UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the fiscal year ended: December 31, 2021
Red Oak Capital Intermediate Income Fund, LLC | ||
(Exact name of issuer as specified in its charter) |
Delaware |
| 85-1676855 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
625 Kenmoor Avenue SE, Suite 200
Grand Rapids, Michigan 49546
(Full mailing address of principal executive offices)
(616) 734-6099
(Issuer’s telephone number, including area code)
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION AND FIGURES
This Annual Report on Form 1-K, or the Annual Report, of Red Oak Capital Intermediate Income Fund, LLC, a Delaware limited liability company, contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, funds derived from operations, cash available for distribution, cash flows, liquidity and prospects include, but are not limited to, the factors referenced in our offering circular dated January 11, 2011, filed pursuant to Rule 253(g)(2), under the caption “RISK FACTORS” and which are incorporated herein by reference https://www.sec.gov/Archives/edgar/data/0001817413/000165495422000393/redoak_253g2.htm
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this report. The matters summarized below and elsewhere in this report could cause our actual results and performance to differ materially from those set forth or anticipated in forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise.
All figures provided herein are approximate.
Item 1. Business
General
Unless the context otherwise requires or indicates, references in this Annual Report on Form 1-K to “us,” “we,” “our” or “our Company” refer to Red Oak Capital Intermediate Income Fund, LLC, a Delaware limited liability company.
Red Oak Capital Intermediate Income Fund, LLC, a Delaware limited liability company, was formed on June 24, 2020. We acquire and manage commercial real estate loans and securities and other real estate-related debt instruments. We implement an investment strategy that preserves and protects our capital while producing attractive risk-adjusted returns generated from current income on our portfolio. We actively participate in the servicing and operational oversight of our assets through our manager, Red Oak Capital Participation Fund GP, LLC, or our Manager, rather than subrogate those responsibilities to a third party.
The Company does not act as a land or real estate developer and currently has no intent to invest in, acquire, own, hold, lease, operate, manage, maintain, redevelop, sell or otherwise use any undeveloped real property or developed real property, unless such actions are necessary or prudent based upon borrower default in accordance with the terms of the debt instruments held by the Company.
We filed an offering statement on Form 1-A, or the Offering Statement, with the United States Securities and Exchange Commission, or the SEC, on July 17, 2020, which offering statement was qualified by the SEC on December 28, 2020. We filed a post-qualification amendment on Form 1-A POS, or the revised Offering Statement on December 28, 2021, which was qualified by the SEC on January 11, 2022. Pursuant to the revised Offering Statement, we are offering a maximum of $75,000,000 in the aggregate of the Company’s 6.0% Series A, B, C and D Bonds, or the Bonds. The purchase price per Bond is $1,000, with a minimum purchase amount of $10,000. Assuming that the maximum amount of Bonds is purchased and issued, we anticipate that the net proceeds, will be approximately $74,437,500, if we sell the maximum offering amount. Proceeds from the sale of the Bonds will be used to acquire minority participation interests in commercial real estate loans originated by other funds sponsored by our Manager consistent with our investment strategies, or participations, and pay or reimburse selling commissions and other fees and expenses associated with the offering of the Bonds.
2 |
As of December 31, 2021, the Offering has issued $3,514,000 of Series A Bonds and $1,636,000 of Series B Bonds. As of the issuance date of this report, the Offering has issued $3,514,000 of Series A Bonds and $4,605,000 of Series B Bonds.
As of December 31, 2021, the Company had not deployed any capital into minority participation interests in commercial real estate loans.
On June 9, 2021, the previous sponsor, Red Oak Capital Group, LLC (“ROCG”), of the Company completed an assignment and assumption of interests (the “Assignment”) whereby Messrs. Gary Bechtel, Joseph Elias, Kevin Kennedy, Raymond T. Davis and Jason Anderson (each, a “Member” and collectively, the “Members”) became the owners of all of the equity interests in the Company’s manager, Red Oak Capital Participation Fund GP, LLC (the “Manager”).
