SUI Group Holdings Ltd 10-Q for FY2023 Q3
SUI Group Holdings Ltd. (SUIG)
About this 10-Q
SUI Group Holdings Ltd filed this 10-Q on November 17, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Diluted EPS
- $0.06
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM
__________________________
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended |
or | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _______________________ to ___________________ |
Commission File Number
__________________________
(Exact name of registrant as specified in its charter) |
__________________________
| ||
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code)
__________________________
N/A
(Former name, former address and former fiscal year, if changed since last report)
__________________________
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 such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of November 15, 2023, Mill City Ventures III, Ltd. had
MILL CITY VENTURES III, LTD.
Index to Form 10-Q
for the Quarter Ended September 30, 2023
| 2 |
| Table of Contents |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MILL CITY VENTURES III, LTD.
CONDENSED BALANCE SHEETS
|
| September 30, 2023 (unaudited) |
|
| December 31, 2022 |
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ASSETS |
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Investments, at fair value: |
| $ |
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| $ |
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Non-control/non-affiliate investments (cost: $ |
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Cash |
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Note receivable |
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Prepaid expenses |
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Interest and dividend receivables |
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Right-of-use lease asset |
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Deferred taxes |
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Total Assets |
| $ |
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| $ |
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LIABILITIES |
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Accounts payable |
| $ |
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| $ |
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Operating lease liability |
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Deferred interest income |
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Total Liabilities |
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SHAREHOLDERS EQUITY (NET ASSETS) |
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Common stock, par value $ |
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Additional paid-in capital |
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Additional paid-in capital - stock options |
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Accumulated deficit |
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Accumulated undistributed investment loss |
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Accumulated undistributed net realized gains on investment transactions |
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Net unrealized depreciation in value of investments |
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Total Shareholders' Equity (Net Assets) |
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Total Liabilities and Shareholders' Equity |
| $ |
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| $ |
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Net Asset Value Per Common Share |
| $ |
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| $ |
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See accompanying Notes to Financial Statements
| 3 |
| Table of Contents |
MILL CITY VENTURES III, LTD.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|
| Three Months Ended |
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| Nine Months Ended |
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|
| September 30, 2023 |
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| September 30, 2022 |
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| September 30, 2023 |
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| September 30, 2022 |
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Investment Income |
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Interest income |
| $ |
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| $ |
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| $ |
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| $ |
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Total Investment Income |
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Operating Expenses |
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Professional fees |
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Payroll |
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Insurance |
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Occupancy |
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Director's fees |
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Interest expense |
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Other general and administrative |
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Total Operating Expenses |
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Net Investment Gain (Loss) |
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| $ |
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Realized and Unrealized Gain (Loss) on Investments |
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Net realized gain (loss) on investments |
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Net change in unrealized appreciation (depreciation) on investments |
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Net Realized and Unrealized Gain (Loss) on Investments |
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Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes |
| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Provision for (Benefit from) Income Taxes |
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Net Increase (Decrease) in Net Assets Resulting from Operations |
| $ |
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| $ | ( | ) |
| $ | ( | ) |
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Net Increase (Decrease) in Net Assets Resulting from Operations per share: |
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Basic |
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||
Diluted |
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||
See accompanying Notes to Financial Statements
| 4 |
| Table of Contents |
MILL CITY VENTURES III, LTD.
