SUI Group Holdings Ltd 10-K for FY2022
SUI Group Holdings Ltd. (SUIG)
About this 10-K
SUI Group Holdings Ltd filed this 10-K on April 17, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the fiscal year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the transition period from ______________________ to ______________________ |
Commission File Number
(Exact name of registrant as specified in its charter) |
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(State of incorporation) |
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(Address of principal executive offices) |
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Former name, former address and former fiscal year, if changed since last report
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to Section 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% shareholders of the registrant as of June 30, 2022 was approximately $
DOCUMENTS INCORPORATED IN PART BY REFERENCE
None.
Mill City Ventures III, Ltd.
Form 10-K
Table of Contents
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PART I
ITEM 1 BUSINESS
Overview
Mill City Ventures III, Ltd. is a Minnesota corporation that was incorporated in January 2006. From our inception until December 13, 2012, we were a development-stage company involved in the gaming and entertainment industry. 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 on December 27, 2019. Since that time, we have engaged in the business of providing short-term specialty finance solutions primarily to private businesses, micro- and small-cap public companies and high-net-worth individuals. To avoid again becoming subject to regulation under the 1940 Act, we generally seek to structure our short-term loans such that they do not constitute “securities” under federal securities law, and we monitor our holdings as a whole to ensure that no more than 40% of our total assets may consist of “investment securities,” as that term is defined under the 1940 Act.
The principal specialty finance solutions we provide are high-interest short-term lending arrangements. Typically, these lending arrangements involve us obtaining collateral as security for the borrower’s repayment of funds to us, or personal guarantees from the principals or affiliates of the borrower. In some circles, short-term high-interest collateralized lending is referred to as “hard-money lending.”
We believe we are generally able to charge high interest for our specialty finance solutions because: (i) banks and other traditional providers of credit may have neither the expertise nor the infrastructure needed to evaluate creditworthiness and risks in a timeframe suitable for a potential borrower, preferring instead to process transactions and structures that present few novel issues or risks; and (ii) we will often be able to devote time and attention to transactions involving a smaller dollar amount than an institutional lender will view as worthwhile. These beliefs essentially explain why we refer to our business as “specialty finance”— financing that may involve structures that are unique, creative, and often bespoke; and that may involve dollar amounts that are not suitable for institutional lenders.
We generally provide specialty finance solutions that are short-term in nature. By this, we mean lending arrangements that mature or come due within nine months of the lending date. We view the provision of short-term finance as desirable for two principal reasons: (i) it helps minimize the risk of non-performance; and (ii) it helps minimize regulatory risk.
In terms of non-performance risk, short-term lending requires us to focus upon, and a potential borrower to identify to us, us a near-term source of liquidity for repayment of the funds they borrow from us. This permits us to evaluate that source of repayment clearly and carefully, thus helping identify the potential risks involved in a particular transaction and how we may be able to include structural terms, such as specific collateral and collateral-related arrangements, guarantees, or other types of covenants or arrangements that mitigate these risks.
In terms of regulatory risk, we believe that short-term lending permits us to avail ourselves of a court-recognized exception for treating promissory notes (evidencing a loan) as “securities” under federal securities law. This exception generally applies to promissory notes with short-term maturities of nine months or less. Our ability to avail ourselves of this exception, and to more generally structure our transactions in such a way as to avoid them being properly considered as “securities” under federal securities laws, is important because we believe that it enables us to avoid once again becoming subject to regulation under the 1940 Act. Below we discuss in further detail our process for evaluating transactional terms and structures with a view to remaining outside of the regulatory regime of the 1940 Act (please refer to “Investment Process” below).
Examples of the kinds of the specialty finance solutions we have considered or provided to date, and may continue to provide in the future, include:
| · | Short-term secured loans for real estate development; |
| · | Short-term unsecured loans (with an option to acquire collateral security) to a business; |
| · | Short-term secured loans to a business for operating capital; and |
| · | Short-term secured loans to an individual owed a forthcoming tax refund |
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In addition, we are presently exploring and evaluating our ability to enter into other kinds of short-term specialty finance transactions. Examples include the expansion of our efforts to purchase adjudicated settlements, the purchase (at discounted rates) of receivables owing to professionals on account of certain workers’ compensation claim, and short-term consumer finance lending.
Sourcing Transactions
We believe that our management’s strong combination of experience and contacts in the securities and investment finance sector, including the experience and contacts of our independent directors, should be sufficient to continue attracting suitable prospective investment opportunities. To date, the network of contacts of our management and directors has been successful thus far in sourcing all of the transactions in which we have participated. Accordingly, we presently do not have any plans to hire any business development professionals to assist us with transactional volume.
Competition
The market for specialty finance is competitive, largely as a result of the participation of various types of professionally managed pooled investment funds such as private equity funds, debt and mezzanine-debt funds, and other types of professional finance companies seeking the high returns that are possible in specialty finance and hard-money lending. Nevertheless, we believe we are well positioned to compete successfully in this market because of our entrepreneurial, creative and flexible approach to specialty finance opportunities, and our management’s experience in entrepreneurial ventures and finance.
Throughout our history and in particular after ceasing to be a BDC, we have approached investment opportunities flexibly and creatively in terms of transactional structures and terms. In part, we are able to be flexible and creative because we are not subject to many of the regulatory limitations that govern our other more traditional or institutional competitors. Those competitors are often subject to limitations on the type transactions they undertake, the amount that may be invested in a specific transaction or a particular type of transaction, the markets in which they operate, the maturity or time horizon of their investment, uses of proceeds, or otherwise. These limitations are often imposed by the agreements and documents governing the pooled investment vehicles, or otherwise self-imposed in order to facilitate the investment vetting and due-diligence process, and the documentation and structuring process. More rarely, these limitations may arise from governing regulations or interpretations thereof. For our part, we believe that approaching investment opportunities flexibly expands our overall transactional opportunities, diversifies our risk by avoiding dependence in any material way on a particular borrower, type of transaction, or market or industry niche, and permits us to avail ourselves of the maximum number of relationships from which we source investment opportunities. Moreover, we believe that this flexible approach to structuring our transactions and investments will facilitate the development of positive long-term relationships with our borrowers.
We believe that the only significant limitation on our ability to flexibly structure transactions arises from our desire to remain outside the regulation of the 1940 Act. In order to meet this goal, we intend and aim to structure the vast majority of our transactions (by dollar amount) in ways such that they are not properly considered “securities” under federal securities laws, including the 1940 Act.
For our investors, the freedom afforded to us through the lack of substantive regulation governing the types of transactions we enter into and our methods of operation permits us to allocate our resources, at any given point in time, to those types of transactions that we believe may lead to the highest risk-adjusted returns or the steadiest stream of such returns.
