Aerostructures Inc. | Common Stock | n/a | n/a | 25,000 | 229,832 | 159,250 | — | 70,582 | (70,582 | ) | ||||||||||||||||||||||||
Optex Systems Holdings, Inc. | Common Stock | n/a | n/a | 21,642 | 39,531 | 28,351 | — | 11,180 | (11,180 | ) | ||||||||||||||||||||||||
269,363 | 187,601 | 1.66 | % | — | 81,762 | (81,762 | ) | |||||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||||
Franklin Wireless Corp. | Common Stock | n/a | n/a | 38,189 | 71,435 | 86,689 | 15,254 | — | 15,254 | |||||||||||||||||||||||||
Gogo Inc. | Common Stock | n/a | n/a | 10,000 | 57,640 | 29,900 | — | 27,740 | (27,740 | ) | ||||||||||||||||||||||||
Insite Software Solutions, Inc | Warrants(8) | n/a | 12/30/2023 | 108,960 | — | — | — | — | — | |||||||||||||||||||||||||
Intelligent Systems Corp. | Common Stock | n/a | n/a | 9,671 | 130,269 | 124,949 | — | 5,320 | (5,320 | ) | ||||||||||||||||||||||||
Kwikbit Inc. (fka MAX 4G) | Preferred Stock(8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||||
Microvision, Inc. | Common Stock | n/a | n/a | 5,000 | 6,250 | 3,020 | — | 3,230 | (3,230 | ) | ||||||||||||||||||||||||
Points International, Inc. | Common Stock | n/a | n/a | 8,000 | 98,932 | 79,680 | — | 19,252 | (19,252 | ) | ||||||||||||||||||||||||
Simulations Plus, Inc. | Common Stock | n/a | n/a | 24,001 | 237,363 | 477,611 | 240,248 | — | 240,248 | |||||||||||||||||||||||||
Taitron Components Inc. | Common Stock | n/a | n/a | 20,000 | 41,295 | 34,600 | 470 | 7,165 | (6,695 | ) | ||||||||||||||||||||||||
TESSCO Technologies Inc. | Common Stock | n/a | n/a | 20,074 | 346,203 | 240,888 | — | 105,315 | (105,315 | ) | ||||||||||||||||||||||||
Travelzoo, Inc. | Common Stock | n/a | n/a | 15,100 | 138,966 | 148,433 | 11,159 | 1,692 | 9,467 | |||||||||||||||||||||||||
1,278,353 | 1,525,770 | 13.53 | % | 417,131 | 169,714 | 247,417 | ||||||||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||||
Bitesquad.com LLC | Preferred LLC Units(4) (8) | n/a | n/a | 13,227 | 726,736 | 714,258 | — | 12,478 | (12,478 | ) | ||||||||||||||||||||||||
Bitesquad.com LLC | Common Stock(8) | n/a | n/a | 60,316 | 288,157 | 3,136,432 | 2,848,275 | — | 2,848,275 | |||||||||||||||||||||||||
DBR Enclave US Investors, LLC | LLC Units Units | n/a | n/a | 500,000 | 500,000 | 500,000 | — | — | — | |||||||||||||||||||||||||
1,514,893 | 4,350,690 | 38.57 | % | 2,848,275 | 12,478 | 2,835,797 | ||||||||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||||
Northern Capital Partners I, LP | LP Units(8) | n/a | n/a | 550,000 | 550,000 | 488,629 | — | 61,371 | (61,371 | ) | ||||||||||||||||||||||||
Southern Plains Resources, Inc. | Common Stock(8) | n/a | n/a | 600,000 | 730,000 | — | — | 730,000 | (730,000 | ) | ||||||||||||||||||||||||
1,280,000 | 488,629 | 4.33 | % | — | 791,371 | (791,371 | ) | |||||||||||||||||||||||||||
Publishing | ||||||||||||||||||||||||||||||||||
Educational Development Corp. | Common Stock | n/a | n/a | 127,404 | 648,321 | 1,086,756 | 9.64 | % | 438,435 | — | 438,435 | |||||||||||||||||||||||
Total Equity Investments | $ | 6,958,827 | $ | 9,960,192 | 88.31 | % | $ | 4,703,002 | $ | 1,701,637 | $ | 3,001,365 | ||||||||||||||||||||||
Total Cash | 966,121 | 966,121 | 8.57 | % | — | — | — | |||||||||||||||||||||||||||
Total Investments and Cash | $ | 7,924,948 | $ | 10,926,313 | 96.87 | % | $ | 4,703,002 | $ | 1,701,637 | $ | 3,001,365 |
| | | | | | | | | |
| | | | | | | | Percentage |
|
| | | | | | | | of Net | |
Investment / Industry |
| Cost |
| Fair Value |
| Assets | | ||
Short-Term Non-banking Loans | |
| | |
| | |
|
|
Consumer - 15% secured loans | | | | | | | | | |
AirDog Supplies, Inc. | | $ | 1,250,000 | | $ | 1,250,000 |
| 9.32 | % |
Financial - 52% secured loans | |
| 500,000 | |
| 500,000 |
| 3.73 | % |
Financial - 12% secured loans | |
| 500,000 | |
| 500,000 |
| 3.73 | % |
Litigation Financing - 23% secured loans | |
|
| |
|
|
|
| |
The Cross Law Firm, LLC | |
| 1,805,750 | |
| 1,800,000 |
| 13.42 | % |
Real Estate - 15% secured loans | |
| 700,000 | |
| 700,000 |
| 5.22 | % |
Tailwinds, LLC | |
| 3,000,000 | |
| 3,000,000 |
| 22.36 | % |
Real Estate - 12% secured loans | |
|
| |
|
|
|
| |
Alatus Development, LLC | |
| 3,900,000 | |
| 3,900,000 |
| 29.07 | % |
Total Short-Term Non-Banking Loans | |
| 11,655,750 | |
| 11,650,000 |
| 86.85 | % |
| | | | | | | | | |
Common Stock | |
|
| |
|
|
|
| |
Financial Services | |
| 414,128 | |
| 436,175 |
| 3.25 | % |
| | | | | | | | | |
Preferred Stock | |
|
| |
|
|
|
| |
Consumer | | | | | | | | | |
Wisdom Gaming, Inc | | | 900,000 | | | 900,000 | | 6.71 | % |
Information Technology | | | 150,000 | | | 300,000 | | 2.24 | % |
Total Other Equity | |
| 1,050,000 | |
| 1,200,000 |
| 8.95 | % |
| | | | | | | | | |
Warrants | |
|
| |
|
|
|
| |
Healthcare | |
| 679 | |
| — |
| 0.00 | % |
| | | | | | | | | |
Other Equity | |
|
| |
|
|
|
| |
Consumer | | | 212,500 | | | 212,500 | | 1.58 | % |
Financial | |
| 600,000 | |
| 600,000 |
| 4.47 | % |
Total Other Equity | | | 812,500 | | | 812,500 | | 6.05 | % |
| | | | | | | | | |
Total Investments | | $ | 13,933,057 | | $ | 14,098,675 |
| 105.10 | % |
| | | | | | | | | |
Total Cash | |
| 1,936,148 | |
| 1,936,148 |
| 14.43 | % |
| | | | | | | | | |
Total Investments and Cash | | $ | 15,869,205 | | $ | 16,034,823 |
| 119.53 | % |
At December 31, 2018, aggregate non-qualifying assets represented approximately 6.0% of our total assets.
At December 31, 2018, the estimated net unrealized gain for federal tax purposes was $3,202,798, based on a tax cost basis of $6,757,394.
At December 31, 2018, the estimated aggregate gross unrealized gain for federal income tax purposes was $4,789,742 and the estimated aggregate gross unrealized loss for federal income tax purposes was $1,586,944.