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended September 30, 2023 |
| Common Shares |
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| Par Value |
|
| Additional Paid In Capital |
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| Accumulated Deficit |
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| Accumulated Undistributed Net Investment Loss |
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| Accumulated Undistributed Net Realized Gain (Loss) on Investments Transactions |
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| Net Unrealized Appreciation in value of Investments |
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| Total Shareholders' Equity |
| ||||||||
Balance as of June 30, 2023 |
|
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|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Exercise of stock options |
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Undistributed net investment gain |
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Depreciation in value of investments |
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Balance as of September 30, 2023 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Three Months Ended September 30, 2022 |
| Common Shares |
|
| Par Value |
|
| Additional Paid In Capital |
|
| Accumulated Deficit |
|
| Accumulated Undistributed Net Investment Loss |
|
| Accumulated Undistributed Net Realized Gain on Investments Transactions |
|
| Net Unrealized Appreciation in value of Investments |
|
| Total Shareholders' Equity |
| ||||||||
Balance as of June 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
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| $ |
| ||||||
Common shares issued in public offering |
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Common shares issued in reverse stock split rounding |
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Common shares issued in stock-based compensation |
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Common shares issued in consideration for expense payment |
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Undistributed net investment loss |
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| ( | ) |
|
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| ( | ) | |||||
Balance as of September 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| ||||||
Nine Months Ended September 30, 2023 |
| Common Shares |
|
| Par Value |
|
| Additional Paid In Capital |
|
| Accumulated Deficit |
|
| Accumulated Undistributed Net Investment Loss |
|
| Accumulated Undistributed Net Realized Gain on Investments Transactions |
|
| Net Unrealized Appreciation (Depreciation) in value of Investments |
|
| Total Shareholders' Equity |
| ||||||||
Balance as of December 31, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of stock options |
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Exercise of stock options |
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Net investment loss, net of tax benefit of $139,300 |
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| ( | ) |
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Undistributed net realized loss on investment transactions |
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| ( | ) |
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| ( | ) | |||||
Appreciation in value of investments |
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Balance as of September 30, 2023 |
|
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|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Nine Months Ended September 30, 2022 |
| Common Shares |
|
| Par Value |
|
| Additional Paid In Capital |
|
| Accumulated Deficit |
|
| Accumulated Undistributed Net Investment Loss |
|
| Accumulated Undistributed Net Realized Gain on Investments Transactions |
|
| Net Unrealized Appreciation in value of Investments |
|
| Total Shareholders' Equity |
| ||||||||
Balance as of December 31, 2021 |
|
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| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
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| $ |
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| $ |
| ||||||
Common shares issued in public offering |
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Common shares issued in reverse stock split rounding |
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Common shares issued in stock-based compensation |
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Common shares issued in consideration for expense payment |
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Undistributed net investment gain |
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Undistributed net realized gain on investment transactions |
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Depreciation in value of investments |
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| ( | ) |
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Balance as of September 30, 2022 |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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| $ |
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| $ |
| ||||||
See accompanying Notes to Financial Statements
| 5 |
| Table of Contents |
MILL CITY VENTURES III, LTD.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
STATEMENT OF CASH FLOWS |
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| Nine Months Ended |
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| September 30, 2023 |
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| September 30, 2022 |
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Cash flows from operating activities: |
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Net increase (decrease) in net assets resulting from operations |
| $ | ( | ) |
| $ |
| |
Adjustments to reconcile net increase (decrease) in net assets resulting |
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from operations to net cash used in operating activities: |
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Net change in unrealized (appreciation) depreciation on investments |
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Net realized (gain) loss on investments |
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| ( | ) | |
Purchases of investments |
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Proceeds from sales of investments |
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Issuance of stock options |
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Deferred income taxes |
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Common shares issued as consideration for expense payment |
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Changes in operating assets and liabilities: |
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Prepaid expenses and other assets |
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Interest and dividends receivable |
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Payable for investment purchase |
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Accounts payable and other liabilities |
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Income taxes payable |
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Deferred interest income |
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Net cash used in operating activities |
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Cash flows from financing activities: |
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Proceeds from public offering |
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Proceeds from stock option exercise |
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Proceeds from line of credit |
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Repayments on line of credit |
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Net cash provided by financing activities |
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Net increase (decrease) in cash |
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Cash, beginning of period |
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Cash, end of period |
| $ |
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| $ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
| $ |
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| $ |
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Non-cash investing activities: |
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See accompanying Notes to Financial Statements
| 6 |
| Table of Contents |
MILL CITY VENTURES III, LTD.