Subsequently, on March 14, 2022, Joseph Elias and Jason Anderson sold all their equity interests in the Manager to White Oak Capital Holdings, LLC, a Michigan limited liability company (“White Oak”), and resigned from their positions as Managers and members of the board of managers of the Manager, effective March 14, 2022. Joseph Elias also resigned from any and all officer positions, including without limitation Chief Operating Officer, that he holds with the Manager or any other entities affiliated with the Manager, effective immediately upon the termination of that certain Transition Services Agreement, dated as of March 14, 2022, by and among Mr. Elias, the Manager, Red Oak Holdings Management, LLC, and Red Oak Capital Holdings, LLC, which occurred on April 26, 2022. Likewise, Jason Anderson resigned from any and all officer positions, including without limitation Chief Financial Officer, that he holds with the Manager or any other entities affiliated with the Manager, effective immediately upon the termination of that certain Transition Services Agreement, dated as of March 14, 2022, by and among Mr. Anderson, the Manager, Red Oak Holdings Management, LLC, and Red Oak Capital Holdings, LLC. Further information regarding these resignations is available in the Current Report on Form 1-U dated March 14, 2022, located at: https://www.sec.gov/Archives/edgar/data/1817413/000165495422003271/rociif_1u.htm
We are managed by our Manager, which is wholly owned by Messrs. Gary Bechtel, Kevin Kennedy, Raymond T. Davis and White Oak Capital Holdings, LLC. Red Oak Capital Holdings, LLC, our Sponsor, has entered into a Management and Advisory Agreement whereby it has agreed to act as asset manager of the Company. Red Oak Capital Holdings, LLC is a Grand Rapids, Michigan based commercial real estate finance company specializing in the acquisition, processing, underwriting, operational management and servicing of commercial real estate debt instruments. We benefit from our Sponsor’s significant experience in the marketing and origination of project transactions in which to properly and efficiently evaluate suitable investments for our Company.
We do not have any employees. We rely on the employees of our Sponsor, as the sole member of our Manager, and its affiliates for the day-to-day operation of our business.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
We commenced active operations upon the first closing of our offering of Bonds on May 24, 2021. To date we have received approximately $8,100,000 in net proceeds from our offering of Bonds and have not deployed any proceeds in minority participation interests in commercial real estate loans. We intend to continue to sell the Bonds through December 28, 2022, or the date upon which our Manager determines to terminate the offering, in its sole discretion.
3 |
We intend to make reserve allocations as necessary to (i) aid our objective of preserving capital for our investors by supporting the maintenance and viability of assets we acquire in the future and (ii) meet the necessary covenants of the Bonds. If reserves and any other available income become insufficient to meet our covenants and cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, restructuring property loans or liquidating our investment in one or more assets. There is no assurance that such funds will be available, or if available, that the terms will be acceptable to us. Additionally, our ability to borrow additional funds will be limited by the restrictions placed on our and our subsidiaries' borrowing activities by our indenture.
Results of Operations – Period from January 1, 2021 through December 31, 2021
We operate on a calendar year. Set forth below is a discussion of our operating results for the year ended December 31, 2021.
As of December 31, 2021, the Company had not deployed any capital into minority participation interests in commercial real estate loans. For the period ended December 31, 2021, our total revenues from operations were $0. Operating costs for the same period, including professional fees of $33,634, organization fees of $25,750, bond interest expense of $102,226 amounted to $166,350. Net loss for the period amounted to $166,350.
We are working diligently through our expanding pipeline of potential senior secured loans in order to deploy our cash on hand as well as the proceeds from future closings of our Bonds offering, which has been held on or about the 20th of each month through the latest Series B Bond settlement date of April 21, 2022.
Results of Operations – For the Period Ended December 31, 2020
We had not commenced operations as of December 31, 2020.
Liquidity and Capital Resources
As of December 31, 2021, we had sold $3,514,000 of Series A Bonds and $1,636,000 of Series B Bonds pursuant to our offering of Bonds. Our principal demands for cash will be for acquisition costs, including the purchase price of any participations, securities or other assets we acquire, the payment of our operating and administrative expenses, and all continuing debt service obligations, including our debt service on the Bonds. Generally, we will fund additional acquisitions from the net proceeds of this offering. We intend to acquire additional assets with cash and/or debt. As we are dependent on capital raised in this offering to conduct our business, our investment activity over the next twelve (12) months will be dictated by the capital raised in this offering. We expect to originate or acquire participations and meet our business objectives regardless of the amount of capital raised in this offering. If the capital raised in this offering is insufficient to purchase assets solely with cash, we will implement a strategy of utilizing a mix of cash and debt to acquire assets. The Company had cash on hand of $5,058,550 as of December 31, 2021.
We expect to use debt financing as a source of capital. We have a 49% limit on the amount of debt that can be employed in the operations of the business.
We anticipate that adequate cash will be generated from operations to fund our operating and administrative expenses, and all continuing debt service obligations, including the debt service obligations of the Bonds. However, our ability to finance our operations is subject to some uncertainties. Our ability to generate working capital is dependent the performance of the mortgagor related to each of our assets and the economic and business environments of the various markets in which our underlying collateral properties are located. Our ability to liquidate our assets is partially dependent upon the state of real estate markets and the ability of mortgagors to obtain financing at reasonable commercial rates. In general, we intend to pay debt service from cash flow obtained from operations. If cash flow from operations is insufficient then we may exercise the option to partially leverage the asset to increase liquidity. Moreover, our Manager may change this policy, in its sole discretion, at any time to facilitate meeting its cash flow obligations.
Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit, proceeds from the sale of assets and undistributed cash flow, subject to the limitations previously described. Note that, currently, we have not identified any additional source of financing, other than the proceeds of this offering, and there is no assurance that such sources of financing will be available on favorable terms or at all.
4 |
Trend Information
In the year ended 2021, we sold $5,515,000 of Bonds. In the four subsequent closes after December 31, 2021, we have sold $3,019,0000 of Bonds. The last Series B offering will occur on or around April 21, 2022, after which we will begin offering Series C Bonds in May 2022. Each series of Bonds beginning with Series A will be issued for a total of six months. Each series of Bonds will mature on the date which is the last day of the 30th month from the initial issuance date of Bonds in such series. The first three months of 2022 is on track to outpace the first three closes of 2021 in terms of proceeds from bond closings. We also expect the average net proceeds from closings to increase through December 31, 2022. As Bonds are sold, we intend to use the net proceeds from the Offering to continue to issue senior secured loans on commercial real estate and thereby increase cash flows.
In the year ended 2021, we did not close any minority participation interests in commercial real estate loans. On January 31, 2022, the Company executed the first minority participation with LaRose Hospitality, LLC. The Company purchased the Participation Interest from Red Oak Capital Fund II, LLC, a related party, for $2,000,261, and the Company's pro-rata share of the interest due on the Loan is 7.5%. As we have already deployed capital into minority participation in 2022, the Company anticipates the deployment of capital to increase through December 31, 2022. As we issue additional senior secured loans on commercial real estate, the Company’s cash flows increase.
As a result of the global outbreak of a new strain of coronavirus, COVID-19, economic uncertainties have arisen that continue to have an adverse impact on economic and market conditions. The global impact of the outbreak has been rapidly evolving, and the outbreak presents material uncertainty and risk with respect to our future financial results and capital raising efforts. We are unable to quantify the impact COVID-19 may have on us at this time. Although we have not experienced a significant increase in the number of late payments or defaulting borrowers as of the date of this report, we may experience adverse effects in the performance of our existing loans as a result of COVID-19 which may materially alter our ability to pay our debt service obligations and fees.
Item 3. Directors and Officers
As of the issuance date of this report, the following table sets forth information on our board of managers and executive officers of our Manager.
Name |
| Age |
| Position with our Company |
| Director/Officer Since |
Gary Bechtel |
| 64 |
| Chief Executive Officer* |
| August2020 |
Jason Anderson | 36 | Chief Financial Officer (outgoing) | June 2020 | |||
Kevin P. Kennedy |
| 56 |
| Chief Sales and Distribution Officer* |
| June 2020 |
Raymond T. Davis |
| 55 |
| Chief Business Development Officer* |
| June 2020 |
Paul Cleary |
| 58 |
| President & Chief Operating Officer |
| March 2022 |
Thomas McGovern |
| 43 |
| Chief Financial Officer (incoming)** |
| April 2022 |
*Member of the board of managers of the Manager.
**On April 21, 2022, our Manager announced the appointment of Thomas McGovern as Chief Financial Officer of the Manager, effective immediately upon the termination of Jason Anderson as CFO of the Manager, whose termination shall be effective immediately upon the termination of Anderson’s Transition Services Agreement.
Set forth below is biographical information for our Manager’s executive officers.
5 |
Gary Bechtel, Chief Executive Officer and a member of the board of managers for our Manager. Gary previously served as President of Money360 and was responsible for developing and executing Money360’s expansion strategy. Gary also served on Money360’s Credit Committee and Board of Directors. Prior to joining the Money360, he was Chief Lending/Originations Officer of CU Business Partners, LLC, the nation’s largest credit union service organization (CUSO). Previously, Gary held management or production positions with Grubb & Ellis Company, Meridian Capital, Johnson Capital, FINOVA Realty Capital, Pacific Southwest Realty Services and Hometown Commercial Capital. Gary began his career with the Alison Company and over the past thirty-four years has been involved in all aspects of the commercial real estate finance industry, as a lender and as an intermediary, including the origination, underwriting, structuring, placement and closing of over $10B in commercial debt transactions, utilizing various debt structures which have included permanent, bridge, equity, mezzanine and construction on transactions of $1M to $250M. These transactions were placed with a variety of capital sources that included life companies, commercial banks, credit unions and equity and mezzanine funds, on property types that included office, retail, industrial, multifamily, hospitality, self storage and manufactured housing. He is or has been a member of the Mortgage Bankers Association of America, California Mortgage Bankers Association, National Association of Industrial and Office Properties, and International Council of Shopping Centers. Gary has spoken at numerous industry events and written articles and has been regularly quoted in a number of regional and national publications.