The accompanying notes are an integral part of these financial statements.
25
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 20172020
Investments(1) | Investment Type | Interest Rate(2) | Maturity Date | Principal Amount | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||||
Debt Investments | ||||||||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||
Mix 1 Life, Inc. | Secured Loan(4) | 12 | % | 2/6/2016 | $ | 500,000 | $ | 500,000 | $ | — | $ | — | $ | 500,000 | $ | (500,000 | ) | |||||||||||||||||||
Mix 1 Life, Inc. | Secured Loan | 12 | % | 3/13/2016 | $ | 250,000 | 250,000 | — | — | 250,000 | (250,000 | ) | ||||||||||||||||||||||||
750,000 | — | 0.00 | % | — | 750,000 | (750,000 | ) | |||||||||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||||
Bravo Financial LLC | Secured Loan | 12 | % | 8/31/2018 | $ | 500,000 | 500,000 | 500,000 | 5.19 | % | — | — | — | |||||||||||||||||||||||
Total Debt Investments | $ | 1,250,000 | $ | 500,000 | 5.19 | % | $ | — | $ | 750,000 | $ | (750,000 | ) |
| | | | | | | | | |
| | | | | | | | Percentage | |
| | | | | | | | of Net | |
Investment / Industry |
| Cost |
| Fair Value |
| Assets |
| ||
Short-Term Non-banking Loans | |
| | |
| | |
|
|
Consumer - 20% secured loans | | $ | 400,000 | | $ | 400,000 |
| 3.44 | % |
Financial - 44% secured loans | |
| 400,000 | |
| 400,000 |
| 3.44 | % |
Financial - 36% secured loans | |
| 500,000 | |
| 500,000 |
| 4.30 | % |
Real Estate - 15% secured loans | |
|
| |
|
|
|
| |
Alatus Development, LLC | |
| 1,250,000 | |
| 1,250,000 |
| 10.74 | % |
Other | |
| 239,000 | |
| 239,000 |
| 2.05 | % |
Total Short-Term Non-Banking Loans | |
| 2,789,000 | |
| 2,789,000 |
| 23.97 | % |
| | | | | | | | | |
Common Stock | |
|
| |
|
|
|
| |
Consumer | |
|
| |
|
|
|
| |
Ammo, Inc. | |
| 1,750,000 | |
| 3,300,000 |
| 28.34 | % |
| | | | | | | | | |
Preferred Stock | |
|
| |
|
|
|
| |
Information Technology | |
| 150,000 | |
| 300,000 |
| 2.58 | % |
| | | | | | | | | |
Warrants | |
|
| |
|
|
|
| |
Healthcare | |
| 679 | |
| — |
| 0.00 | % |
| | | | | | | | | |
Other Equity | |
|
| |
|
|
|
| |
Leisure & Hospitality | |
| 278,897 | |
| 278,897 |
| 2.40 | % |
| | | | | | | | | |
Total Investments | | $ | 4,968,576 | | $ | 6,667,897 |
| 57.30 | % |
| | | | | | | | | |
Total Cash | |
| 5,440,579 | |
| 5,440,579 |
| 46.74 | % |
| | | | | | | | | |
Total Investments and Cash | | $ | 10,409,155 | | $ | 12,108,476 |
| 104.04 | % |
Investments(1) | Investment Type(5) | Interest Rate(6) | Expiration Date(7) | Shares/Units | Cost | Fair Value | Percentage of Net Assets | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||||
Equity Investments | ||||||||||||||||||||||||||||||||||
Advertising | ||||||||||||||||||||||||||||||||||
Creative Realities, Inc. | Warrants(8) | n/a | 12/28/2020 | 1,071,429 | $ | — | $ | 42,857 | 0.45 | % | $ | 42,857 | $ | — | $ | 42,857 | ||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||
Famous Daves of America, Inc. | Common Stock | n/a | n/a | 37,923 | 159,087 | 248,395 | 89,308 | — | 89,308 | |||||||||||||||||||||||||
Forward Industries, Inc. | Common Stock(8) | n/a | n/a | 20,100 | 23,969 | 24,723 | 778 | 24 | 754 | |||||||||||||||||||||||||
Mix 1 Life, Inc. | Common Stock(10) | n/a | n/a | 100,000 | 46,160 | 800 | — | 45,360 | (45,360 | ) | ||||||||||||||||||||||||
Stanley Furniture Co., Inc. | Common Stock(8) | n/a | n/a | 171,292 | 181,871 | 149,024 | — | 32,847 | (32,847 | ) | ||||||||||||||||||||||||
Tzfat Spirits of Israel, LLC | LLC Membership Units(8) | n/a | n/a | 55,000 | 101,019 | 25,000 | — | 76,019 | (76,019 | ) | ||||||||||||||||||||||||
512,106 | 447,942 | 4.65 | % | 90,086 | 154,250 | (64,164 | ) | |||||||||||||||||||||||||||
Education | ||||||||||||||||||||||||||||||||||
Nat'l Amer. Univ. Holdings, Inc. | Common Stock | n/a | n/a | 100,000 | 172,757 | 142,000 | 1.47 | % | 3,321 | 34,078 | (30,757 | ) | ||||||||||||||||||||||
Financial | ||||||||||||||||||||||||||||||||||
OTC Markets Group Cl A | Common Stock | n/a | n/a | 11,279 | 182,557 | 327,655 | 145,098 | — | 145,098 | |||||||||||||||||||||||||
Hi-Crush Partners, LP | Common Stock(9) | n/a | n/a | 10,000 | 106,222 | 107,000 | 778 | — | 778 | |||||||||||||||||||||||||
QC Holdings, Inc. | Common Stock(8) | n/a | n/a | 15,000 | 10,655 | 6,862 | — | 3,793 | (3,793 | ) | ||||||||||||||||||||||||
299,434 | 441,517 | 4.59 | % | 145,876 | 3,793 | 142,083 | ||||||||||||||||||||||||||||
Healthcare | ||||||||||||||||||||||||||||||||||
Reshape Life Sciences Inc Pfd Conv Ser B | Preferred LLC Units(4) (8) | n/a | n/a | 156 | 155,321 | 100,433 | — | 54,888 | (54,888 | ) | ||||||||||||||||||||||||
Reshape Life Sciences Inc Pfd Conv Ser B | Warrants(8) | n/a | 8/16/2024 | 67,860 | 679 | — | — | 679 | (679 | ) | ||||||||||||||||||||||||
HemaCare Corp. | Common Stock(8) | n/a | n/a | 136,897 | 421,839 | 413,429 | 6,396 | 14,806 | (8,410 | ) | ||||||||||||||||||||||||
577,839 | 513,862 | 5.34 | % | 6,396 | 70,373 | (63,977 | ) | |||||||||||||||||||||||||||
Industrial Goods | ||||||||||||||||||||||||||||||||||
ClearSign Combustion Corporation | Common Stock | n/a | n/a | 3,400 | 11,310 | 12,240 | 930 | — | 930 | |||||||||||||||||||||||||
11,310 | 12,240 | 0.12 | % | 930 | — | 930 | ||||||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||||
Insite Software Solutions, Inc | Warrants(8) | n/a | 12/30/2023 | 108,960 | — | — | — | — | — | |||||||||||||||||||||||||
MAX 4G, Inc. | Preferred Stock(8) | n/a | n/a | 300,000 | 150,000 | 300,000 | 150,000 | — | 150,000 | |||||||||||||||||||||||||
Simulations Plus, Inc. | Common Stock | n/a | n/a | 25,001 | 246,710 | 402,509 | 155,799 | — | 155,799 | |||||||||||||||||||||||||
Travelzoo, Inc. | Common Stock | n/a | n/a | 30,000 | 324,848 | 193,500 | — | 131,348 | (131,348 | ) | ||||||||||||||||||||||||
721,558 | 896,009 | 9.31 | % | 305,799 | 131,348 | 174,451 | ||||||||||||||||||||||||||||
Leisure & Hospitality | ||||||||||||||||||||||||||||||||||
Bitesquad.com LLC | Preferred LLC Units(4) (8) | n/a | n/a | 13,227 | 726,736 | 726,736 | — | — | — | |||||||||||||||||||||||||
Bitesquad.com LLC | Common Stock(8) | n/a | n/a | 60,316 | 288,157 | 1,293,490 | 1,005,333 | — | 1,005,333 | |||||||||||||||||||||||||
DBR Enclave US Investors, LLC | LLC Units | n/a | n/a | 500,000 | 500,000 | 500,000 | — | — | — | |||||||||||||||||||||||||
1,514,893 | 2,520,226 | 26.17 | % | 1,005,333 | — | 1,005,333 | ||||||||||||||||||||||||||||
Oil & Gas | ||||||||||||||||||||||||||||||||||
Northern Capital Partners I, LP | LP Units(8) | n/a | n/a | 550,000 | 550,000 | 488,629 | — | 61,371 | (61,371 | ) | ||||||||||||||||||||||||
Southern Plains Resources, Inc. | Common Stock(8) | n/a | n/a | 600,000 | 730,000 | — | — | 730,000 | (730,000 | ) | ||||||||||||||||||||||||
1,280,000 | 488,629 | 5.07 | % | — | 791,371 | (791,371 | ) | |||||||||||||||||||||||||||
Publishing | ||||||||||||||||||||||||||||||||||
Educational Development Corp. | Common Stock | n/a | n/a | 65,202 | 660,848 | 1,235,578 | 12.83 | % | 574,730 | — | 574,730 | |||||||||||||||||||||||
Total Equity Investments | $ | 5,750,745 | $ | 6,740,860 | 70.00 | % | $ | 2,175,328 | $ | 1,185,213 | $ | 990,115 | ||||||||||||||||||||||
Total Cash | 2,158,314 | 2,158,314 | 22.41 | % | — | — | — | |||||||||||||||||||||||||||
Total Investments and Cash | $ | 9,159,059 | $ | 9,399,174 | 97.60 | % | $ | 2,175,328 | $ | 1,935,213 | $ | 240,115 |