CONDENSED SCHEDULE OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 2023
Investment / Industry |
| Cost |
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| Fair Value |
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| Percentage of Net Assets |
| |||
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Short-Term Non-banking Loans |
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Business Services - 15% secured loans |
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Mustang Litigation Funding |
| $ |
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| $ |
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| % | |||
Consumer - 18% secured loans |
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Intelligent Mapping, LLC |
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| % | |||
Financial - 12% secured loans |
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| % | |||
Information Technology - 15% convertible note |
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| % | |||
Real Estate - 18% secured loans |
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| % | |||
Real Estate - 12% secured loans |
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Alatus Development Corp |
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| % | |||
Total Short-Term Non-Banking Loans |
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| % | |||
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Preferred Stock |
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Consumer |
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Wisdom Gaming, Inc |
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| % | |||
Information Technology |
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| % | |||
Total Preferred Stock |
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| % | |||
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Common Stock |
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Consumer |
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| % | |||
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Warrants |
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|
|
|
|
|
|
|
|
|
Healthcare |
|
|
|
|
| — |
|
|
| % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
| $ |
|
| $ |
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments and Cash |
| $ | $ |
|
| $ | $ |
|
|
| % | |
See accompanying Notes to the Financial Statements
| 7 |
| Table of Contents |
MILL CITY VENTURES III, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2022
Investment / Industry |
| Cost |
|
| Fair Value |
|
| Percentage of Net Assets |
| |||
|
|
|
|
|
|
|
|
|
| |||
Short-Term Non-banking Loans |
|
|
|
|
|
|
|
|
| |||
Business Services - 18% secured loans |
|
|
|
|
|
|
|
|
| |||
Liberated Syndication Inc. |
| $ |
|
| $ |
|
|
| % | |||
Business Services - 15% secured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Mustang Litigation Funding |
|
|
|
|
|
|
|
| % | |||
Consumer - 15% secured loans |
|
|
|
|
|
|
|
| % | |||
Intelligent Mapping, LLC |
|
|
|
|
|
|
|
| % | |||
Financial - 33% secured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Benton Financial, LLC |
|
|
|
|
|
|
|
| % | |||
Financial - 12% secured loans |
|
|
|
|
|
|
|
| % | |||
Information Technology - 15% convertible note |
|
|
|
|
|
|
|
| % | |||
Real Estate - 15% secured loans |
|
|
|
|
|
|
|
| % | |||
Real Estate - 12% secured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Alatus Development Corp |
|
|
|
|
|
|
|
| % | |||
Total Short-Term Non-Banking Loans |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Wisdom Gaming, Inc |
|
|
|
|
|
|
|
| % | |||
Information Technology |
|
|
|
|
|
|
|
| % | |||
Total Preferred Stock |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
|
|
|
|
| — |
|
|
| % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
| % | |||
Financial |
|
|
|
|
|
|
|
| % | |||
Total Other Equity |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
| $ |
|
| $ |
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments and Cash |
| $ | $ |
|
| $ | $ |
|
|
| % | |
See accompanying Notes to the Financial Statements
| 8 |
| Table of Contents |
NOTE 1 – ORGANIZATION
In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.
We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. We engage in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The condensed balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2022.
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 4 – Fair Value of Financial Instruments” below. The Company presents its financial statements as an investment company following accounting and reporting guidance in 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 our Board of Directors, based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures.
Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.
Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the relative observability of inputs used in the valuation. The three levels are defined as follows:
| 9 |
| Table of Contents |
· | Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities. |
· | Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets. |
· | Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances. |
Our valuation policy and procedures: Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value. For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted. In the case of traded debt securities the prices for which are not readily available, we may value those securities using a discounted cash flows approach, at their weighted-average yield to maturity.
The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors. In general, we value our Level 3 equity investments at fair value certain circumstances however, impact the qualitative factors that we use in determining fair value. Examples of these circumstances includes a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors). Other facts and circumstances that may serve as an input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional.
When valuing preferred equity investments, we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion.
When valuing warrants, our valuation approach indicates that value will generally be the difference between the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero.
For non-traded (Level 3) debt instruments with a residual maturity less than or equal to 60 days, we will generally value such instruments based on a discounted cash flows approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. For level 3 non-banking loans with a maturity in excess of 60 days, fair value is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the financial strength of the creditor and changes in interest rates in the high-yield credit markets.
We value Level 2 investments based on quoted prices for similar instruments or investments traded in active markets. If there are no active markets for similar instruments or investments, then we value our Level 2 investments based on quoted prices not traded in active markets, or on valuation models whose inputs or significant value drivers consist of observable market data.
On a quarterly basis, our management provides members of our Board of Directors with recommendations, if any, to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. In such a case, the Board of Directors would then discuss these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.
We made no changes to our valuation policy and procedures during the reporting period.
Income taxes:
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
| 10 |
| Table of Contents |
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2020 through 2022, which are the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2023.
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 is 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.
Stock-based compensation: The Company’s stock-based compensation consists of stock options issued to certain employees and directors of the Company. The Company recognizes compensation expense based on an estimated grant date fair value using the Black Sholes option-pricing method. If the factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future. The Company recognizes stock-based compensation expense for these options on a straight-line basis over the requisite service period. The Company has elected to account for forfeitures as they occur.
Management and service fees:
We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.