Our management team and Board of Directors has significant experience in a variety of entrepreneurial ventures, including service as management and directors for small and large public companies, private businesses, start-up and development-stage businesses, and the securities and finance industries. As a result of this diverse general experience and particular experience in transactional finance, we believe we are able to manage the evaluation and due-diligence process involved in our investment opportunities swiftly and efficiently, by collaborating with our professional advisers and focusing on high-level and material issues.
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Other Matters
We do not believe that we are dependent in any material way on any particular borrower, type of specialty finance transaction, or industry.
We do not own or use through license any patents, trademarks, or other intellectual properties and we do not believe that any such assets would be material to our business.
Sometimes the types of transactions we engage in are governed by particular laws, regulations, or rules. For example, lending transactions in which high-net-worth individuals (as opposed to entities) are the borrower will nearly always involve state law usury limitations. Transactions in which we seek and obtain collateral as security for obligations owed to us involve legal issues arising under the Uniform Commercial Code or its various state law iterations. To date, we have not engaged in transactions that require us to obtain licensure or a permit prior to entering into the transaction—e.g., brokering transactions or engaging in licensed consumer finance activities.
Pending the consummation of transactions and deployment of cash, we generally keep the majority of our assets in cash, cash equivalents such as money-market investments, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
Our Investment Process
We have identified several criteria that we believe are generally important guidelines for us to meet our financial objectives. These criteria are, however, only general guidelines for our investment decisions and, in the case of some transactions in which we invest, fewer than all—or even none—of these criteria will be met.
| · | Existing Liquidity Source. Because the vast majority of our transactions involve short-term maturities, we typically seek to identify a liquidity source for the borrower to repay us. Examples of sources of potential liquidity may include accounts receivable, another valuable asset, or a pending payment (e.g., a tax refund, or a litigation judgment or settlement payment) that is reasonably expected to pay out prior to the maturity of the credit we provide. |
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| · | Collateral Value. We will often, but not always, seek to collateralize the obligations owing to us. Our ability to identify valuable collateral is a significant factor in our credit analysis and determination of the attractiveness of a potential transaction. This analysis will often involve legal counsel, both to assist in the identification of potential collateral assets, and to better understand the ease with a security interest in the collateral may be granted, perfected and, if necessary, foreclosed upon and the relevant jurisdiction(s) involved. |
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| · | Experienced and Capable Management. In transactions involving business borrowers, we seek businesses that have an experienced, knowledgeable and capable management team. |
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| · | Competitive Position. In transactions involving business borrowers, we will seek to invest in transactions with businesses that have developed, or appear poised to develop, a strong competitive position within their respective industry sector or niche. |
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| · | Cash Flow. In transactions involving business borrowers, we will seek to invest in businesses that are profitable or nearly profitable on an operating cash flow basis, principally so that the business’ operating cash flow may serve as another source of liquidity from which we may ultimately be repaid. |
If we believe a potential transaction generally meets the characteristics described above or if we otherwise determine that a potential transaction may be desirable to enter into, we may perform a more rigorous due-diligence examination of the prospective borrower, the likely source or sources of liquidity for their repayment to us, and other aspects of the borrower or its assets (e.g., assets of the borrower that may serve as collateral security for the obligations that may be owing to us). Our due-diligence examination for each transaction will necessarily be unique and tailored to the specific transaction, but will generally be undertaken in light of the following facts and circumstances:
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| · | our familiarity with the borrower (or, in the case of a business borrower, our familiarity with management or other persons such as directors involved with the borrower); |
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| · | in the case of a business borrower, our review and assessment of the potential borrower’s financing history, as well as the likely need for additional financings after our transaction; |
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| · | the industry in which the borrower operates, our knowledge and familiarity with that industry, our assessment of the complexity of the business, any regulatory matters or other unique aspects presenting special risks, and the competitive landscape faced by the borrower; |
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| · | the amount of dollars involved in the potential transaction; |
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| · | where the borrower is located, how it is organized as an entity, as well as its management and ownership structure and profile; |
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| · | whether we might have been involved with a transaction of the same or similar kind before; |
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| · | the ease with which we can evaluate the borrower’s source or sources of liquidity; |
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| · | the ease with which we can apprehend the process involved with taking collateral security in some or all of the borrower’s assets; and |
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| · | the ease with which we could realize on that collateral if repayment were not otherwise forthcoming. |
The assessments described above outlines our general approach for our investment decisions, although not all of such activities will be followed in each instance, or some may be stressed moreso than others depending on facts and circumstances. Upon successful completion of this preliminary evaluation, we will typically (1) evaluate our own regulatory concerns (i.e., to what extent the potential transaction may properly be considered an investment in a “security” for purposes of the 1940 Act and, if necessary, consider alternative structures to alleviate any risks to our company relating thereto), and (2) decide whether to move forward towards negotiating a letter of intent and, thereafter, definitive documentation for our transaction. Depending on timing, we may not use a letter of intent and will instead proceed directly to definitive documentation.
As indicated above, to avoid becoming subject to the regulatory requirements of the 1940 Act, we monitor our investment holdings as a whole to ensure that investments and other holdings which may be considered “investment securities” do not comprise more than 40% of our total assets. We undertake this analysis (1) at least on a quarterly basis and in connection with the review and preparation of our financial statements filed as part of our quarterly and annual reports with the SEC, and (2) at other times when we are considering how to structure a new transaction that is of a significant size—with “significance” largely based on the outcome of our most recent quarterly review. This review is generally undertaken by our Chief Financial Officer and may involve our outside legal counsel, in particular in a case where we are considering the structure of a potential new transaction.
In general, our analysis starts with the length or duration of a potential new transaction. Although federal securities laws generally define “securities” in such a way as to include promissory notes, the U.S. Supreme Court held in Reves v. Ernst & Young, 110 S. Ct. 945 (1990), that certain kinds of promissory notes are not properly considered securities. Over time, court precedent has developed to identify these kinds of promissory notes as generally not constituting securities:
| · | notes that mature in nine months or less; |
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| · | notes secured by a mortgage or lien on a home; |
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| · | notes secured by a small business or business assets; |
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| · | so-called “character loans” made to a bank customer; |
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| · | notes delivered or borrowings entered into through consumer finance; |
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| · | commercial loans made to businesses; |
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| · | loans secured by accounts receivable (e.g., factoring); |
In addition to the “types” of financing arrangements noted above, court precedent indicates that there may be facts and circumstances surrounding a transaction that may cause a promissory note to not be considered a “security” under federal securities laws. For example, while it is presumed that a promissory note that matures in more than nine months is a “security,” this presumption may be rebutted (with the conclusion that such a promissory note is not a properly considered a security) upon an evaluation of the following factors:
| · | whether the borrower’s motivation is to raise money for general business use, and whether the lender’s motivation is to make a profit, including interest; |
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| · | whether the borrower’s plan of distribution for the promissory note resembles the plan of distribution of a security; |
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| · | whether the investing public, or the parties to the transaction, reasonably expects that the note is a security; and |
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| · | whether there is a regulatory scheme that protects the investor other than the securities laws (e.g., Federal Deposit Insurance). |
While the application of these factors can be helpful in some instances, often the factors and the proper manner of weighting them are unclear. As a result, the analyses we periodically undertake focuses on the more bright-line types of lending arrangements enumerated above—i.e., promissory notes maturing in nine months or less, etc.