At December 31, 2017, aggregate non-qualifying assets represented approximately 1.1%The accompanying notes are an integral part of our total assets.
At December 31, 2017, the estimated net unrealized gain for federal tax purposes was $541,796, based on a tax cost basis of $6,699,064.these financial statements.
At December 31, 2017, the estimated aggregate gross unrealized gain for federal income tax purposes was $2,365,077, and the estimated aggregate gross unrealized loss for federal income tax purposes was $1,823,281
26
NOTE 1 —– ORGANIZATION
Mill City Ventures III, Ltd. is an investment company incorporated in the State of Minnesota on January 10, 2006. 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 are an internally managed closed-end non-diversified management investment company. We havewere incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to be regulated asbecome a business development company or “BDC,”(“BDC”) under the Investment Company1940 Act of 1940 (the “1940 Act”). To date, we have not made an election to be treatedWe operated as a regulated investmentBDC until we withdrew our BDC election on December 27, 2019. As of the time of this filing, we remain a public reporting company or “RIC,”that files periodic reports with the SEC. We offer short-term specialty finance solutions primarily to private businesses, small-cap public companies and high-net-worth individuals. To avoid regulation under the Internal Revenue Code of 1986.
We primarily focus on investing in or lending1940 Act, we generally seek to privately held and small capitalization publicly traded U.S. companies, and making managerial assistance available to such companies. Thesestructure our investments are typically structured as purchases of preferred or common stock or loans evidenced by promissory notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be madeso they do not constitute “investment securities” for purposes of financing acquisitions, recapitalizations, buyouts, organic growthfederal securities law, and working capital. Our future revenues will relatewe monitor our investments as a whole to the gain we realize from the saleensure that no more than 40% of securities we purchase, and to dividends and interest we derive from thoseour total assets may consist of investment securities. Our investment objective is to generate both current income and capital appreciation that ultimately become 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 Accounting Standards Codification (“ASC”)ASC 946.
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: We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. For more information, 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.
Recent Accounting Pronouncements:
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance inLeases (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. While we are currently evaluating the impact of ASU No. 2016-02, we expect an increase to the consolidated balance sheets for the lease assets and associated lease liabilities for our lease agreements previously accounted for as operating leases.
NOTE 3 — NET GAIN PER COMMON SHARE
Basic net gain per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average 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:
Year Ended | ||||||||
December 31, 2018 | December 31, 2017 | |||||||
Numerator: Net increase in net assets resulting from operations | $ | 1,649,674 | $ | 675,443 | ||||
Denominator: Weighted-average number of common shares outstanding | 11,067,402 | 11,863,392 | ||||||
Basic and diluted net gain per common share | $ | 0.15 | $ | 0.06 |
At December 31, 2018 and 2017, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares.
NOTE 4—COMMITMENTS AND CONTINGENCIES
On June 6, 2013, we entered into an agreement to lease approximately 1,917 square feet of commercial space and two parking spots, for a period of 62 months. The leased space became available for occupancy on September 23, 2013. The 62-month lease term began on October 1, 2013 and expired on November 30, 2018.
On October 17, 2018, we entered into a 12-month lease agreement to lease approximately 183 square feet of commercial space and one parking spot for the use of Mr. Geraci at the amount of $2,408 per month. The leased space became available for occupancy on December 1, 2018.
On October 24, 2018, we entered into a 39-month lease agreement to lease approximately 1,247 square feet of commercial space and one parking spot for the use of Mr. Polinsky. The 39-month lease term began on January 3, 2019 and expires on March 31, 2022.
The total base rent expense for the year ended December 31, 2018 and December 31, 2017 was $41,597 and $45,378, respectively.
The following is a schedule of the aggregate required annual minimum lease payments.
Year | Amount | |||
2019 | $ | 41,447 | ||
2020 | 20,551 | |||
2021 | 21,162 | |||
2022 | 5,396 | |||
TOTAL | $ | 88,555 |
NOTE 5—SHAREHOLDERS’ EQUITY
On September 25, 2017, the Company repurchased and retired 1,084,091 shares of common stock at a purchase price of $0.40. At December 31, 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, 2018 (together with the corresponding percentage of total portfolio investments):
As of December 31, 2018 | ||||||||||||||||
Investments at | Percentage of | Investments at | Percentage of | |||||||||||||
Amortized Cost | Amortized Cost | Fair Value | 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 major class, at amortized cost and fair value, as of December 31, 2017 (together with the corresponding percentage of total portfolio investments):
As of December 31, 2017 | ||||||||||||||||
Investments at | Percentage of | Investments at | Percentage of | |||||||||||||
Amortized Cost | Amortized Cost | Fair Value | Fair Value | |||||||||||||
Loans (Secured) | $ | 1,250,000 | 17.9 | % | $ | 500,000 | 6.9 | % | ||||||||
Preferred Stock | 1,032,057 | 14.7 | 2,420,659 | 33.4 | ||||||||||||
Common Stock | 3,566,990 | 51.0 | 3,263,715 | 45.1 | ||||||||||||
Warrants | 679 | — | 42,857 | 0.6 | ||||||||||||
Other Equity | 1,151,019 | 16.4 | 1,013,629 | 14.0 | ||||||||||||
Total | $ | 7,000,745 | 100.0 | % | $ | 7,240,860 | 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 | Percentage of | |||||||
Fair Value | 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 | % |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2017:
As of December 31, 2017 | ||||||||
Investments at Fair Value | Percentage of Fair Value | |||||||
Advertising | $ | 42,857 | 0.6 | % | ||||
Consumer | 447,942 | 6.2 | ||||||
Education | 142,000 | 2.0 | ||||||
Financial | 941,517 | 13.0 | ||||||
Healthcare | 513,862 | 7.1 | ||||||
Industrial Goods | 12,240 | 0.2 | ||||||
Information Technology | 896,009 | 12.4 | ||||||
Leisure & Hospitality | 2,520,226 | 34.8 | ||||||
Oil & Gas | 488,629 | 6.7 | ||||||
Publishing | 1,235,578 | 17.0 | ||||||
Total | $ | 7,240,860 | 100.0 | % |
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, 2018 and 2017. 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. |
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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. |
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 value 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 that 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 examples of these circumstances, such as when 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 Policy and Procedures that may serve as input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional.