NOTE 3 – INVESTMENTS
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of September 30, 2023 (together with the corresponding percentage of the fair value of our total portfolio of investments):
|
| As of September 30, 2023 |
| |||||||||||||
|
| Investments at Amortized Cost |
|
| Percentage of Amortized Cost |
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||||
|
|
|
|
|
|
|
|
| ||||||||
Short-term Non-banking Loans |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
| |
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2022 (together with the corresponding percentage of the fair value of our total investments):
|
| As of December 31, 2022 |
| |||||||||||||
|
| Investments at Amortized Cost |
|
| Percentage of Amortized Cost |
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term Non-banking Loans |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common Stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Warrants |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
| |
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of September 30, 2023:
|
| As of September 30, 2023 |
| |||||
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||
|
|
|
|
|
|
| ||
Business Services |
| $ |
|
|
| % | ||
Consumer |
|
|
|
|
|
| ||
Financial |
|
|
|
|
|
| ||
Information Technology |
|
|
|
|
|
| ||
Real Estate |
|
|
|
|
|
| ||
Total |
| $ |
|
|
| % | ||
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2022:
|
| As of December 31, 2022 |
| |||||
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||
|
|
|
|
|
|
| ||
Business Services |
| $ |
|
|
| % | ||
Consumer |
|
|
|
|
|
| ||
Financial |
|
|
|
|
|
| ||
Information Technology |
|
|
|
|
|
| ||
Real Estate |
|
|
|
|
|
| ||
Total |
| $ |
|
|
| % | ||
NOTE 4 – 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 investments portfolio as of September 30, 2023 may differ materially from values that would have been used had a readily available market for the investments existed.
| 11 |
| Table of Contents |
The following table presents the fair value measurements of our portfolio investments by major class, as of September 30, 2023, according to the fair value hierarchy:
|
| As of September 30, 2023 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Short-term Non-banking Loans |
| $ | — |
|
| $ | — |
|
| $ |
|
| $ |
| ||
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Common Stock |
|
|
|
|
| — |
|
|
| — |
|
|
|
| ||
Warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other Equity |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Total |
| $ |
|
| $ | — |
|
| $ |
|
| $ |
| |||
The following table presents the fair value measurements of our investment portfolio by major class, as of December 31, 2022, according to the fair value hierarchy:
|
| As of December 31, 2022 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Short-term Non-banking Loans |
| $ | — |
|
| $ | — |
|
| $ |
|
| $ |
| ||
Preferred Stock |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Common Stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other Equity |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||
Total |
| $ | — |
|
| $ | — |
|
| $ |
|
| $ |
| ||
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the nine months ended September 30, 2023:
|
| For the nine months ended September 30, 2023 |
|
|
|
| ||||||||||||||
|
| ST Non-banking Loans |
|
| Preferred Stock |
|
| Common Stock |
|
| Warrants |
|
| Other Equity |
| |||||
Balance as of January 1, 2023 |
| $ |
|
| $ |
|
| $ | — |
|
| $ | — |
|
| $ |
| |||
Net change in unrealized appreciation |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| ||
Purchases and other adjustments to cost |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Sales and redemptions |
|
| ( | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net realized loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| ( | ) |
Transfers out of level 3 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| ( | ) |
Balance as of September 30, 2023 |
| $ |
|
| $ |
|
| $ | — |
|
| $ | — |
|
| $ |
| |||
The net change in unrealized appreciation for the nine months ended September 30, 2023 attributable to Level 3 portfolio investments still held as of September 30, 2023 is $
The following table lists our Level 3 investments held as of September 30, 2023 and the unobservable inputs used to determine their valuation:
Investement Type |
| 9/30/23 FMV |
|
| Valuation Technique |
| Unobservable Inputs |
| Range | ||
ST Non-banking Loans |
| $ |
|
| discounted cash flow |
| determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness |
| % | ||
Other Equity |
|
|
|
| last secured funding known by company |
| data obtained from issuer, and stated value of instrument (if any), less assumed transaction costs. |
|
| ||
Preferred Stock |
|
|
|
| last funding secured by company |
| data obtained from issuer, and stated value of instrument (if any), less assumed transaction costs. |
|
| ||
|
| $ |
|
|
|
|
|
|
| ||
| 12 |
| Table of Contents |
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2022:
|
| For the year ended December 31, 2022 |
|
|
|
| ||||||||||||||
|
| ST Non-banking Loans |
|
| Preferred Stock |
|
| Common Stock |
|
| Warrants |
|
| Other Equity |
| |||||
Balance as of January 1, 2022 |
| $ |
|
| $ |
|
| $ | — |
|
| $ | — |
|
| $ |
| |||
Net change in unrealized depreciation |
|
| ( | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| ( | ) |
Purchases and other adjustments to cost |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| ||
Sales and redemptions |
|
| ( | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance as of December 31, 2022 |
| $ |
|
| $ |
|
| $ | — |
|
| $ | — |
|
| $ |
| |||
The net change in unrealized depreciation for the year ended December 31, 2022 attributable to Level 3 portfolio investments still held as of December 31, 2022 was $
The following table lists our Level 3 investments held as of December 31, 2022 and the unobservable inputs used to determine their valuation:
Security Type |
| 12/31/22 FMV |
|
| Valuation Technique |
| Unobservable Inputs |
| Range | ||
ST Non-banking Loans |
| $ |
|
| discounted cash flow |
| determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness |
| % | ||
Other Equity |
|
|
|
| last secured funding known by company |
|
|
|
| ||
Preferred Stock |
|
|
|
| last funding secured by company |
| economic changes since last funding |
|
| ||
|
| $ |
|
|
|
|
|
|
| ||
NOTE 5 – RELATED-PARTY TRANSACTIONS
We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with the SEC. In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions:
| · | · On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately |
|
|
|
| · | · On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $ |
| 13 |
| Table of Contents |
NOTE 6 – INCOME TAXES
We are a C-Corporation for tax purposes and have booked an income tax provision for the periods described below.