Jason Anderson is (outgoing) Chief Financial Officer for our Manager. He focuses on the creation and development of operational and accounting expertise. Jason has more than 12 years in the financial services industry. Under his tenure as a Shareholder, Director and Executive Committee Member at Strait Capital from 2009 to 2017, assets under administration increased from $40 million to nearly $4 billion. His expertise lies in architecting and delivering a full-fledge institutional operating platform for hedge funds, private equity groups, and family offices. Jason launched over 100 alternative investment vehicles while at Strait Capital. Jason has also served as Director of Anderson Capital Consulting LLC since 2017. He began his career as a hedge fund analyst specializing in distressed securities, mergers and acquisitions, and capital arbitrage strategies. While a university student, he was hand-picked to serve as an analyst for the $1+ Billion SMU Endowment Fund. Jason graduated Magna Cum Laude with a Bachelor of Business Administration in Finance and a Bachelor of Science in Economics with Business Honors and Department Distinction from Southern Methodist University. Jason has earned the Chartered Financial Analyst (CFA) designation.
Kevin P. Kennedy is a founding partner, Chief Sales and Distribution Officer and a member of the board of managers for our Manager. He is responsible for capital acquisition, platform distribution and broker dealer relationships. Kevin has 25 years of experience in investment management. Most recently, he was with BlackRock Investment Management Corporation from 1990 to 2016, where he served as Managing Director and Divisional Sales Director prior to leaving. His team was responsible for selling and marketing BlackRock’s active, passive and alternative investments. Prior to BlackRock, Kevin was a Director and Vice President for Merrill Lynch Investment Managers covering the Midwest region. He began his career with Merrill Lynch in 1990 as a trading liaison. He was instrumental in helping both firms raise billions in sales, increase revenue, new offerings, platform enhancements and sales team development. Kevin holds a Series 7, 24, 63, 65 and 66 securities licenses. He received his Bachelor of Arts degree from Duquesne University, in Pittsburg, PA. He completed his Certified Investment Management Analyst certification (CIMA) designation from Wharton Executive Education-University of Pennsylvania in 2007.
Raymond T. Davis is Chief Business Development Officer and a member of the board of managers for our Manager. Ray is responsible for the company’s long-term business strategy, including supporting our lending product development, and leading capital strategy, which includes concurrently developing strategic offerings with investment partners amongst the independent broker dealer community, family offices and pension funds. Ray has more than 20 years of management experience. Since 2014, Ray has focused is operational and strategic skills on implementing policy, process and operational enhancements for various investment funds and vehicles distributed in the independent broker dealer community. Ray has served both private companies and registered alternative investment funds in various senior roles. Ray attended Wayne State University.
Paul Cleary is the President and Chief Operating Officer for our Manager. Paul brings nearly 25 years of national commercial real estate lending experience involving small-balance originations, construction loans, as well as a federally chartered credit union’s national CRE loan portfolio. He most recently served as a Senior Loan Originator for Parkview Financial, a national private mid-market commercial construction lender. He previously served as Chief Operating Officer for Money360, a national private mid-market commercial real estate lender. His role encompassed the development of lending operations to fuel growth, which included managing loan production growth. Prior to joining Money360, Paul was a founding member and the EVP, National Production Manager for Cherrywood Commercial Lending, a national small balance commercial real estate lender. Paul has held management or production positions with Kinecta Federal Credit Union, Impac Commercial Capital, Hawthorne Savings, Fremont Investment and Loan as well as FINOVA Realty Capital. He earned a master’s degree in Business Administration from the University of California, Irvine, a juris doctor degree (JD) from the University of San Diego School of Law and a bachelors’ degree with a Political Finance concentration from the University of California, Santa Barbara.
6 |
Thomas McGovern is the (incoming) Chief Financial Officer for our Manager. Thomas previously served as Interim Chief Financial Officer for Veronica’s Insurance, a personal lines property and casualty insurance broker. Prior to that he spent 20 years on Wall Street as an investment banker and equity research analyst, most recently covering non-depository lenders and financial institutions sponsors as an Executive Director at Nomura Securities International. He also advised depository and non-depository lenders as a Vice President at The Royal Bank of Canada Capital Markets, a Vice President at independent advisory firm Cypress Associates and a member of the Global Financial Institutions investment banking group at Morgan Stanley. Thomas had been a sell side equity research analyst at Lehman Brothers covering banks and thrifts for the top ranked Institutional Investor mortgage & specialty finance research group. He earned an MBA from the Darden Graduate School of Business at the University of Virginia and a BA in Economics from Hamilton College where he graduated summa cum laude. Thomas holds the Chartered Financial Analyst (CFA) designation and the Series 79 securities license.