When valuing preferred equity investments, we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion.
When valuing warrants, our Valuation Policy and Procedures indicate that value will generally be the difference between 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 securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists.
On a quarterly basis, our management provides members of our Valuation Committee with (i) valuation reports for each portfolio investment (which reports include our cost,, the most recent prior valuation and 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 committee then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.
We made no changes to our Valuation Policy and Procedures during the reporting period.
Income taxes:
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and
28
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.
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, 2018 through 2020, which are the tax years that remain subject to examination by the tax jurisdictions as of December 31, 2021.
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.
29
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 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, | ||||
| | 2021 |
| 2020 | ||
Numerator: Net increase in net assets resulting from operations | | $ | 2,831,050 | | $ | 2,213,570 |
Denominator: Weighted-average number of common shares outstanding |
| | 10,789,294 |
| | 10,869,054 |
Basic and diluted net gain per common share | | $ | 0.26 | | $ | 0.20 |
At December 31, 2021 and 2020, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares.
NOTE 4—LEASES
We are subject to 2 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, 2021 was 4.5% and the weighted average remaining lease term is one year.
Under ASC 840, rent expense for office facilities for the year ended December 31, 2021 and December 31, 2020 was $66,459 and $66,307, respectively.
The components of our operating leases were as follows for the three and twelve months ended December 31, 2021:
| | | | | | |
| | Year Ended | | Year Ended | ||
| | December 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Operating lease costs | | $ | 19,116 | | $ | 19,116 |
Variable lease cost | |
| 17,613 | |
| 17,461 |
Short-term lease cost | |
| 29,730 | |
| 29,730 |
Total | | $ | 66,459 | | $ | 66,307 |
Supplemental balance sheet information consisted of the following at December 31, 2021:
| | | |
Operating Lease |
|
| |
Right-of-use assets | | $ | 4,984 |
| | | |
Operating Lease Liability | | $ | 5,654 |
Less: short term portion | |
| (5,654) |
Long term portion | | $ | — |
30
Maturity analysis under lease agreements consisted of the following as of December 31, 2021:
| | | |
|
| Operating | |
|
| Leases | |
2022 | | $ | 5,449 |
Total lease payments |
| | 5,449 |
Plus: interest |
| | 205 |
Present value of lease liabilities | | $ | 5,654 |
NOTE 5—SHAREHOLDERS’ EQUITY
At December 31, 2021 a total of 10,790,413 shares of common stock were issued and outstanding. At December 31, 2020 a total of 10,785,913 shares of common stock were issued and outstanding.
During 2021, there were 4,500 shares issued by the Company.
On October 26, 2020, the Board of Directors approved a stock repurchase program of up to $400,000 of the Company’s outstanding shares of common stock. Repurchases may be completed in public or private transactions. The repurchase program does not require the Company to acquire any specific number of shares, and may be suspended from time to time in accordance with the Company's insider trading policy and existing best practices, or it may be discontinued. Repurchases completed under the program are expected to be funded from available working capital.
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, 2021 (together with the corresponding percentage of total portfolio investments):
| | | | | | | | | | | |
|
| As of December 31, 2021 |
| ||||||||
|
| Investments at |
| Percentage of |
| Investments at |
| Percentage of |
| ||
|
| Amortized Cost |
| Amortized Cost |
| Fair Value |
| Fair Value | | ||
Short-term Non-banking Loans | | $ | 11,655,750 |
| 83.7 | % | $ | 11,650,000 |
| 82.6 | % |
Preferred Stock | |
| 1,050,000 |
| 7.5 | |
| 1,200,000 |
| 8.5 | |
Common Stock | |
| 414,128 |
| 3.0 | |
| 436,175 |
| 3.1 | |
Warrants | |
| 679 |
| — | |
| — |
| — | |
Other Equity | |
| 812,500 |
| 5.8 | |
| 812,500 |
| 5.8 | |
Total | | $ | 13,933,057 |
| 100.0 | % | $ | 14,098,675 |
| 100.0 | % |
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2020 (together with the corresponding percentage of total portfolio investments):
| | | | | | | | | | | |
| | As of December 31, 2020 |
| ||||||||
|
| Investments at |
| Percentage of |
| Investments at |
| Percentage of |
| ||
|
| Amortized Cost |
| Amortized Cost |
| Fair Value |
| Fair Value | | ||
Short-term Non-banking Loans | | $ | 2,789,000 |
| 56.2 | % | $ | 2,789,000 |
| 41.8 | % |
Preferred Stock | |
| 150,000 |
| 3.0 | |
| 300,000 |
| 4.5 | |
Common Stock | |
| 1,750,000 |
| 35.2 | |
| 3,300,000 |
| 49.5 | |
Warrants | |
| 679 |
| — | |
| — |
| — | |
Other Equity | |
| 278,897 |
| 5.6 | |
| 278,897 |
| 4.2 | |
Total | | $ | 4,968,576 |
| 100.0 | % | $ | 6,667,897 |
| 100.0 | % |
31
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 |
| Percentage of |
| |
|
| Fair Value |
| Fair Value | | |
Consumer | | $ | 2,362,500 |
| 16.8 | % |
Financial | |
| 3,836,175 |
| 27.2 | |
Information Technology | |
| 300,000 |
| 2.1 | |
Real Estate | |
| 7,600,000 |
| 53.9 | |
Total | | $ | 14,098,675 |
| 100.0 | % |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2020:
| | | | | | |
| | As of December 31, 2020 |
| |||
|
| Investments at |
| Percentage of |
| |
|
| Fair Value |
| Fair Value | | |
Consumer | | $ | 3,700,000 |
| 55.5 | % |
Financial | |
| 900,000 |
| 13.5 | |
Information Technology | |
| 300,000 |
| 4.5 | |
Leisure & Hospitality | |
| 278,897 |
| 4.2 | |
Real Estate | |
| 1,489,000 |
| 22.3 | |
Total | | $ | 6,667,897 |
| 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, 20182021 and 20172020 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, 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 |
Other Equity | |
| — | |
| — | |
| 812,500 | |
| 812,500 |
Total | | $ | 436,175 | | $ | — | | $ | 13,662,500 | | $ | 14,098,675 |
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2018,2020, according to the fair value hierarchy:
As of December 31, 2018 | ||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
|
| As of December 31, 2020 | ||||||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||||||||||||||
Short-term Non-banking Loans | | $ | — | | $ | — | | $ | 2,789,000 | | $ | 2,789,000 | ||||||||||||||||
Preferred Stock | $ | — | $ | 32,448 | $ | 1,014,258 | $ | 1,046,706 | |
| — | |
| — | |
| 300,000 | |
| 300,000 | ||||||||
Common Stock | 4,763,425 | — | 3,136,432 | 7,899,857 | |
| 3,300,000 | |
| — | |
| — | |
| 3,300,000 | ||||||||||||
Warrants | — | — | — | — | ||||||||||||||||||||||||
Other Equity | — | — | 1,013,629 | 1,013,629 | |
| — | |
| — | |
| 278,897 | |
| 278,897 | ||||||||||||
Total | $ | 4,763,425 | $ | 32,448 | $ | 5,164,319 | $ | 9,960,192 | | $ | 3,300,000 | | $ | — | | $ | 3,367,897 | | $ | 6,667,897 |