Our Management and Employees
Currently, Mr. Douglas M. Polinsky, the Chief Executive Officer and Chairman of our Board of Directors, and Joseph A. Geraci, II, our Chief Financial Officer and a director of the company, serve as our senior management team. These are also the only two persons employed by our company that have a management role. There are three persons in total employed by our company.
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ITEM 1A RISK FACTORS
You should consider the following risk factors, in addition to the other information presented or incorporated by reference into this Annual Report on Form 10-K, in evaluating our business and any investment decision relating to our securities.
We have a short operating history upon which to evaluate our current business.
We withdrew our election to be treated as a BDC under the 1940 Act at the end of 2019, and during the three years since that time have refocused our business on providing short-term specialty finance solutions to private businesses, small-cap public companies and high-net-worth individuals. Given that our current business has been developed and pursued over the three years prior to this filing, investors have limited means to evaluate our performance, its evolution, and the likelihood of our future success.
We may need to raise additional capital to fund our operations, and such capital may not be available to us in sufficient amounts or on acceptable terms.
For the time being, management believes that our current cash is sufficient to continue operations for the foreseeable future. Nevertheless, various future developments may cause us to seek or require additional financing. For instance, our letter of intent with Mustand Litigation Funding contemplates an additional financing, of some kind, being undertaken by us as a condition to the closing of that transaction. In addition, we may determine to seek additional financing in order to avail ourselves of additional opportunities to provide specialty finance solutions to borrowers. Alternatively, we may seek additional financing in the event that a material portion of our investments default, leaving us with little means to pay for our operations and continue making investments.
In any event, additional financing could be sought from a number of sources, including but not limited to additional sales of equity or debt securities, or loans from financial institutions or our affiliates. We cannot, however, be certain that any such financing will be available on terms favorable or acceptable to us if at all. If additional funds are raised by the issuance of our equity securities, such as through the issuance of stock, convertible securities, or the issuance and exercise of warrants, then the ownership interest of our existing shareholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations, and such securities may have rights senior to the rights of our common shareholders. If adequate funds are not available on acceptable terms, we may be unable to consummate acquisitions or investments desired by our management and board.
If we are unable to maintain diverse and robust sources of capital, our growth prospects, business, financial condition and results of operations could be adversely affected.
Our business depends on maintaining diverse and robust sources of capital to originate our short-term loans. In January 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our company. Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets. As a Lender, Mr. Berman is obligated to furnish only one-half of the aggregate $5 million available under the Loan Agreement. The Loan Agreement has a five-year term ending on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. See “Certain Relationships and Related Transactions.” We cannot be sure that this funding source, or others, will continue to be available on reasonable terms or at all beyond its current maturity date.
Events of default or breaches of financial, performance or other covenants, or worse than expected performance of one or more of our short-term loans, could reduce or terminate our access to funding from the Loan Agreement. The availability and capacity of sources of capital also depends on many factors that are outside of our control, such as credit market volatility and regulatory reforms. In the event that we do not maintain adequate sources of capital, we may not be able to maintain the necessary levels of funding to retain current loan volume, which could adversely affect our business, financial condition and results of operations.
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Changes in laws or regulations, or a failure to comply with laws and regulations, may adversely affect our business, including our results of operations and ultimately the price of our common stock.
We are subject to various local, state and federal laws and regulations. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and manner of application or enforcement may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business and results of operations. Any of these outcomes would likely adversely affect the trading price of our common stock.
Changes in consumer finance and other applicable laws and regulations, as well as changes in government enforcement policies and priorities, may negatively impact the management of our business, results of operations, ability to offer certain kinds of specialty finance solutions or the terms and conditions upon which they are offered, and our ability to compete.
Consumer finance regulation is constantly changing, and new laws or regulations, or new interpretations of existing laws or regulations, could have a materially adverse impact on our ability to operate as currently intended or as we may intend to expand in the future, and cause us to incur significant expense in order to ensure compliance. Federal and state financial services regulators are also enforcing existing laws, regulations, and rules aggressively and enhancing their supervisory expectations regarding the management of legal and regulatory compliance risks. These regulatory changes and uncertainties make our business planning more difficult and could result in changes to our business model and potentially adversely impact our results of operations. Because we operate as a non-bank lender, we are sometimes subject to state licensing and usury laws. Furthermore, to the extent applicable, these laws can impose specific statutory liabilities upon creditors who fail to comply with their provisions and may affect the enforceability of a loan. If the application of consumer protection laws were to cause our loans, or any of the terms of our loans, to be unenforceable against the relevant borrowers, our business may be materially adversely affected. Even if we seek to comply with licensing and other requirements that we believe may be applicable to us, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain a license in one or more such jurisdictions, which may have an adverse effect on our business.
New laws, regulations, policy or changes in enforcement of existing laws or regulations applicable to our business, or reexamination of current practices, could adversely impact our profitability, limit our ability to continue existing or pursue new business activities, require us to change certain of our business practices, affect retention of key personnel, or expose us to additional costs, including compliance costs. These changes also may require us to invest significant resources, and devote significant management attention, to make any necessary changes and could adversely affect our business.
Although we have identified general guidelines that we believe are important in evaluating prospective investment opportunities, we may enter into transactions with borrowers that do not meet such guidelines, increasing the risk that the price of our common stock could be volatile.
Although we have identified general guidelines for evaluating prospective investment opportunities, it is possible that a borrower with which we enter into a transaction will not have all, or any, of the attributes outlined in those guidelines. If we complete transactions with borrowers that do not meet some or any of these guidelines, it is possible that such an investment may not be as successful as an alternative opportunity that were to satisfy some or all of those guidelines. Investments that do not perform as well as imagined, or as well as they otherwise might have, in combination with the public knowledge that we may stray, or have strayed, from strict implementation of our investment guidelines, could affect the volatility of the trading price of our common stock.
We may provide specialty finance solutions to early-stage companies, financially unstable businesses, or a borrower lacking an established record of revenue or earnings, which could adversely affect the price of our common stock.
While we believe that being entrepreneurial in our approach to specialty finance is a strength, we may complete investments with an early-stage company, a financially unstable business or an entity lacking an established record of revenues, cash flows or earnings. These kinds of transactions present numerous risks associated with investing in a business without a proven business model and with limited historical financial data, volatile revenues, cash flows or earnings and difficulties in obtaining and retaining key personnel. Although our management endeavors to evaluate the risks inherent in each particular investment we consider and make, we may not be able to properly ascertain or assess all of the significant risk factors and we may not have adequate time to complete a full evaluation of those risks. Furthermore, some of these risks may be outside of our control and leave us with no ability to control or reduce the chances that those risks will adversely impact a borrower or our likelihood of repayment. The manifestation of any of these risks could adversely affect the trading price of our common stock.