Director and Executive Compensation
Our company does not have executives. It is operated by our Manager. We will not reimburse our Manager for any portion of the salaries and benefits to be paid to its executive officers.
Item 4. Security Ownership of Management and Certain Security Holders
The table below sets forth, as of the issuance date of this report, certain information regarding the beneficial ownership of our outstanding membership units for (1) each person who is expected to be the beneficial owner of 10% or more of our outstanding membership units and (2) each of our named executive officers, if together such group would be expected to be the beneficial owners of 10% or more of our outstanding membership units. Each person named in the table has sole voting and investment power with respect to all of the membership units shown as beneficially owned by such person. The SEC has defined “beneficial ownership” of a security to mean the possession, directly or indirectly, of voting power and/or investment power over such security.
Title of Class |
| Name and Address of Beneficial Owner |
| Amount and Nature of Beneficial Ownership Acquirable |
| Percent of Class |
LLC Interests |
| Gary Bechtel* |
| N/A |
| 19.16% |
|
|
|
|
|
|
|
LLC Interests |
| Kevin Kennedy* |
| N/A |
| 27.65% |
|
|
|
|
|
|
|
LLC Interests |
| Raymond Davis* |
| N/A |
| 12.77% |
|
|
|
|
|
|
|
LLC Interests |
| White Oak Capital Holdings, LLC**† |
| N/A |
| 40.42% |
|
|
|
|
|
|
|
LLC Interests |
| All Executives and Managers* |
| N/A |
| 59.58% |
_________________
*625 Kenmoor Avenue SE, Suite 200, Grand Rapids, Michigan 49546
**121 West Long Lake Road, Suite 300 Bloomfield Hills, MI 48304
† Messrs. Bechtel and Davis own the majority of the voting equity securities (each own 40%) of White Oak Capital Holdings, LLC
Item 5. Interest of Management and Others in Certain Transaction
For further details, please see Note 4, Related Party Transactions in Item 7, Financial Statements.
Item 6. Other Information
None.
7 |
Item 7. Financial Statements
RED OAK CAPITAL INTERMEDIATE INCOME FUND, LLC
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR’S REPORT
DECEMBER 31, 2021
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Red Oak Capital Intermediate Income Fund, LLC Contents |
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Table of Contents |
To the Managing Member
Red Oak Capital Intermediate Income Fund, LLC
Opinion
We have audited the accompanying financial statements of Red Oak Capital Intermediate Income Fund, LLC (a Delaware limited liability corporation), which comprise the balance sheet as of December 31, 2021, and the related statements of operations, changes in member’s capital, and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations, changes in member’s capital, and cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
10 |
To the Managing Member
Red Oak Capital Intermediate Income Fund, LLC
Page Two
In performing an audit in accordance with GAAS, we:
| · | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| · | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| · | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
| · | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
| · | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
/s/ UHY LLP
Farmington Hills, Michigan
April 29, 2022
11 |
Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Balance Sheet December 31, 2021 |
Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 5,058,550 |
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Total assets |
| $ | 5,058,550 |
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Liabilities and Member's Deficit |
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Current liabilities: |
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Bond interest payable |
| $ | 58,409 |
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Bond proceeds received in advance |
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| 50,000 |
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Total current liabilities |
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| 108,409 |
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Long term liabilities: |
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Series A Bonds payable, net |
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| 3,492,454 |
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Series B Bonds payable, net |
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| 1,624,036 |
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Total long term liabilities |
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| 5,116,490 |
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Member's deficit |
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| (166,350 | ) |
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Total liabilities and member's deficit |
| $ | 5,058,550 |
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Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Statement of Operations For the year ending December 31, 2021 |
Revenue: |
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Mortgage interest income |
| $ | - |
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Total revenue |
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| - |
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Expenses: |
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Bond Interest expense |
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| 102,226 |
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Management fees |
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| 4,097 |
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Organizational expense |
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| 25,750 |
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Professional fees |
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| 33,634 |
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General and administrative |
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| 642 |
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Total expenses |
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| 166,350 |
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Net income (loss) |
| $ | (166,350 | ) |
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Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Statement of Changes in Member's Capital For the year ending December 31, 2021 |
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Members' capital, January 1, 2021 |
| $ | - |
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Net income (loss) |
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| (166,350 | ) |
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Member's deficit, December 31, 2021 |
| $ | (166,350 | ) |
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Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Statement of Cash Flows For the year ending December 31, 2021 |
Cash flows from operating activities: |
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Net income (loss) |
| $ | (166,350 | ) |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Amortization of debt issuance costs |
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| 5,115 |
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Change in other operating assets and liabilities: |
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Net change in bond interest payable |
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| 58,409 |
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Net cash provided by (used in) operating activities |
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| (52,825 | ) |
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Cash flows from financing activities: |
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Proceeds from Series A Bonds |
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| 3,514,000 |
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Proceeds from Series B Bonds |
|
| 1,636,000 |
|
Payment of debt issuance costs |
|
| (38,625 | ) |
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
| 5,111,375 |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| 5,058,550 |
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
| - |
|
|
|
|
|
|
Cash and cash equivalents, end of year |
| $ | 5,058,550 |
|
15 |
Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Notes to Financial Statements For the year ending December 31, 2021 |
1. | Organization |
Red Oak Capital Intermediate Income Fund, LLC, (the “Company”) is a Delaware limited liability company formed to acquire minority participation interests in commercial real estate loans (“Participation Loans”) made by other funds sponsored by the Sponsor and its affiliates (“Sponsored Funds”). The Company intends to enter into a loan participation agreements pursuant to which it will share the rights, obligations and benefits of the Participation Loan with the Sponsored Fund which shall retain the majority of the participation interest in the Participation Loan. Red Oak Capital Participation Fund GP, LLC is the Managing Member and owns 100% of the member interests in the Company.