As of September 30, 2023 and December 31, 2022, we have a deferred tax asset of $
As of September 30, 2023 and December 31, 2022 we had prepaid income taxes of $
As of September 30, 2023, we had a
NOTE 7 – LINE OF CREDIT
On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $
As a Lender, Mr. Berman is obligated to furnish only one-half of the aggregate $
During the period January 3 to September 30, 2022, the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement 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. Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash.
As of September 30, 2023 and December 31, 2022, there was no balance outstanding on the line.
NOTE 8 – STOCK-BASED COMPENSATION
The Company’s 2022 Stock Incentive Plan (the “Plan”) authorized the issuance of incentives relating to
The following table summarizes the activity for all stock options outstanding for the nine months ended September 30, 2023:
|
| Shares |
|
| Weighted Average Exercise Price |
| ||
Options outstanding at beginning of year |
|
| — |
|
| $ | — |
|
Granted |
|
|
|
|
|
| ||
Exercised |
|
| ( | ) |
|
|
| |
Forfeited |
|
| — |
|
|
| — |
|
Balance at September 30, 2023 |
|
|
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Options exercisable at September 30: |
|
|
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Grant Date Fair Value for options granted during the period: |
| $ |
|
|
|
|
| |
| 14 |
| Table of Contents |
The following table summarizes additional information about stock options outstanding and exercisable at September 30, 2023:
Options Outstanding |
|
| Options Exercisable |
| ||||||||||||||||||||||
Options Outstanding |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Options Exercisable |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value |
| |||||||
|
|
|
|
|
| $ |
|
| $ |
|
|
|
|
| $ |
|
| $ |
| |||||||
The Company recognized stock-based compensation expense for stock options of $
The Black-Scholes option-pricing model was used to estimate the fair value of equity-based awards with the following weighted-average assumptions for the nine months ended September 30, 2023:
|
| 2023 |
| |
Risk-free interest rate |
|
| % | |
Expected volatility |
|
| % | |
Expected life (years) |
|
|
| |
Expected dividend yield |
| — | % | |
The inputs for the Black-Scholes valuation model require management’s significant assumptions. The price per share of common stock is determined by using the closing market price on the Nasdaq Capital Market on the grant date. The risk-free interest rates are based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life is based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility is estimated based on historical volatility information of peer companies that are publicly available in combination with the Company’s calculated volatility.