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Many of our specialty finance investment transactions involve borrowers about which little, if any, information is publicly available, which may impair our ability to identify borrowers able to repay our loans and adversely affect the price of our common stock.
In pursuing our business, we often interact with a privately held companies about which very little public information exists. As a result, we are often required to make our investment decision on the basis of limited information, nearly all of which is obtained from the business itself, which may result in our consummating an investment with a borrower that is not as solvent or profitable as we suspected, if at all. These risks could affect our results of operations and, ultimately, the trading price of our common stock.
If we are deemed to be an investment company under the 1940 Act, we may be required to institute burdensome compliance requirements and our activities may be restricted. In such an event, our business would likely be materially and adversely affected.
If we are deemed to be an investment company under the 1940 Act, then our activities may be restricted, including:
| · | restrictions on the nature of our investments; |
| · | restrictions on the issuance of securities; |
| · | a requirement to register as an investment company; |
| · | adoption of a specific form of corporate structure and changes in corporate governance; |
| · | the hiring of a chief compliance officer, and adoption and implementation of various policies and requirements; and |
| · | additional reporting, record-keeping, voting, proxy and disclosure requirements, together with other rules and regulations. |
In order not to be regulated as an investment company under the 1940 Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of “securities” and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.
We do not believe that our principal activities will subject us to the 1940 Act. To this end, we hold reserve un-invested assets in cash and United States “government securities” within the meaning of Section 2(a)(16) of the Act having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act, which invest only in direct U.S. government treasury obligations. Furthermore, we monitor our investment holdings as a whole to ensure that investments and other holdings which may be considered “investment securities” do not comprise more than 40% of our total assets. We undertake this analysis (1) on a quarterly basis and in connection with the review and preparation of our financial statements filed as part of our quarterly and annual reports with the SEC, and (2) at other times when we are considering how to structure a new transaction that is of a significant size—with “significance” largely based on the outcome of our most recent quarterly review. This review is generally undertaken by our Chief Financial Officer and may involve outside legal counsel, in particular in a case where we are considering the structure of a potential new transaction.
If, however, we do not invest as discussed above or are otherwise unsuccessful in ensuring that no more than 40% of our total assets consist of “investment securities,” then we may be deemed to be subject to the 1940 Act. It is also possible that regulatory authorities, such as the SEC, may disagree with our analysis of whether certain investment holdings constitute “investment securities” and may more broadly disagree with our position that the short-term promissory notes we receive in exchange for our short-term loans are not properly considered “securities” under federal securities law and the 1940 Act in particular. If that were to be the case, compliance with the additional regulatory burdens imposed under the 1940 Act would require additional expenses for which we have not allotted funds, and would surely hinder our ability to operate as profitably as we have since the withdrawal of our BDC election. This outcome would of course adversely affect the trading price of our common stock.
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We may engage in transactions with businesses that may be affiliated with our officers, directors or significant shareholders, and which may involve actual or potential conflicts of interest.
We may decide to make investments in one or more businesses affiliated with our officers, directors or significant shareholders. Such investment opportunities may compete with other opportunities for our investment dollars. Although we are not specifically focusing on, or targeting, any particular transaction with any affiliates or affiliated entities, we would pursue such a transaction if we determined that such an affiliated investment were attractive from a risk-adjusted return perspective, and such transaction were approved by a majority of our independent and disinterested directors. Any such activity would involve actual or potential conflicts of interest. Although we are confident that we can navigate these conflicts consistent with best practices and applicable law, the existence or appearance of such conflicts of interest could make our common stock less attractive and thereby reduce its trading price.
A limited number of shareholders control a significant majority of our voting stock and, as a result, control the election of our Board of Directors. As a result, these shareholders may exert an influence on actions requiring a shareholder vote, potentially in a manner that you do not support.
Nine shareholders (five of whom are presently officers and directors) beneficially own shares representing approximately 54.01% of our issued and outstanding common stock. As a result, investors in our common stock cannot reasonably expect to have any influence over the election of our directors or other matters submitted to a vote of our shareholders. Instead, our existing significant shareholders will exert a substantial influence on the election of our directors and any actions requiring or otherwise put to a shareholder vote, potentially in a manner that you do not support. Examples of such voting matters, apart from the election of our directors, includes amendments to our articles of incorporation, bylaws, and approval of major corporate transactions. The concentrated amount of control over our affairs held by a relatively few number of significant investors could serve to reduce the attractiveness or liquidity of our common stock, and thereby depress its trading price.
Our ability to identify and consummate investment opportunities, and any need we may have for additional capital, will almost certainly be affected by general economic conditions.
General economic conditions will almost certainly impact our ability to (i) identify, pursue and consummate investment opportunities, and (ii) if necessary, seek and obtain additional financing on terms acceptable or favorable to us, if at all. Therefore, a deterioration in general economic conditions may adversely affect our business or slow the growth of our business.
Our reputation and brand are important to our success, and if we are unable to continue developing our reputation and brand, our ability to retain existing capital sources, our ability to attract borrowers could be adversely affected.
We believe that maintaining a strong brand and trustworthy reputation is critical to our success and our ability to attract borrowers, attract new capital sources and maintain existing capital sources. Factors that affect our brand and reputation include:
| · | the non-bank lending industry generally; |
| · | our company specifically, including the quality and reliability of our investment process, our ability to effectively manage and resolve issues with our borrowers, our collection practices, our privacy and security practices, any litigation in which we may become involved; any regulatory activity to which we may become involved; and the overall experience of our borrowers. |
Negative publicity or negative public perception of these factors, even if inaccurate, could adversely affect our brand and reputation. Any negative publicity or negative public perception of the loans we make, or similar loans made by similar lenders or our competitors, may also result in negative publicity that is adverse to our reputation. If we are unable to protect our reputation, our business, financial condition and results of operations could be adversely affected.
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We are highly dependent on the services provided by certain executives and key personnel.
Our success depends in significant part upon the continued service of our senior management personnel. In particular, we are materially dependent upon the services of Douglas M. Polinsky, our Chief Executive Officer and Chairman, and Joseph A. Geraci, II, our Chief Financial Officer and a director of our company. Practically, we cannot prevent the departure of these executives, whether due to death, disability, retirement or otherwise. Any loss of the services provided by these executives would likely have a material and adverse effect on our operations and ability to execute our business plans.
Our articles of incorporation grant our Board of Directors the power to designate and issue additional shares and classes of common and preferred stock.