32
The following table presents a reconciliation of the beginning and ending fair value measurements ofbalances for our Level 3 portfolio investment assets for the year ended December 31, 2021:
| | | | | | | | | | | | | | | |
| | For the year ended December 31, 2021 | | | | ||||||||||
|
| ST |
| | |
| | |
| | |
| | | |
|
| Non-banking |
| Preferred |
| Common | | | | | | | |||
|
| Loans | | Stock | | 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) |
Net realized loss | |
| — | |
| — | |
| — | |
| — | |
| — |
Balance as of December 31, 2021 | | $ | 11,650,000 | | $ | 1,200,000 | | $ | — | | $ | — | | $ | 812,500 |
The net change in unrealized appreciation for the year ended December 31, 2021 attributable to Level 3 portfolio investments by major class,still held as of December 31, 2017, according to2021 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the fair value hierarchy:
As of December 31, 2017 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Loans (Secured) | $ | - | $ | - | $ | 500,000 | $ | 500,000 | ||||||||
Preferred Stock | - | 100,433 | 1,026,736 | 2,420,659 | ||||||||||||
Common Stock | 3,262,915 | 800 | 1,293,490 | 3,263,715 | ||||||||||||
Warrants | - | 42,857 | - | 42,857 | ||||||||||||
Other Equity | - | - | 1,013,629 | 1,013,629 | ||||||||||||
Total | $ | 3,262,915 | $ | 144,890 | $ | 3,833,855 | $ | 7,240,860 |
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, 2018:2020:
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 | $ | — | $ | — |
| | | | | | | | | | | | | | | |
| | For the year ended December 31, 2020 | | | | ||||||||||
|
| ST Non-banking |
| Preferred |
| Common |
| |
| | |||||
| | Loans | | Stock | | Stock | | Warrants | | Other Equity | |||||
Balance as of January 1, 2020 | | $ | — | | $ | 300,000 | | $ | — | | $ | — | | $ | 534,200 |
Net change in unrealized appreciation | |
| — | |
| — | |
| — | |
| — | |
| 486,018 |
Purchases and other adjustments to cost | |
| 7,543,000 | |
| — | |
| — | |
| — | |
| — |
Sales and redemptions | |
| (4,754,000) | |
| — | |
| — | |
| — | |
| (91,313) |
Net realized loss | |
| — | |
| — | |
| — | |
| — | |
| (650,008) |
Balance as of December 31, 2020 | | $ | 2,789,000 | | $ | 300,000 | | $ | — | | $ | — | | $ | 278,897 |
The net change in unrealized appreciation for the year ended December 31, 20182020 attributable to Level 3 portfolio investments still held as of December 31, 2018 was $1,830,464,2020 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
33
The following table lists our levelLevel 3 investments held as of December 31, 20182021 and the unobservable inputs used to determine their valuation:
Security Type | 12/31/18 FMV | Unobservable Inputs | ||||||
Insite Software Solutions, Inc | Warrants | $ | — | company has substantail doubt about being a going concern | ||||
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 interest rate based on credit | | 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 |
|
|
|
|
|
| |
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, 2017:2020:
As of December 31, 2017 | ||||||||||||||||||||
Secured Loans | Preferred Stock | Common Stock | Warrants | Other Equity | ||||||||||||||||
Balance as of January 1, 2017 | $ | 680,000 | $ | 3,047,011 | $ | — | $ | — | $ | 513,629 | ||||||||||
Net change in unrealized appreciation | (97,305 | ) | (867,012 | ) | 1,005,333 | — | — | |||||||||||||
Purchases and other adjustments to cost | 10,000 | (288,157 | ) | 288,157 | — | 500,000 | ||||||||||||||
Sales and redemptions | (182,695 | ) | (746,225 | ) | — | (5,884 | ) | — | ||||||||||||
Net realized gain (loss) | 90,000 | (118,881 | ) | — | 5,884 | — | ||||||||||||||
Balance as of December 31, 2017 | $ | 500,000 | $ | 1,026,736 | $ | 1,293,490 | $ | — | $ | 1,013,629 | ||||||||||
Net change in unrealized appreciation for the year ended 12/31/17 on securities still held | $ | (180,000 | ) | $ | — | $ | — | $ | — | $ | — |
| | | | | | | | | | |
Security Type |
| 12/31/20 FMV |
| Valuation Technique |
| Unobservable Inputs |
| Range |
| |
ST Non-banking Loans | | $ | 2,789,000 |
| discounted cash flow |
| determining private company interest rate based on credit |
| 14-44 | % |
Other Equity | |
| 278,897 |
| last secured funding known by company |
| economic changes since purchase |
|
| |
Preferred Stock | |
| 300,000 |
| last funding secured by company |
| economic changes since last funding |
|
| |
| | $ | 3,367,897 | | | | | | | |
The net change in unrealized appreciation for the year ended December 31, 2017 attributable to Level 3 portfolio investments still held as of December 31, 2017 is $180,000, 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, 2017 and the unobservable inputs used to determine their valuation:
Security Type | 12/31/17 FMV | Unobservable Inputs | ||||||
Mix 1 Life, Inc. | Loans (Secured) | $ | — | company is in default on its debt to us | ||||
Bravo Financial LLC | Loans (Secured) | 500,000 | cost | |||||
Insite Software Solutions, Inc | Warrants | — | company is a going concern | |||||
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 | 726,736 | last funding secured by company | |||||
Bitesquad.com LLC | Common Stock | 1,293,490 | last funding secured by company | |||||
DBR Enclave US Investors, LLC | Other Equity | 500,000 | cost | |||||
Northern Capital Partners I, LP | Other Equity | 488,629 | last K-1 valuation received | |||||
Southern Plains Resources, Inc. | Common Stock | — | company in default on its balance sheet debt | |||||
$ | 3,833,855 |
There were no0 transfers between levels during the years ended December 31, 20182021 and 2017.2020.
NOTE 8 — MINIMUM ASSET COVERAGE
As a BDC, we are required to meet various regulatory tests. Among other things, these tests will require us to invest at least 70% of our total assets in private or small-cap 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 of December 31, 2018, approximately 99% of our investments (by fair value at that date) were in private or small-cap public U.S.-based companies and we did not carry any debt.
NOTE 98 – 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 relating to what regulations applicable to BDCs generally describe as “affiliate transactions.”policy. Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. Our Board of Directors has adopted a policy to require our disclosure of these instances in our periodic filings withIn this regard, during the SEC. Ourperiod covered by this report we entered into 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 |
● | 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 |
34
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 repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments. |
● | 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 requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. |
NOTE 10 —9 - RETIREMENT SAVINGS PLANS
Our two 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 5% of eligible earnings in addition to our option to make discretionary contributions to the plan. We made contributions totaling $11,250 and $2,500$10,550 to the plans for the years ended 20182021 and 2017,2020, respectively.