NOTE 9 – SHAREHOLDERS’ EQUITY
At September 30, 2023, we had
On August 9, 2022, the Company effected a stock combination (reverse stock split) of its
NOTE 10 – PER-SHARE INFORMATION
Basic net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. Diluted net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of dilutive common shares outstanding during the period calculated using the Treasury Stock method. The Treasury Stock method assumes that the proceeds received upon exercise of stock options are used to repurchase stock at the average market price during the period, thereby increasing the number of shares to be added in computing diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below:
| 15 |
| Table of Contents |
|
| For the Three Months Ended September 30, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Basic |
|
| Diluted |
|
| Basic |
|
| Diluted |
| ||||
Numerator: Net increase in net assets resulting from operations |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | ||
Denominator: Weighted-average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted net gain (loss) per common share |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | ||
|
| For the Nine Months Ended September 30, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Basic |
|
| Diluted |
|
| Basic |
|
| Diluted |
| ||||
Numerator: Net increase (decrease) in net assets resulting from operations |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
| ||
Denominator: Weighted-average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted net gain (loss) per common share |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
| ||
NOTE 11 – OPERATING LEASES
We are a party to two non-cancelable operating leases for office space expiring May 31, 2024. 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 leases do 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 September 30, 2023 and September 30, 2022 was
Rent expense for office facilities for the nine months ended September 30, 2023 and September 30, 2022 was $
The components of our operating lease were as follows for the three and nine months ended September 30, 2023:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
|
| September 30, 2023 |
|
| September 30, 2023 |
| ||
|
|
|
|
|
|
| ||
Operating lease costs |
| $ |
|
| $ |
| ||
Variable lease cost |
|
|
|
|
|
| ||
Short-term lease cost |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
| 16 |
| Table of Contents |
Supplemental balance sheet information consisted of the following at September 30:
Operating Lease |
| 2023 |
|
| 2022 |
| ||
Right-of-use assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Operating Lease Liability |
| $ |
|
| $ |
| ||
Less: short term portion |
|
| ( | ) |
|
| ( | ) |
Long term portion |
| $ | — |
|
| $ | — |
|
Maturity analysis under lease agreements consisted of the following as of September 30:
|
| 2023 |
|
| 2022 |
| ||
2022 |
| $ | — |
|
| $ |
| |
2023 |
|
|
|
|
|
| ||
2024 |
|
|
|
|
| — |
| |
Total lease payments |
|
|
|
|
|
| ||
Less: Present value discount |
|
| ( | ) |
|
|
| |
Present value of lease liabilities |
| $ |
|
| $ |
| ||
NOTE 12 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the nine months ended September 30, 2023 through 2019:
|
| Nine Months Ended September 30, |
| |||||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||||
Per Share Data (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net asset value at beginning of period |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net investment income (loss) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| ( | ) | |||
Net realized and unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Provision for income taxes |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
| |||
Issuance of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other changes in equity |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Payment of common stock dividend |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | |||
Net asset value at end of period |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio / Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value of investments at end of period |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Shares outstanding at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Average weighted shares outstanding for the period - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Average weighted shares outstanding for the period - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net assets at end of period |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Average net assets (2) |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total investment return (loss) |
|
| ( | )% |
|
| % |
|
| % |
|
| % |
|
| ( | )% | |||
Portfolio turnover rate (3) |
|
| % |
|
| % |
|
| % |
|
| % |
|
| % | |||||
Ratio of operating expenses to average net assets (3) |
|
| ( | )% |
|
| ( | )% |
|
| ( | )% |
|
| ( | )% |
|
| ( | )% |
Ratio of net investment income (loss) to average net assets (3) |
|
| ( | )% |
|
| % |
|
| % |
|
| % |
|
| ( | )% | |||
(1) | Per-share data was derived using the ending number of shares outstanding for the period. |
(2) | Based on the monthly average of net assets as of the beginning and end of each period presented. |
(3) | Ratios are annualized. |
NOTE 13 – Subsequent Events
At the Company's 2023 annual shareholder meeting held on October 31, 2023, the shareholders of the Company re-elected all directors to serve another term on our Board of Directors, approved on an advisory basis the executive compensation paid to the Company's named executives, and voted on an advisory basis in favor of future advisory votes on the Company's executive compensation every three years.
| 17 |
| Table of Contents |
ITEM 2. 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 (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections:
| · | Overview |
| · | Portfolio and Investment Activity |
| · | Results of Operations |
| · | Financial Condition |
| · | Critical Accounting Estimates |
| · | Off-Balance Sheet Arrangements |
| · | Forward Looking Statements |
OVERVIEW
Mill City Ventures III, Ltd. was 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.”
We are engaged in the business of providing short-term non-bank lending and specialty finance solutions to companies and individuals, generally on a secured basis. The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the principals of the borrower. Our loans may be made for real estate acquisitions, renovation and sale, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes. We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our business objective is to generate revenues from the interest and fees we charge, and capital appreciation from any related investments we make.
Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees. In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation. We occasionally derive income from dividends paid on equity securities we hold from time to time, or from the sale of our equity securities. Our statement of operations also reflect increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.
| 18 |
| Table of Contents |
PORTFOLIO AND INVESTMENT ACTIVITY
During the nine months ended September 30, 2023, we made $11,900,500 of investment purchases and had $11,124,193 of redemptions and repayments, resulting in net investments at amortized cost of $17,577,481 at the end of the period.