Our authorized capital consists of 111,111,111 shares of capital stock. Pursuant to authority granted by our articles of incorporation, our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series of preferred stock) as it deems appropriate, and may establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. The rights of holders of new classes or series of stock that may be so designated and issued could be superior to the rights of holders of our common shares. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore, any issuances of additional stock—common or preferred—will dilute the ownership interest of then-current holders of our common stock and may dilute our book value per share.
We may issue additional common stock or preferred shares without the approval of our shareholders. Any such issuances would dilute the interest of our shareholders and likely present other risks.
Our articles of incorporation authorize the issuance of up to 111,111,111 shares of capital stock. Because we have only 6,185,255 shares of common stock issued and outstanding, our Board of Directors has the power and authority to issue a substantial number of additional shares of common stock or preferred shares. The issuance of additional common stock or preferred shares:
| · | may significantly dilute the equity interest of our then-current shareholders; |
| · | may subordinate the rights of holders of common stock if preferred shares are issued with rights senior to those afforded our common stock; |
| · | could cause a change in control if a substantial number of common stock are issued, which could result in the resignation or removal of our present officers and directors; and |
| · | may adversely affect prevailing market price for our common stock. |
Our search for and ability to consummate specialty finance investment opportunities may be materially and adversely affected by COVID-19.
The global spread of the strain of coronavirus known as COVID-19 and its variants, declared a global pandemic by the World Health Organization on March 11, 2020, has resulted in governmental impositions of mandatory closures, quarantines and other restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions. It is unclear whether the pandemic may significantly worsen during the upcoming months, which may result in further restrictions on business, travel, and other activities.
The COVID-19 pandemic has adversely affected the domestic and global economies and financial markets, and the business of our potential borrowers could be materially and adversely affected, decreasing our appetite to consummate transactions that we might have otherwise concluded were attractive. Furthermore, we may be unable to complete an investment if continued concerns relating to COVID-19 continue to restrict travel, limit the ability to have meetings or access a potential borrower’s personnel. The extent to which COVID-19 impacts our search for new investment opportunities will depend on future developments, which are highly uncertain and cannot be predicted. If the disruptions posed by COVID-19 or other matters of domestic or global concern continue for an extensive period of time, our ability to consummate investments, or the operations of our potential and actual borrowers, may be materially adversely affected. Of course, materially adverse effects upon the operations of our actual borrowers could impair their ability to pay us all of the amounts owing to us, or to pay us in a timely manner.
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Finally, our ability to consummate additional transactions may be dependent on our ability to raise equity and debt financing. This ability may be impacted by COVID-19 and other events, including as a result of increased market volatility, decreased market liquidity and third-party financing being unavailable on terms acceptable to us or at all. Overall, the COVID-19 pandemic may generally have the effect of heightening many of the other risks described in this “Risk Factors” section by increasing their likelihood or amplifying their magnitude.
Cyber incidents or attacks directed at us could result in information theft, data corruption, operational disruption and/or financial loss.
We depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those belonging to third parties with whom we deal. Sophisticated and deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties or the cloud, could lead to corruption or misappropriation of our assets, proprietary information and sensitive or confidential data. We have not made a significant investment in data security protection, and we may not be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or to investigate and remediate any vulnerability to, cyber incidents. It is possible that any of these occurrences, or a combination of them, could have adverse consequences on our business and lead to financial loss.
Our stock price may be volatile, or may decline regardless of our operating performance, and you could lose all or part of your investment as a result.
You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuation in the market value of your investment. The market price of our common stock could be subject to significant fluctuations in response to the factors described in this section and other factors, many of which are beyond our control. Among the many factors that could affect our stock price are:
| · | Actual or anticipated variations in our quarterly and annual operating results or those of companies perceived to be similar to us; |
| · | Changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors, or differences between our actual results and those expected by investors and securities analysts; |
| · | Fluctuations in the market valuations of companies perceived by investors to be comparable to us; |
| · | The public’s response to our or our competitors’ filings with the SEC or announcements regarding, significant transactions, acquisitions, strategic investments, litigation, or other significant matters; |
| · | Speculation about our business in the press or the investment community; |
| · | Future sales of our shares; |
| · | Actions by our competitors; |
| · | Additions or departures of members of our senior management or other key personnel; and |
| · | The passage of legislation or other regulatory developments affecting us or our industry. |
In addition, the securities markets have experienced significant price and volume fluctuations that have affected and continue to affect market price of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, or international currency fluctuations, may negatively affect the market price of our shares.
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to securities class action litigation that, even if unsuccessful, could be costly to defend and a distraction to management.
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We do not intend to pay dividends on our common stock.
We intend to retain all of our earnings, if any, for the foreseeable future to finance the operation and expansion of our business and do not anticipate paying cash dividends. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to compliance with applicable law and any contractual provisions, and will depend on, among other factors, our results of operations, financial condition, capital requirements and other factors that our Board of Directors deems relevant. As a result, investors in our common shares should expect to receive a return on investment only if the market price of the common shares increases, which may never occur.
One of the manners in which we may seek to grow our company is through acquisition or combination transactions. It is possible that, even after our announcement of a potential acquisition or combination transaction, such transactions may not ultimately close and occur. Our announcement of these potential transactions, and the occasional failure of them to occur, may cause the price of our common stock to be volatile.
In prior reports, we have publicly announced our intention to grow our company both organically, including by expanding our specialty finance operations into new markets or niches, and through acquisition or combination transactions such as mergers. In the past, we have announced our execution of non-binding letters of intent for these kinds of acquisition or combination transactions. These announcements may create volatility in the trading volume and price of our common stock, in particular when there is not significant publicly available information about the counterparty to such a transaction. Moreover, the failure of the transactions contemplated in these announcements to close could similarly create volatility in the trading volume and price of our common stock. This volatility could ultimately mean that there are fewer buyers or sellers of our common stock at particular times, which creates the risk that you might not be able to sell any common stock of our company that you own at a time or a price that you believe is fair or desirable.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock may be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price may decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
ITEM 2 PROPERTIES
Our executive offices are located at 1907 Wayzata Boulevard, Suite 205, Wayzata, Minnesota 55391, and our telephone number is: (952) 479-1923. We are parties to two operating leases for office space expiring April 2, 2023. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses; and they do not contain contingent-rent provisions. The leases do not include options to renew. We consider our current office space adequate for our current operations.
ITEM 3 LEGAL PROCEEDINGS
There is no material litigation, arbitration or governmental proceeding currently pending against us or any members of our management team in their capacity as such.