NOTE 11 —10 – INCOME TAXES
Presently, we are a “C-corporation” for tax purposes and have booked an income tax provision for the year ended December 31, 2021. Income taxes as of December 31, 2021, and 2020 are described below.
| | | | | | |
|
| December 31, 2021 | ||||
| | 2021 |
| 2020 | ||
Current taxes | |
| | |
| |
Federal | | $ | 909,530 | | $ | — |
State | |
| 357,168 | |
| 16,679 |
Deferred taxes | |
|
| |
|
|
Federal | |
| (212,000) | |
| 258,000 |
Stae | |
| — | |
| 13,722 |
Provision for (benefit from) income taxes | | $ | 1,054,698 | | $ | 288,401 |
A reconciliation of income tax provisions at the U.S. statutory rate for fiscal year 2021 and 2020 is as follows:
| | | | | | |
|
| 2021 |
| 2020 | ||
Rate reconciliation: | |
| | |
| |
Tax expense at U.S.statutory rate | | $ | 1,017,417 | | $ | 716,966 |
Change in valuation allowance | |
| — | |
| (446,000) |
Provision-to-return reconciliation | |
| (14,743) | |
| 21,657 |
Other | |
| (1,976) | |
| (4,222) |
Income tax provision | | $ | 1,054,698 | | $ | 288,401 |
The Company had Federal net operating loss carryforwards of approximately $350,000 at December 31, 2020. We planexpect the Federal net operating loss to be taxed as a regulated investment company, or “RIC”. Compliance with the requirementscompletely used and offset taxable income by December 31, 2021. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code applicableCode. Certain federal NOLs will expire in years 2036 and 2037 if not used. Due to RICs requires ustax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The estimated federal NOL that does not expire included in the total above is $350,000. The Company had Minnesota net operating loss carryforwards of approximately $1,330,000 at December 31, 2020. We expect the state net operating loss to distribute at least 90%be completely used and offset taxable income by December 31, 2021. States may vary in their treatment of post-2017 NOLs. We lost some state NOL carryforwards when we filed final 2019 tax returns in several states. The remaining state NOL carryforwards may expire in 2036 and 2037 if not used.
35
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our investment company taxable income to shareholders. Our intention will be to distribute (or retain through a deemed distribution) alldeferred tax assets and liabilities as of our investment company taxable incomeDecember 31, 2021 and net capital gain, therefore we have made no provision for income taxes. The characterization of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.2020 were as follows:
| | | | | | |
|
| December 31, 2021 | ||||
| | 2021 |
| 2020 | ||
Deferred tax components | |
| | |
| |
Unrealized (gain) loss on marketable securities | | $ | (46,552) | | $ | (488,419) |
Depreciation | |
| 2,458 | |
| 3,002 |
Net operating loss carryforwards | |
| — | |
| 180,460 |
R&D and foreign credits | |
| — | |
| 46,957 |
Other | |
| (906) | |
| — |
Net deferred tax asset (liability) | | $ | (45,000) | | $ | (258,000) |
NOTE 12 —11 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the years ended December 31, 20182021 through 2014:2017:
Year Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Per Share Data(1) | ||||||||||||||||||||
Net asset value at beginning of period | $ | 0.87 | 0.77 | 0.72 | 0.94 | 0.86 | ||||||||||||||
Net investment income (loss) | (0.05 | ) | (0.05 | ) | (0.02 | ) | 0.00 | (0.04 | ) | |||||||||||
Net realized and unrealized gains (losses) | 0.20 | 0.11 | 0.07 | (0.22 | ) | 0.12 | ||||||||||||||
Repurchase of common stock | 0.00 | 0.04 | 0.00 | 0.00 | 0.00 | |||||||||||||||
Net asset value at end of period | $ | 1.02 | 0.87 | 0.77 | 0.72 | 0.94 | ||||||||||||||
Ratio / Supplemental Data | ||||||||||||||||||||
Per share market value of investments at end of period | $ | 0.90 | 0.65 | 0.57 | 0.47 | 0.59 | ||||||||||||||
Shares outstanding at end of period | 11,067,402 | 11,067,402 | 12,151,493 | 12,151,493 | 12,151,493 | |||||||||||||||
Average weighted shares outstanding for the period | 11,067,402 | 11,863,392 | 12,151,493 | 12,151,493 | 12,166,608 | |||||||||||||||
Net assets at end of period | $ | 11,278,889 | 9,629,215 | 9,387,408 | 8,741,288 | 11,473,690 | ||||||||||||||
Average net assets(2) | $ | 10,341,702 | 9,444,440 | 8,651,742 | 10,520,199 | 11,416,452 | ||||||||||||||
Total investment return | 17.24 | % | 7.79 | % | 6.94 | % | (23.40 | )% | 9.30 | % | ||||||||||
Portfolio turnover rate (3) | 26.93 | % | 35.03 | % | 24.94 | % | 26.26 | % | 11.21 | % | ||||||||||
Ratio of operating expenses to average net assets(3) | (6.59 | )% | (7.30 | )% | (7.15 | )% | (6.08 | )% | (7.00 | )% | ||||||||||
Ratio of net investment income (loss) to average net assets(3) | (5.13 | )% | (5.45 | )% | (2.66 | )% | (0.68 | )% | (4.02 | )% | ||||||||||
Ratio of realized gains (losses) to average net assets(3) | (5.62 | )% | 5.71 | % | (2.12 | )% | 1.74 | % | 2.54 | % |
| | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |
Per Share Data (1) |
| |
|
|
|
|
|
|
|
|
| |
Net asset value at beginning of period | | $ | 1.08 |
| 0.91 |
| 1.02 |
| 0.87 |
| 0.77 | |
Net investment gain (loss) | |
| 0.12 |
| 0.05 |
| (0.06) |
| (0.05) |
| (0.05) | |
Net realized and unrealized gains (losses) | |
| 0.24 |
| 0.18 |
| 0.00 |
| 0.20 |
| 0.11 | |
Provision for income taxes | |
| (0.10) |
| (0.02) |
| 0.00 |
| 0.00 |
| 0.00 | |
Stock based compensation | | | 0.00 | | (0.01) | | 0.00 | | 0.00 | | 0.00 | |
Repurchase of common stock | |
| 0.00 |
| 0.02 |
| 0.00 |
| 0.00 |
| 0.04 | |
Payment of common stock dividend | |
| (0.10) |
| (0.05) |
| (0.05) |
| 0.00 |
| 0.00 | |
Net asset value at end of period | | $ | 1.24 |
| 1.08 |
| 0.91 |
| 1.02 |
| 0.87 | |
| |
|
|
|
|
|
|
|
|
|
| |
Ratio / Supplemental Data | |
|
|
|
|
|
|
|
|
|
| |
Per share market value of investments at end of period | | $ | 1.31 |
| 0.62 |
| 0.16 |
| 0.90 |
| 0.65 | |
Shares outstanding at end of period | |
| 10,790,413 |
| 10,785,913 |
| 11,067,402 |
| 11,067,402 |
| 11,067,402 | |
Average weighted shares outstanding for the period | |
| 10,789,294 |
| 10,869,054 |
| 11,067,402 |
| 11,067,402 |
| 11,863,392 | |
Net assets at end of period | | $ | 13,414,049 |
| 11,640,887 |
| 10,068,533 |
| 11,278,889 |
| 9,629,215 | |
Average net assets (2) | | $ | 13,155,207 |
| 10,504,563 |
| 11,473,535 |
| 10,341,702 |
| 9,444,440 | |
Total investment return | |
| 24.07 | % | 23.08 | % | (5.88) | % | 17.24 | % | 7.79 | % |
Portfolio turnover rate (3) | |
| 168.67 | % | 61.11 | % | 7.63 | % | 26.93 | % | 35.03 | % |
Ratio of operating expenses to average net assets (3) | |
| (10.30) | % | (7.16) | % | (7.27) | % | (6.59) | % | (7.30) | % |
Ratio of net investment income (loss) to average net assets (3) | |
| 9.89 | % | 5.35 | % | (5.86) | % | (5.13) | % | (5.45) | % |
Ratio of realized gains (losses) to average net assets (3) | |
| 31.30 | % | 0.05 | % | 28.35 | % | (5.62) | % | 5.71 | % |
(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 —12 – SUBSEQUENT EVENTS
Our portfolio company, Bitesquad.com, LLC was acquired January 18, 2019 by Waitr Holdings, Inc., a publicly traded on demand and online food delivery company. The total purchase price was approximately $323 million. As a result, we received cash consideration of $2,122,872 and 166,118 restricted shares of common stock of Waitr Holdings. The shares are subject to a leak out lock up agreement allowing for the resale of the shares over time, beginning in July 2019.