During the nine months ended September 30, 2022, we made $9,103,580 of investment purchases and had $7,977,898 of redemptions and repayments, resulting in net investments at amortized cost of $15,191,759 at the end of that period.
Our portfolio composition by major class, based on fair value at September 30, 2023, was as follows:
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||
Short-term Non-banking Loans |
| $ | 16,296,986 |
|
|
| 92.8 | % |
Equity/Other |
|
| 1,258,615 |
|
|
| 7.2 |
|
Total |
| $ | 17,555,601 |
|
|
| 100.0 | % |
RESULTS OF OPERATIONS
Our operating results for the three and nine months ended September 30, 2023 and September 30, 2022 were as follows:
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Investment Income: |
| $ | 725,158 |
|
| $ | 1,115,224 |
|
| $ | 2,496,688 |
|
| $ | 3,351,935 |
|
Operating Expenses: |
|
| (421,373 | ) |
|
| (1,179,792 | ) |
|
| (2,883,235 | ) |
|
| (2,227,865 | ) |
Net Investment Gain (Loss) |
| $ | 303,785 |
|
| $ | (64,568 | ) |
| $ | (386,547 | ) |
| $ | 1,124,070 |
|
Investment Income
We generate revenue primarily in the form of interest income derived from the short-term non-banking loans we provide, together with fees we charge in connection with those loans, such as commitment, origination, structuring, diligence, or consulting fees. Any such fees will be recognized as earned. In some cases, the interest payable to us on the short-term loans we provide may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments. On occasion, we may also generate revenue from dividends and capital gains on equity investments we make, if any, or on warrants or other equity interests that we may acquire.
For the three and nine months ended September 30, 2023, our total investment income was $725,158 and $2,496,688, respectively. For the three and nine months ended September 30, 2022, our total investment income was $1,115,224 and $3,351,935, respectively. The decrease is due to an overall reduction in our short-term non-bank lending activity. Our loan portfolio generates interest income, with an average rate on the loans of 15.2%.
Professional Fees
For the three and nine months ended September 30, 2023, we had $184,008 and $601,184 professional fees expense, respectively. For the three and nine months ended September 30, 2022, we had $916,359 and $1,309,348 professional fees expense, respectively. The decrease is due to the significant costs we incurred during and in conjunction with our public offering of common stock in 2022, partially offset by our costs incurred to amend our Form 10K filing for December 31, 2022 during 2023.
| 19 |
| Table of Contents |
Payroll and Directors Fees
For the three and nine months ended September 30, 2023, we had $141,040 and $1,418,640 of payroll expense, respectively, and we had $30,000 and $592,968 of directors fees, respectively. For the three and nine months ended September 30, 2022, we had $122,477 and $433,461 of payroll expense, respectively, and we had $30,000 and $147,073 of directors fees, respectively. The increase in the current period was due in large part to the company’s issuance of 870,000 10-year options to directors, officers and consultants in November and December 2022 (which were issued subject to shareholder approval). On January 20, 2023 company shareholders approved the options and the related incentive plan at a special meeting held for that purpose. These options generated a noncash expense of $1,460,209.
Interest Expense
For the three and nine months ended September 30, 2023, we had $0 and $78,000 of interest expense, respectively. For the three and nine months ended September 30, 2022, we had $46,779 and $164,632 of interest expense, respectively. The decrease is due to our reduced borrowing on the line of credit during the current period.
Net Realized Gain (Loss) from Investments
For the three and nine months ended September 30, 2023, we had $0 and $94,569, respectively, of sales of investments and $1,975,000 and 11,029,625, respectively, of repayments on short-term loans, resulting in $0 and $558,629 of realized losses, respectively. For the three and nine months ended September 30, 2022, we had $0 and $552,898, respectively, of sales of investments and $2,098,585 and $9,523,585, respectively, of repayments on short-term loans, resulting in $0 and $133,020 of realized gains, respectively.
Net Change in Unrealized Appreciation (Depreciation) on Investments
For the three and nine months ended September 30, 2023, our investments had $2,175 and $629,491 of unrealized appreciation, respectively. For the three and nine months ended September 30, 2022, our investments had $0 and $16,297 of unrealized depreciation, respectively.
Changes in Net Assets from Operations
For the three and nine months ended September 30, 2023, we recorded a net increase in net assets from operations of $369,560 and a net decrease in net assets from operations of $277,763, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2023, our per-share net increase in net assets from operations was $0.06 and our per share net decrease in net assets from operations was $0.04, respectively. For the three and nine months ended September 30, 2022, we recorded a net decrease in net assets from operations of $36,126 and a net increase in net assets from operations of $893,993, respectively. Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2022, our per-share net decrease in net assets from operations was $0.01 and our per share net increase in net assets from operations was $0.18, respectively.