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PART II
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed for trading on the Nasdaq under the symbol “MCVT”. The transfer agent and registrar for our common stock is Pacific Stock Transfer Company, 6725 Via Austi Parkway, Suite 300, Las Vegas, NV 89119. The following table sets forth the high and low bid prices for our common stock as reported by the OTCQB from January 1, 2021 through August 30, 2022 and as reported on the Nasdaq Capital Market from September 1, 2022 through December 31, 2022. The quotations for prices during our listing on the OTCQB reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions. Trading in our common stock during our listing on the OTCQB was generally infrequent, exemplified by low trading volume and many days during which no trades occurred.
|
| Market Price |
|
| Market Price |
| ||
|
| (High/Low) |
|
| (High/Low) |
| ||
Period |
| 2022 |
|
| 2021 |
| ||
First Quarter |
| $ | 5.00 – 2.00 |
|
| $ | 6.45 – 2.42 |
|
Second Quarter |
| $ | 4.55 - 2.20 |
|
| $ | 6.25 – 3.60 |
|
Third Quarter |
| $ | 4.32 - 1.84 |
|
| $ | 5.50 – 3.50 |
|
Fourth Quarter |
| $ | 2.73 - 1.81 |
|
| $ | 4.15 – 2.66 |
|
Holders
As of the date of this filing, we had approximately 253 holders of record of our common stock.
Dividends
On September 17, 2021, our Board of Directors declared a cash dividend of $0.10 per share to our shareholders of record as of October 15, 2021. The dividend was paid on October 29, 2021. The company does not expect that the Board of Directors will declare any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
|
| Weighted-average exercise price of outstanding options, warrants and rights |
|
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| |||
|
| (a) |
|
| (b) |
|
| (c) |
| |||
Equity compensation plans approved by security holders |
|
| — |
|
|
| — |
|
|
| — |
|
Equity compensation plans not approved by security holders |
|
| 870,000 |
|
| $ | 2.11 |
|
|
| 30,000 |
|
Total |
|
| 870,000 |
|
| $ | 2.11 |
|
|
| 30,000 |
|
The securities reflected in column (a) above were issued pursuant to the company’s 2022 Stock Incentive Plan. These securities were not approved by security holders as of December 31, 2022; but were subsequently approved by security holders on January 20, 2023. See below “Recent Sales of Unregistered Securities” for further information.
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Recent Sales of Unregistered Securities
In August 2020, the company issued 22,223 shares of restricted stock to executive officers. Under their terms, the shares vested on the one-year anniversary of their issuance and, until such time, were subject to forfeiture. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933. No proceeds were received in connection with the issuance of these restricted shares, as they were issued for compensatory purposes.
In April 2022, the company issued an aggregate of 28,889 shares of restricted stock to directors and executive officers. Under their terms, the shares vest on the one-year anniversary of their issuance and, until such time, remain subject to forfeiture. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933. No proceeds were received in connection with the issuance of these restricted shares, as they were issued for compensatory purposes.
In September 2022, the company issued an aggregate of 25,448 shares of restricted stock to certain directors and executive officers. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933, and were issued for in lieu of cash compensation owing to such individuals.
In September 2022, the company issued an aggregate of 6,667 shares of restricted stock to certain employees of the company. Under their terms, the shares vest on the three-year anniversary of their issuance and, until such time, are subject to forfeiture. These shares were issued in a private offering exempt from registration under Section 4(a)(2) the Securities Act of 1933. No proceeds were received in connection with the issuance of these restricted shares, as they were issued for compensatory purposes.
In November and December 2022, the company issued options for the purchase of an aggregate of 870,000 shares of common stock to officers, directors and employees of, and consultants to, the company contemporaneously with the adoption of a 2022 Stock Incentive Plan. These option grants were made subject to subsequent shareholder approval of the 2022 Stock Incentive Plan in accordance with Nasdaq rules. The options were granted pursuant to Section 4(a)(2) of the Securities Act of 1933 and other applicable exemptions. The shareholders of the company subsequently approved the 2022 Stock Incentive Plan on January 20, 2023 at a special meeting of shareholders called for that purpose.
Recent Purchases of Securities
None.
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below should be read in conjunction with our audited financial statements, and notes thereto, filed together with this Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report may constitute “forward-looking statements” for purposes of federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
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The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the “Risk Factors” section of this report and those summarized below:
| · | our being a company with little operating history; |
| · | our ability to select appropriate specialty finance investment opportunities; |
| · | our expectations around the performance of borrowers in which we invest; |
| · | our success in retaining our officers and directors, or replacing them in the event we lose their services; |
| · | actual and potential conflicts of interest involving our directors or management team; |
| · | our ability to obtain additional financing, if needed and on acceptable terms; |
| · | our ability to source quality prospective borrowers for our specialty finance solutions; |
| · | our ability to consummate transactions due to the uncertainty resulting from the ongoing COVID-19 pandemic and other unpredictable events such as terrorist attacks, natural disasters or other significant outbreaks of infectious diseases; |
| · | the dependence of our success on the general economy and its impact on the industries in which we invest; |
| · | the ability of our portfolio companies to achieve their objectives; |
| · | our regulatory structure and tax treatment; |
| · | the adequacy of our cash resources and working capital; |
| · | the timing of cash flows, if any, we receive from our investments; |
| · | our overall financial performance and financial condition following this offering; |
| · | our public securities’ potential liquidity and trading price; |
| · | the lack of a market for our securities; and |
| · | the other risks and uncertainties discussed in “Risk Factors” and elsewhere in this report. |
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Results of Operations
|
| For the Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Investment Income: |
|
|
|
|
|
| ||
Interest Income |
| $ | 4,199,453 |
|
| $ | 2,656,201 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
General Operating Expenses |
|
| 140,993 |
|
|
| 107,203 |
|
Legal and Accounting Expenses |
|
| 1,592,218 |
|
|
| 453,440 |
|
Executive Management Compensation |
|
| 541,590 |
|
|
| 556,432 |
|
Insurance Expense |
|
| 111,110 |
|
|
| 108,165 |
|
Director's Fees |
|
| 177,073 |
|
|
| 120,000 |
|
Interest Expense |
|
| 195,893 |
|
|
| 9,511 |
|
|
|
|
|
|
|
|
|
|
Net Investment Gain |
| $ | 1,440,576 |
|
| $ | 1,301,450 |
|
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For the year ended December 31, 2022, we earned $3,397,443 from 31 different short-term loans; and an aggregate of $802,010 in related origination fees.
For the year ended December 31, 2021, we earned $11,480 in interest payments from one equity investment company, an aggregate of $2,099,684 from 26 short-term loans; an additional $25,037 in bank interest on cash balances and note receivable; an aggregate of $467,500 in origination fees relating to our short-term loans; and an additional $52,500 in late fee penalties.
As the table above indicates, we incurred operating expenses aggregating $2,758,877 for the year ended December 31, 2022, and $1,354,751 for the year ended December 31, 2021. A summary of the various components of our operating expenses for these periods is set forth below.
General Operating Expenses. Our general operating expenses were $140,993 for the year ended December 31, 2022 and $107,203 for the year ended December 31, 2021. The increase in the current period is primarily related to fees incurred during 2022 in relation to our line of credit (see Liquidity and Capital Resources below for more information on the “Loan Agreement” comprising our line of credit).