The Company formed on June 24, 2020 and commenced operations on May 24, 2021. The Company is raising a maximum of $75 million of Senior Secured Series A Bonds and Series B Bonds (collectively the “Bonds”) pursuant to an exemption from registration under Regulation A of the Securities Act of 1933, as amended. The Company’s term is indefinite.
The Company’s operations may be affected by the recent and ongoing outbreak of the coronavirus (COVID-19) which was declared a pandemic by the World Health Organization in March 2020. Possible effects of the pandemic may include, but are not limited to, delay of payments from borrowers, an increase in extension risk, higher rate of defaults, and delaying loan closing periods due to third parties experiencing quarantines or social distancing within the labor workforce. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows.
2. | Significant accounting policies |
Basis of presentation
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and all values are stated in United States dollars.
Use of estimates
The preparation of the financial statements requires the Managing Member to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. In particular, the novel coronavirus (“COVID-19”) pandemic and the resulting adverse impacts to global economic conditions, as well as our operations, may affect future estimates including, but not limited to, our allowance for loan losses. The Managing Member believes the estimates utilized in preparing the Company’s financial statements are reasonable and prudent; however, actual results could differ from these estimates and such differences could be material to the Company’s financial statements.
Fair value – hierarchy of fair value
In accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures, the Company discloses the fair value of its assets and liabilities in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation. FASB ASC 820-10-35-39 to 55 provides three levels of the fair value hierarchy as follows:
Level One - Inputs use quoted prices in active markets for identical assets or liabilities of which the Company has the ability to access.
Level Two - Inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
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Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Notes to Financial Statements For the year ending December 31, 2021 |
2. | Significant accounting policies (continued) |
Level Three- Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset.
In instances whereby inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgement and considers factors specific to each asset or liability.
Cash and cash equivalents
Cash represents cash deposits held at financial institutions. Cash equivalents may include short-term highly liquid investments of sufficient credit quality that are readily convertible to known amounts of cash and have original maturities of three months or less. Cash equivalents are carried at cost, plus accrued interest, which approximates fair value. Cash equivalents are held to meet short-term liquidity requirements, rather than for investment purposes.
Cash and cash equivalents are held at major financial institutions and are subject to credit risk to the extent those balances exceed applicable Federal Deposit Insurance Corporation or Securities Investor Protection Corporation or Securities Investor Protection Corporation limitations. As of December 31, 2021, the Company held cash and cash equivalents of $5,058,550.
Mortgage loans receivable
Mortgage loans receivable are classified as held-for-investment based on the Company’s intention and ability to hold the loans until maturity. The loans are stated at the amount of unpaid principal adjusted for any impairment or allowance for loan losses. The Company’s mortgage loans receivable are expected to consist of senior secured private company loans collateralized by the borrower’s underlying commercial real estate assets. The repayment of the loans will be dependent upon the borrower’s ability to obtain a permanent financing solution or to sell the commercial real estate asset. The Company’s mortgage loans receivable will have heightened credit risk stemming from several factors, including the concentration of loans to a limited number of borrowers, the likelihood of construction projects running over budget, and the inability of the borrower to sell the underlying commercial real estate asset.
Impairment and allowance for loan losses
Mortgage loans receivable is considered “impaired” when, based on observable information, it is probable the Company will be unable to collect the total amount outstanding under the contractual terms of the loan agreement. The Managing Member assesses mortgage loans receivable for impairment on an individual loan basis and determines the extent to which a specific valuation allowance is necessary by comparing the loan’s remaining balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loan’s base interest rate.