On January 28, 20193, 2022, we entered into new employment agreementsa Loan and Security Agreement (the “Loan Agreement”) with Messrs. PolinskyEastman Investment, Inc., a Nevada corporation, and Geraci. Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a
36
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 will 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.
Each new employment agreementLender 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 of three years. We do not have any key-man insurance in placeending 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 to terminate the Loan Agreement, solely with respect to Messrs. Geracisuch Lender’s obligation to provide further credit, at any time after January 3, 2023. In the event that a Lender terminates its lending obligations, the Loan Agreement requires that we repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments.
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 Polinsky.requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions.
The Loan Agreement contains other provisions, such as representations, warranties, terms and conditions, that are customary for revolving credit facilities. Promissory notes, evidencing amounts owing under the Loan Agreement and conforming to the terms and conditions of the Loan Agreement, were also executed by us and delivered to the Lenders as contemplated under the Loan Agreement.
On January 12, 2022, we entered into a $2,500,000 revolving credit and security loan investment bearing interest at 15%. On January 12, 2022, we advanced $1,250,000 under this loan, and an additional $960,000 on January 26, 2022.
On January 26, 2022, we invested $ 1,125,000 in a 120-day promissory note bearing interest at 33.33%.
On February 15, 201911, 2022, we announced thatfiled a registration statement on Form S-1 seeking to register an offering of five-year common stock warrants we intend to distribute to our boardshareholders as a dividend, and up to 2,697,603 shares of directors had approved a special cash dividend of $0.05 perour common share. The dividend was paid on March 15, 2019 to stockholders of record asstock purchasable upon the exercise of the closewarrants. The warrants are contemplated to be exercisable at a price of business$4.00 per share of common stock. We intend to apply to have the warrants listed for trading on the OTC Markets.
The offering is subject to the effectiveness of the S-1 registration statement. Accordingly, no record date has been established for the associated dividend contemplated as part of the offering. The warrants will not be issued until the registration statement is declared effective, and the warrants will not be exercisable unless such registration statement remains effective. If the offering is consummated, we expect to use net proceeds from the offering for general corporate purposes, including but not limited to extending specialty finance solutions and credit to borrowers and repaying credit facility borrowings.
On March 8, 2019.7, 2022, the company funded a $3.4 million short-term loan, the proceeds of which will be used to acquire real estate located in Glendale, Arizona, where 139 townhouse units are expected to be developed by the borrower. The short-term loan accrues interest at the per annum rate of 48%, and the loan is due on May 30, 2022.
37
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, 2018,2020, 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, 2018.2021.
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, 20182021 based on the framework set forth in Internal Control — Integrated Framework 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, 2018.2021. 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, 2018.2021.
/s/ Douglas M. Polinsky
Chairman, President and Chief Executive Officer
/s/ Joseph A. Geraci, II
Chief Financial Officer
Changes in Internal Controls
Control
There were no changes in our internal control over financial reporting during the year ended December 31, 20182021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 | 62 | Chairman, Chief Executive Officer and President | ||
Joseph A. Geraci, II | 52 | Director and Chief Financial Officer | ||
Howard Liszt | 76 | Director | ||
Lyle Berman | 80 | Director | ||
Laurence Zipkin | 82 | 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 co-foundedcofounded 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 Minneapolis-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. Mr. Geraci was employed at other Minneapolie 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. Mr. Geraci was employed at other Minneapolis brokerage firms from July 1991 to June 2000. 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.
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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 growth-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 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 Sarbanes-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.
The Code of Ethics has been drafted in order to facilitate compliance with the requirements applicable to the Company, as a BDC, under Section 17 of the 1940 Act. In this regard, the Company has recently implemented procedures to ensure compliance with the provisions of the Code of Ethics, which procedures are part of the various requirements applicable to the Company under Section 17 of the 1940 Act and Rule 17j-1 promulgated by the SEC thereunder.
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, 2018.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.
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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, a Valuation 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 “non-interested” 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 http://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 “non-interested” 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 bonus-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 http//www.millcityventures3.com.
The members of the Valuation Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934 and “non-interested” directors for purposes of the 1940 Act.1934. Mr. Zipkin currently serves as chair of the Valuation Committee. The Valuation Committee is responsible for approving the fair value of debt and equity securities comprising the Company’s investment portfolio pursuant to the Company’s written valuation policy and procedures.
The members of the Nominating and Corporate Governance Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1943. Mr. Liszt currently serves as chair of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance committee is responsible for advising the Board on a broad range of issues surrounding the composition and operation of the Board of Directors and its committees, specifically including identifying criteria for suitable board candidates, identifying individuals suited to service on the board (consistent with those criteria), recommending director candidates to the board and to the shareholders, conducting annual reviews of corporate governance matters and making related recommendations to the Board of Directors and its committees.
Of the directors presently serving 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 “non-interested” persons as that term is defined instandards.
While the 1940 Act. Our companyCompany is not however,presently subject to the Nasdaq listing standards because its common stock is not listed for trading on any Nasdaq market tier.tier, the Company has submitted an application to have its common stock listed on the Nasdaq Capital Markets.
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 2018.2021 other than: a Form 4 filed by Mr. Geraci on April 9, 2021, reporting a gift of 2,000 shares of common stock made on March 25, 2021; and a Form 4 filed by Mr. Zipkin on December 13, 2021, reporting open-market purchases of common stock back to November 18, 2021.
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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, 20182021 and 20172020 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”).
| | | | | | | | | | | | | | | | | |
|
| | | | |
| Cash |
| Stock |
| All Other |
| | | |||
Name and Principal Position |
| Year |
| Salary |
| Bonus |
| Awards |
| Compensation |
| Total | |||||
Douglas M. Polinsky, | | 2021 | | $ | 100,000 | | $ | 100,000 | | $ | — | | $ | 34,984 | | $ | 234,984 |
Chief Executive Officer |
| 2020 | | $ | 50,000 | | $ | | | $ | 30,500 | | $ | 31,845 |
| $ | 112,345 |
Joseph A. Geraci, II, |
| 2021 | | $ | 150,000 | | $ | 100,000 | | $ | — | | $ | 41,197 | | $ | 291,197 |
Chief Executive Officer |
| 2020 | | $ | 100,000 | | $ | | | $ | 30,500 | | $ | 37,918 | | $ | 168,418 |
Salary | Stock Awards | All Other Compensation | Total | |||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | |||||||||||||||
Douglas M. Polinsky, | 2018 | $ | 60,000 | $ | 0 | $ | 27,685 | * | $ | 87,685 | ||||||||||
Chief Executive Officer | 2017 | $ | 50,000 | $ | 0 | $ | 26,267 | * | $ | 76,267 | ||||||||||
Joseph A. Geraci, II, | 2018 | $ | 110,000 | $ | 0 | $ | 26,101 | * | $ | 136,101 | ||||||||||
Chief Financial Officer | 2017 | $ | 100,000 | $ | 0 | $ | 21,011 | * | $ | 121,011 |
*includes additional compensation of payment of health insurance premiums and 401(k) matching contributions under the employment retirement program.