Legal and Accounting Expenses. Our legal and accounting expenses were $1,592,218 for the year ended December 31, 2022 and $453,440 for the year ended December 31, 2021. The increase in the current period is primarily related to legal, consulting and underwriting fees and costs incurred in connection with our public offering and listing on the Nasdaq Capital Market tier of the Nasdaq exchange.
Director’s Fees. Our director’s fees were $177,073 for the year ended December 31, 2022 and $120,000 for the year ended December 31, 2021. The increase is due to a one-time director’s stock bonus in April, 2022.
Interest Expense. Our interest expense was $195,893 for the year ended December 31, 2022 and $9,511 for the year ended December 31, 2021. The increase is due to our use of the line of credit arrangement we entered into in 2022 (see Liquidity and Capital Resources below for more information on the “Loan Agreement” comprising our line of credit).
For the year ended December 31, 2022 our net investment gain was $1,440,576. For the year ended December 31, 2021, our net investment gain was $1,301,450. The increased net investment gain during 2022 was primarily the result of higher interest income earned during 2022 from the short-term specialty finance solutions we provided in the form of short-term promissory notes bearing higher rates of interest and return, including related origination fees.
Financial Condition
For the year ended December 31, 2022, we had an increase in net assets of $4,928,290. This increase in net assets was primarily due to the capital we raised during our August 2022 public offering and an increase in our interest income earned from the short-term loans we provided. Our net assets increased by $1,773,162 for the year ended December 31, 2021, primarily due to the increase in our interest income earned from the short-term loans we provided.
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Liquidity and Capital Resources
Summary cash flow data is as follows:
|
| For the Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash flows used by: |
|
|
|
|
|
| ||
Operating activities |
| $ | (4,888,302 | ) |
| $ | (1,886,094 | ) |
Financing activities |
|
| 4,041,795 |
|
|
| (1,618,337 | ) |
Net decrease in cash |
|
| (846,507 | ) |
|
| (3,504,431 | ) |
Cash, beginning of period |
|
| 1,936,148 |
|
|
| 5,440,579 |
|
Cash, end of period |
| $ | 1,089,641 |
|
| $ | 1,936,148 |
|
On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust. The Loan Agreement provides us with a $5 million revolving line of credit to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrues interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets. The Loan Agreement, together with our cash and cash equivalents, together comprise our sources of liquidity. Management believes that these sources of liquidity, together with cash obtained through maturing investments earlier made, will be sufficient for the Company to fund its operations through the entirety of fiscal 2023. Accordingly, at present we have no definitive plans to obtain other sources of liquidity through borrowing.
On February 11, 2022, we filed a registration statement on Form S-1 seeking to register an offering of five-year common stock warrants that we intended to distribute to our shareholders as a dividend, and up to 2,697,603 shares of our common stock purchasable upon the exercise of those warrants. The warrants were contemplated to be exercisable at a price of $9.00 per share of common stock (adjusted to account for the August 2022 reverse stock split we effected on a 1-for-2.25 ratio). We recently determined to abandon this contemplated offering, and expect to file a withdrawal of this registration statement with the Commission soon after the filing of this report.
Capital Expenditures
We did not have any material commitments for capital expenditures in fiscal 2022 and we do not anticipate any such capital expenditures for fiscal 2023.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, nor are we a party to any contract or other obligation not included on its balance sheet that has, or is reasonably likely to have, a current or future effect on our financial condition.
Critical Accounting Policies
Critical accounting policies are policies that are both most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to investment valuation and interest and dividend income as an investment company.
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Investment Valuation
Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized.
Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by our Board of Directors, based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors and any independent third party valuation expert that may be engaged by management to assist in the valuation of our portfolio investments. Valuation determinations are in all cases made in conformity with the written valuation policies and procedures respecting the valuation of company investments.
Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of investment income and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| F-1 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders’ of Mill City Ventures III, Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Mill City Ventures III, Ltd. (the Company) as of December 31, 2022 and 2021, including the investment schedules and the related statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter – Investment Valuation
As explained in Note 7 to the financial statements, the accompanying financial statements include investments valued at $16,708,432 and $13,662,500 for 2022 and 2021, respectively, whose fair values have been estimated by management in absence of readily determinable fair values. Such estimates are based on financial and other information provided by management in absence of readily determinable fair values. Such estimates are based on financial and other information provided by management of its portfolio companies and pertinent market and industry data. These investments are valued in accordance with FASB ASC 820, “Fair Value Measurement”, which requires the Company to assume that the portfolio investments are sold in a principal market to market participants. The Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to these valuation techniques are observable or unobservable. The investments are valued based on unobservable inputs as of December 31, 2022 and 2021 of $16,708,432 and $13,662,500, respectively. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate significantly over short periods of time. These determinations of fair value could differ materially from the values that would have been utilized had a ready market for these investments existed.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of investments which utilize significant unobservable inputs
Description of the Matter | At December 31, 2022, the balances of the Company’s investments, at fair value, categorized as Level 3 within the fair value hierarchy totaled $16,708,432. The fair value of these investments is determined by management using the valuation techniques and significant unobservable inputs described in Notes 6 and 7 to the financial statements.
Auditing the fair value of the Company’s investments categorized as Level 3 within the fair value hierarchy was complex and involved a high degree of auditor subjectivity due to the estimation uncertainty resulting from the unobservable nature of the inputs used in the valuations and the limited number of comparable market transactions for the same or similar investments. | ||
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| ||
How We Addressed the Matter in Our Audit | We obtained an understanding and evaluated the design of controls over the Company’s valuation process, including management’s assessment of the significant inputs and estimates used in the fair value measurements.
We performed the following procedures, among others, for the Company’s Level 3 investments: | ||
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| · | We evaluated the valuation techniques used by the Company and considered the consistency in application of the valuation techniques to each subject investment and investment class. We also consulted with our valuation department to ascertain that the Company’s valuation method was widely accepted. |
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| · | We involved senior, more experienced audit team members to perform audit procedures. |
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| · | We evaluated the reasonableness of the significant unobservable inputs by comparing the inputs used by the Company to third-party sources, if available, such as market indexes or other market data. |
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| · | We considered other information obtained during the audit that corroborated or contradicted the Company’s inputs or fair value measurements. |
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| · | For investments sold during the year, we compared the transaction price to the Company’s fair value estimate to assess the reasonableness of management’s fair value estimates. |
We have served as the Company’s auditor since 2019
April 17, 2023
| F-3 |
| Table of Contents |
Mill City Ventures III, Ltd.