An allowance for loan losses on mortgage loans receivable is established through a provision for loan losses charged against income and includes specific reserves for impaired loans. Loans deemed to be uncollectible are charged against the allowance when the Managing Member believes that the collectability of the principal is unlikely and subsequent recoveries, if any, are credited to the allowance. The Managing Member’s periodic evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including known inherent risks, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral, and current economic conditions.
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Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Notes to Financial Statements For the year ending December 31, 2021 |
2. | Significant accounting policies (continued) |
Revenue recognition and accounts receivable
Interest income on mortgage loans receivable is recognized over time using the interest method. Interest is accrued when earned in accordance with the terms of the loan agreement. Loan origination income is accreted over the life of the mortgage loan receivable using the interest method and is reflected as a direct deduction from the related mortgage loans receivable in the accompanying balance sheet.
Bonds payable
Company issued bonds will be held as a liability upon the effective date of closing. The bond interest will be expensed on an accrual basis. The contingent interest associated with the bonds will be recognized on an accrual basis at the end of each reporting period assuming a hypothetical liquidation of the Company’s mortgage loans receivable at fair value.
Income taxes
As a limited liability company, the Company itself is not subject to United States federal income taxes. Each member is individually liable for income taxes, if any, on its share of the Company’s net taxable income. Accordingly, no provision or credit for income taxes is recorded in the accompanying financial statements. The Company anticipates paying distributions to members in amounts adequate to meet their tax obligation.
The Company applies the authoritative guidance for uncertainty in income taxes included in Financial Accounting Standards Board (“FASB”) ASC 740, “Income Taxes,” as amended by Accounting Standards Update 2009-06, “Implementation Guidance on Accounting for Uncertainty in Taxes and Disclosures Amendments for Nonpublic Entities.” This guidance requires the Company to recognize a tax benefit or liability from an uncertain position only if it is more likely than not that the position is sustainable, based on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If this threshold is met, the Company would measure the tax benefit or liability as the largest amount that is greater than 50% likely of being realized upon ultimate settlement. As of December 31, 2021, the Company had not recorded any benefit or liability for unrecognized taxes.
The Company files United States federal income tax returns as well as various state returns. With few exceptions, the Company’s tax returns and the amount of allocable income or loss are subject to examination by taxing authorities for three years subsequent to the Company’s commencement of operations. If such examinations result in changes to income or loss, the tax liability of the members could be changed accordingly. There are currently no examinations being conducted of the Company by the Internal Revenue Service or any other taxing authority.
The Company accrues all interest and penalties under relevant tax law as incurred. As of December 31, 2021, no amount of interest and penalties related to uncertain tax positions was recognized in the statement of operations.
Extended Transition Period
Under Section 107 of the Jumpstart Our Business Startups Act of 2012, the Company is permitted to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. This permits the Company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has selected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, these consolidated financial statements may not be comparable to companies that adopt accounting standard updates upon the public business entity effective dates.
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Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Notes to Financial Statements For the year ending December 31, 2021 |
2. | Significant accounting policies (continued) |
Recent Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses: Measurement of Credit Losses of Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial asset. An entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes for financial assets measured at amortized cost. ASU 2016-13 is effective for the Company, under the extended transition period under the JOBS Act, for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU 2016-13 on its financial statements.
3. | Related party transactions |
The Company will pay an annual management fee, calculated and payable on a quarterly basis, to the Managing Member. The management fee is based on an annual rate of 0.25% of the gross offering proceeds. During the year ending December 31, 2021, $4,097 of management fees have been earned and paid to the Managing Member, respectively. Zero management fees were held as payable to the Managing Member as of December 31, 2021.
The Company will pay organization fees, calculated and payable at every closing, to the Managing Member. The organizational fee is calculated as 0.50% of the gross principal outstanding of all Bonds. During the year ending December 31, 2021, $25,750 of organization fees have been earned, respectively. As of December 31, 2021, zero organization fees are payable to the Managing Member.
4. | Member’s equity |
As of December 31, 2021, the Managing Member, as sole member of the Company, made no capital contributions or received any distributions. In accordance with the operating agreement, the Company made A $100 capital contribution subsequent to year end.
5. | Bonds payable |
During the year ending December 31, 2021 the Company issued approximately $3.5 million Series A Bonds and $1.64 million Series B Bonds. The Bonds are secured by a senior blanket lien on all assets of the Company. The Company has incurred debt issuance costs from the Bond offering. The Company capitalizes and amortizes the costs through the maturity of each Series as applicable. The Series A and Series B Bonds mature on November 30, 2023 and May 31, 2024, respectively. The Company has created and anticipates issuing Series C and Series D Bonds in May and November of 2022, which will mature on the date which is the last day of the 30th month from the initial issuance date of Bonds in such series. Besides the maturity, all other terms of the Series A, B, C, and D Bonds are identical.