Cash Flows for the Nine months Ended September 30, 2023 and 2022
The level of cash flows used in or provided by operating activities is affected primarily by our provision of short-term loans, purchases of other investments, redemptions and repayments of our loans or investments, and other related factors. For the nine months ended September 30, 2023, net cash used in operating activities was $550,781. Cash flows used in operating activities for the nine months ended September 30, 2023 were primarily related to the funding of our short-term loans and purchases of investments aggregating $11,900,500, offset mostly by redemptions and repayments of short-term loans and investments totaling $11,124,193. For the nine months ended September 30, 2022, net cash used in operating activities was $6,429,293. Cash flows used in operating activities for the nine months ended September 30, 2022 were primarily related to the funding of our short-term loans and purchases of investments aggregating $13,924,333, offset mostly by redemptions and repayments of short-term loans and investments totaling $10,076,483.
FINANCIAL CONDITION
As of September 30, 2023, we had cash of $962,860, a decrease of $126,781 from December 31, 2022. The primary use of our existing funds and any funds raised in the future is expected to be for our investments in portfolio companies or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities. Pending investment in portfolio companies, 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.”
| 20 |
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On August 9, 2022, we effected a stock combination (reverse stock split) of our common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock issued and outstanding on that date were combined into one share of common stock. Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share. The reverse stock split was approved by our Board of Directors in accordance with Minnesota law, and resulted in a proportionate reduction in the number of authorized shares of capital stock available for issuance under our articles of incorporation. On a post-reverse-split basis, we are authorized to issue up to 111,111,111 shares of capital stock.
On August 11, 2022, we completed a public offer and sale of 1,250,000 common shares pursuant to a registration statement filed with the SEC and declared effective on August 9, 2022. We sold these shares at $4.00 per share, resulting in gross proceeds of $5,000,000. As part of the registered public offering, we granted the underwriters a 45-day option to purchase up to 187,500 additional common shares at the offering price, less underwriting discounts, which option was not exercised. In connection with the offering, we issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $5.00. Our net proceeds after the payment of underwriting discounts, underwriting expenses, and offering-related expenses we incurred were otherwise obligated to pay, were approximately $4,041,000.
CRITICAL ACCOUNTING ESTIMATES
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.
In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition. For more information, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.
OFF-BALANCE-SHEET ARRANGEMENTS
During the nine months ended September 30, 2023, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.
FORWARD-LOOKING STATEMENTS
Some of the statements made in this section of our report are forward-looking statements based on our management’s current expectations for our company. These expectations involve assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance, and can ordinarily be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to identify and consummate new investments, achieve certain margins and levels of profitability, the availability of any needed additional capital, and the ability to maintain compliance with regulations applicable to us. Some of the forward-looking statements contained in this report relate to, and are based our current assumptions regarding, the following:
| · | our future operating results; |
| · | the success of our investments; |
| · | our relationships with third parties; |
| · | 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 expected financings and investments; |
| · | our regulatory structure and tax treatment; |
| · | the adequacy of our cash resources and working capital; and |
| · | the timing of cash flows, if any, we receive from our investments. |
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The foregoing list is not exhaustive. For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on April 17, 2023 (related to our year ended December 31, 2022) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.
ITEM 4. 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 September 30, 2023, our Chief Executive Officer and Chief Financial 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 were not effective as of September 30, 2023 due to the material weakness in our internal control over financial reporting identified and disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022.
There were no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls.
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PART II. OTHER INFORMATION
ITEM 5. EXHIBITS
Exhibit Number | Description | |
3.1 | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013) | |
3.2 |
| Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008) |
10.1 |
| Amendment to 2022 Stock Incentive Plan, dated August 14, 2023 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 10-Q filed August 15, 2023) |
31.1* | Section 302 Certification of the Chief Executive Officer | |
31.2* |
| Section 302 Certification of the Chief Financial Officer |
32.1* |
| Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MILL CITY VENTURES III, LTD. |
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Date: November 17, 2023 | By: | /s/ Douglas M. Polinsky |
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| DOUGLAS M. POLINSKY Chief Executive Officer |
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Date: November 17, 2023 | By: | /s/ Joseph A. Geraci, II |
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| JOSEPH A. GERACI, II Chief Financial Officer |
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