Outstanding Equity Awards at Fiscal Year End
We had no outstanding options, warrants, unvested stock awards or equity incentive plan awards as of December 31, 20182021 held by any named executive. In addition, we have no options, warrants, unvested stock awards or equity incentive plan awards outstanding and held by any named executive as of the date of this filing.
Director Compensation
For 2018,2021, we paid a total of $60,000$120,000 in director fees to our independent directors. Presently, each such director receives an annualized fee of $20,000.$40,000.
| | | | | | | | | ||||||||||||
Name | Year | Compensation | Total |
| Year |
| Compensation |
| Total | |||||||||||
Joseph A. Geraci, II | 2018 | — | — | | 2021 | | | — | | | — | |||||||||
Douglas M. Polinsky | 2018 | — | — |
| 2021 |
| | — |
| | — | |||||||||
Lyle Berman | 2018 | $ | 20,000 | $ | 20,000 |
| 2021 | | $ | 40,000 | | $ | 40,000 | |||||||
Howard P. Liszt | 2018 | $ | 20,000 | $ | 20,000 |
| 2021 | | $ | 40,000 | | $ | 40,000 | |||||||
Laurence S. Zipkin | 2018 | $ | 20,000 | $ | 20,000 |
| 2021 | | $ | 40,000 | | $ | 40,000 |
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The table below sets forth certain information with respect to beneficial ownership of our common stock as of March 29, 2019
(onDecember 31, 2021 (on which date there were 11,067,40210,790,413 shares of common stock outstanding), by:
• | each director of the Company |
• | each named executive (see Item 11 above) |
• | all current directors and executive officers of the Company as a group, and |
• | each person or entity known by the Company to beneficially own more than 5% of our common stock. |
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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 |
| Percentage |
|
| | Shares | | of |
|
| | Beneficially | | Outstanding |
|
| | Owned (1) |
| Shares (1) |
|
Douglas M. Polinsky (2) | | 900,899 | | 8.35 | % |
Joseph A. Geraci, II (3) |
| 1,008,828 |
| 9.35 | % |
Howard Liszt (4) |
| 20,000 |
| — | * |
Lyle Berman (5) |
| 20,000 |
| — | * |
Laurence Zipkin (6) |
| 67,931 |
| — | * |
Neal Linnihan SEP/IRA |
| 2,500,000 |
| 23.17 | % |
Scott and Elizabeth Zbikowski (7) |
| 1,765,000 |
| 16.36 | % |
David Bester |
| 1,000,000 |
| 9.27 | % |
Patrick Kinney (8) |
| 933,187 |
| 8.65 | % |
William Hartzell |
| 650,000 |
| 6.02 | % |
All current directors and executive officers as a group (9) (five persons) |
| 1,727,603 |
| 16.01 | % |
| | | | | |
Number of Shares Beneficially Owned(1) | Percentage of Outstanding Shares(1) | |||||||
Douglas M. Polinsky(2) | 460,530 | 4.16 | % | |||||
Joseph A. Geraci, II(3) | 575,051 | 5.20 | % | |||||
Howard Liszt(4) | — | — | ||||||
Lyle Berman(5) | — | — | ||||||
Laurence Zipkin(6) | — | — | ||||||
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) | 1,035,581 | 9.36 | % |
*less than one percent
(1) | Beneficial ownership is determined in accordance with the rules of the SEC and includes general voting power and/or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days of the applicable record date, are deemed outstanding for computing the beneficial ownership percentage of the person holding such options or warrants but are not deemed outstanding for computing the beneficial ownership percentage of any other person. |
(2) | Mr. Polinsky is |
(3) | Mr. Geraci is a director and |
(4) | Mr. Liszt is a director of the Company. |
(5) | Mr. Berman is a director of the Company. |
(6) | Mr. Zipkin is a director of the Company. |
(7) | Based upon a Schedule 13G filed by Mr. and Mrs. Zbikowski, Mr. Zbikowski is the beneficial owner of |
(8) | Based upon a Schedule 13G filed by Mr. Kinney on March 19, 2013, Mr. Kinney may be deemed to be the beneficial owner of |
(9) | Consists of Messrs. Polinsky, Geraci, Liszt, Berman and Zipkin. |
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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 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 |
Related-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 related-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 related-party transactions, subject to conflicting requirements of the 1940 Act or the Company’s written Code of Ethics.transactions. In general, after full disclosure of all material facts, review and discussion, the board approves or disapproves related-party transactions by a vote of a majority of the directors who have no interest in such transaction, direct or indirect. Procedurally, no director is allowed vote in any approval of a related-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 related-party transaction and the director’s interest therein. If a related-party transaction will be ongoing, the board may establish guidelines for management to follow in its ongoing dealings with the related party.
Director Independence
The Company currently has five directors, three of whom—Messrs. Liszt, Berman and Zipkin, are “independent” as that term is defined in Section 4200(a)(15) of National Association of Securities Dealers’ listing standards. None of our independent directors are “interested persons” as that term is defined in the 1940 Act. The Company is not subject to those listing standards, however, because its common stock is presently not listed for trading on a Nasdaq market. The Company has, however, submitted an application for its common stock to be listed and traded on the Nasdaq Capital Markets. Based upon information requested
44
from each such director concerning his background, employment and affiliations, the board has affirmatively determined that none of the independent directors has a material business or professional relationship with the Company, other than in his or her capacity as a member of the board or any committee thereof.
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, 20182021 and (ii) Baker Tilly Virchow Krause for the audit of the Company’s annual financial statements for the year ended December 31, 2017,2020, as well as the fees billed for other services rendered by Baker Tilly Virchow KrauseBoulay PLLP during year ended December 31, 2017.2021.
| | | | | | |
|
| 2021 |
| 2020 | ||
Audit Fees |
| $ | 89,031 |
| $ | 80,875 |
AuditRelated Fees |
| | 11,150 |
| | — |
Tax Fees |
| | 18,975 |
| | 9,100 |
Total | | $ | 119,156 | | $ | 89,975 |
2018 | 2017 | |||||||
Audit Fees | $ | 30,000 | $ | 53,346 | ||||
Audit-Related Fees | — | — | ||||||
Tax Fees | — | 5,823 | ||||||
Total | $ | 30,000 | $ | 59,169 |
Audit Fees. The fees identified under this caption were for professional services rendered by Baker Tilly Virchow Krause, LLPBoulay PLLP for the years ended 20182021 and 20172020 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. In April 2019, we selected Boulay PLLP as our independent auditor. 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.
Audit-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 20182021 and 20172020 were pre-approved by the Audit Committee.
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PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
46
Exhibits
Exhibit | Description | |
3.1 | | |
3.2 | | |
4 | | |
10.1 | | |
10.2 | |
*Filed electronically herewith. |
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SIGNATURES
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.
| |
| MILL CITY VENTURES III, LTD. |
| |
| /s/ Douglas Polinsky |
| Douglas Polinsky |
| Chief Executive Officer |
| |
| Dated: |
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.
| | |
| | | |
/s/ Douglas M. Polinsky | Chief Executive Officer, President and | March 14th, 2022 | |
Douglas M. Polinsky | Director (principal executive officer) | | |
| | | |
/s/ Joseph A. Geraci, II | Chief Financial Officer and Director | March 14th, 2022 | |
Joseph A. Geraci, II | (principal accounting and financial officer) | | |
| | | |
/s/ Lyle Berman | Director | March 14th, 2022 | |
Lyle Berman | | | |
| | | |
/s/ Howard Liszt | Director | March 14th, 2022 | |
Howard Liszt | | | |
| | | |
/s/ Laurence Zipkin | Director | March 14th, 2022 |
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