As of December 31, 2021, there have been $38,625 of debt issuance costs incurred by the Company. During the year ending December 31, 2021, $5,115 has been amortized to bond interest expense.
19 |
Table of Contents |
Red Oak Capital Intermediate Income Fund, LLC Notes to Financial Statements For the year ending December 31, 2021 |
5. | Bonds payable (continued) |
Bonds payable as of December 31, 2021 are comprised of the following:
|
| 12/31/2021 |
| |
Series A bonds payable |
| $ | 3,514,000 |
|
Series B bonds payable |
|
| 1,636,000 |
|
Debt issuance costs |
|
| (33,510 | ) |
Total bonds payable, net |
| $ | 5,116,490 |
|
The Company executes quarterly interest payments to the Series A and Series B Bondholders at a rate of 6.00% per annum. For the year ending December 31, 2021, the Company has recorded $97,111 of bond interest expense. As of December 31, 2021, $58,409 is held as payable to all Bondholders.
The Bonds will be redeemable beginning 90 days from the issuance date. Once the Company receives written notice from the bondholder, it will have 90 days from the date such notice is provided to set the redemption date which shall be the last day of the corresponding quarterly period. If the notice is received on or after 90 days from the issuance date of the Bond and on or before its maturity date, the payment to the bondholder will be reduced by an amount equal to one third of the amount of interest accrued on the applicable Bond as of the redemption date.
The Company’s obligation to redeem bonds in any given year pursuant to this optional redemption is limited to 20% of the outstanding principal balance of the Bonds on January 1st of the applicable year. Bond redemptions pursuant to this election will occur in the order that notices are received. Upon maturity, and subject to the terms and conditions described in the offering memorandum, the Bonds will be automatically renewed for at the same interest rate for an additional two years, unless redeemed upon maturity at the Company or the bondholders election.
6. | Commitments and contingencies |
The Company has provided general indemnifications to the Managing Member, any affiliate of the Managing Member and any person acting on behalf of the Managing Member or that affiliate when they act, in good faith, in the best interest of the Company. The Company is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim but expects the risk of having to make any payments under these general business indemnifications to be remote.
7. | Subsequent events |
Since December 31, 2021, the Company has executed four bond closings resulting in total gross proceeds of $3,019,000.
On January 31 ,2022, the Company executed the first minority participation with LaRose Hospitality, LLC. The Company purchased the Participation Interest from Red Oak Capital Fund II, LLC, a related party, for $2,000,261, and the Company’s pro-rata share of the interest due on the Loan is 7.50%.
On April 26, 2022, the Company executed a minority participation with 11 Waterview Blvd. LLC. The Company purchased the Participation Interest from Red Oak Capital Fund V, LLC, a related party, for $1,000,000, and the Company's pro-rata share of the interest due on the Loan is 7.50%.
On April 26, 2022, the Company executed a minority participation with JV SBAM SB LLC. The Company purchased the Participation Interest from Red Oak Income Opportunity Fund, LLC, a related party, for $1,000,000, and the Company's pro-rata share of the interest due on the Loan is 7.50%.
The financial statements were approved by management and available for issuance on April 29, 2022. Subsequent events have been evaluated through this date.
20 |
Item 8. Exhibits
_____________
* Previously filed as an exhibit to the Company’s Offering Statement on Form 1-A filed on July 21, 2020.
** Previously filed as an exhibit to the Company’s Offering Statement on Form 1-A filed on November 24, 2020.
*** Previously filed as an exhibit to the Company’s Offering Statement on Form 1-A filed on September 1, 2020.
21 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-K and has duly caused this Form 1-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Grand Rapids of Michigan on April 29, 2022.
RED OAK CAPITAL INTERMEDIATE INCOME FUND, LLC, | |
a Delaware limited liability company | |
|
|
By: | Red Oak Capital Participation Fund GP, LLC, |
| a Delaware limited liability company |
Its: | Sole Member |
By: | /s/ Raymond Davis | |
Name: | Raymond Davis | |
Its: | Manager |
By: | /s/ Kevin Kennedy | |
Name: | Kevin Kennedy | |
Its: | Manager |
By: | /s/ Gary Bechtel | |
Name: | Gary Bechtel | |
Its: | Manager |
By: | /s/ Gary Bechtel | |
Name: | Gary Bechtel | |
Its: | Chief Executive Officer of the Sole Member of the Manager | |
(Principal Executive Officer) |
By: | /s/ Jason Anderson | |
Name: | Jason Anderson | |
Its: | Chief Financial Officer of the Sole Member of the Manager | |
(Principal Financial Officer and Principal Accounting Officer) |
22 |