Balance Sheets
|
| December 31, 2022 |
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| December 31, 2021 |
| ||
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, related party |
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Prepaid expenses |
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Interest and dividend receivables |
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Right-of-use operating 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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Dividend payable |
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Payable for purchase of investments |
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Operating lease liability |
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Deferred interest income |
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Accrued income tax |
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Deferred taxes |
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Total Liabilities |
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Commitments and Contingencies |
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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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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 appreciation (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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| $ |
| ||
Net Asset Value Per Common Share |
| $ |
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| $ |
| ||
The accompanying notes are an integral part of these financial statements.
| F-4 |
| Table of Contents |
Mill City Ventures III, Ltd.
Statements of Operations
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| Year Ended |
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| December 31, 2022 |
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| December 31, 2021 |
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Investment Income |
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Interest income |
| $ |
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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 |
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Realized and Unrealized Gain (Loss) on Investments |
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Net realized gain on investments |
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Net change in unrealized depreciation on investments |
|
| ( | ) |
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| ( | ) |
Net Realized and Unrealized Gain (Loss) on Investments |
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| ( | ) |
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Net Increase in Net Assets Resulting from Operations Before Taxes |
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Provision For Income Taxes |
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Net Increase in Net Assets Resulting from Operations |
| $ |
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| $ |
| ||
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Net Increase in Net Assets Resulting from Operations per share: |
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Basic and diluted |
| $ |
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| $ |
| ||
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Weighted-average number of common shares outstanding - basic and diluted |
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The accompanying notes are an integral part of these financial statements.
| F-5 |
| Table of Contents |
Mill City Ventures III, Ltd.
Statements of Shareholders’ Equity
For the years ended December 31, 2022 and 2021
Year Ended December 31, 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 (Depreciation) in value of Investments |
|
| Total Shareholders' Equity |
| ||||||||
Balance as of December 31, 2021 |
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| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
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| $ |
|
| $ |
| ||||||
Common shares issued in public offering net of underwriting costs and warrants |
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Warramts issued to underwriter |
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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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|
| ( | ) |
|
| ( | ) | |||||
Balance as of December 31, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| |||||
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Year Ended December 31, 2021 |
| 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, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| ||||||
Dividend Declared |
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| ( | ) |
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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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|
|
| — |
|
|
| ( | ) |
|
| ( | ) | ||||
The accompanying notes are an integral part of these financial statements.
| F-6 |
| Table of Contents |
Mill City Ventures III, Ltd.
Statements of Cash Flows
|
| Year Ended |
| |||||
|
| December 31, 2022 |
|
| December 31, 2021 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net increase in net assets resulting from operations |
| $ |
|
| $ |
| ||
Adjustments to reconcile net increase 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 depreciation on investments |
|
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| ||
Net realized gain on investments |
|
| ( | ) |
|
| ( | ) |
Purchases of investments |
|
| ( | ) |
|
| ( | ) |
Proceeds from sales of investments |
|
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| ||
Deferred income taxes |
|
| ( | ) |
|
| ( | ) |
Stock-based compensation to employees and vendors |
|
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| ||
Changes in operating assets and liabilities: |
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Prepaid expenses and other assets |
|
|
|
|
| ( | ) | |
Interest and dividends receivable |
|
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| ( | ) | ||
Receivable for investment sales |
|
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| ||
Payable for investment purchase |
|
| ( | ) |
|
|
| |
Accounts payable and other liabilities |
|
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| ||
Deferred interest income |
|
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| ||
Accrued income taxes |
|
| ( | ) |
|
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| |
Net cash used in operating activities |
|
| ( | ) |
|
| ( | ) |
Cash flows from financing activities: |
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Proceeds from public offering, net of underwriting discounts and offering costs |
|
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| ||
Proceeds from line of credit |
|
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| ||
Repayments on line of credit |
|
| ( | ) |
|
|
| |
Payments for common stock dividend |
|
|
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| ( | ) | |
Net cash provided (used) by financing activities |
|
|
|
|
| ( | ) | |
Net decrease in cash |
|
| ( | ) |
|
| ( | ) |
Cash, beginning of period |
|
|
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| ||
Cash, end of period |
| $ |
|
| $ |
| ||
|
|
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|
|
Supplemental disclosure of cash flow information: |
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|
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|
|
Cash paid for income taxes |
| $ |
|
| $ |
| ||
Cash paid for interest |
| $ |
|
| $ |
| ||
Non-cash financing activities: |
|
|
|
|
|
|
|
|
Common shares issued as consideration for investment |
| $ |
|
| $ |
| ||
The accompanying notes are an integral part of these financial statements.
| F-7 |
| Table of Contents |
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 2022
Investment / Industry |
| Cost |
|
| Fair Value |
|
| Percentage of Net Assets |
| |||
|
|
|
|
|
|
|
|
|
| |||
Short-Term Non-banking Loans |
|
|
|
|
|
|
|
|
| |||
Business Services - 18% secured loans |
|
|
|
|
|
|
|
|
| |||
Liberated Syndication Inc. |
| $ |
|
| $ |
|
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| % | |||
Business Services - 15% secured loans |
|
|
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Mustang Litigation Funding |
|
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| % | |||
Consumer - 15% secured loans |
|
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| % | |||
Intelligent Mapping, LLC |
|
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| % | |||
Financial - 33% secured loans |
|
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Benton Financial, LLC |
|
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| % | |||
Financial - 12% secured loans |
|
|
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|
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| % | |||
Information Technology - 15% convertible note |
|
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| % | |||
Real Estate - 15% secured loans |
|
|
|
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|
|
| % | |||
Real Estate - 12% secured loans |
|
|
|
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Alatus Development Corp |
|
|
|
|
|
|
|
| % | |||
Total Short-Term Non-Banking Loans |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
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|
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|
|
|
|
Preferred Stock |
|
|
|
|
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|
|
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Consumer |
|
|
|
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Wisdom Gaming, Inc |
|
|
|
|
|
|
|
| % | |||
Information Technology |
|
|
|
|
|
|
|
| % | |||
Total Preferred Stock |
|
|
|
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|
|
|
| % | |||
|
|
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Warrants |
|
|
|
|
|
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|
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Healthcare |
|
|
|
|
| — |
|
|
| 0.00 | % | |
|
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|
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Other Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
| % | |||
Financial |
|
|
|
|
|
|
|
| % | |||
Total Other Equity |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
| $ |
|
| $ |
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments and Cash |
| $ |
|
| $ |
|
|
| % | |||
The accompanying notes are an integral part of these financial statements.
| F-8 |
| Table of Contents |
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 2021
Investment / Industry |
| Cost |
|
| Fair Value |
|
| Percentage of Net Assets |
| |||
|
|
|
|
|
|
|
|
|
| |||
Short-Term Non-banking Loans |
|
|
|
|
|
|
|
|
| |||
Consumer - 15% secured loans |
|
|
|
|
|
|
|
|
| |||
AirDog Supplies, Inc. |
| $ |
|
| $ |
|
|
| % | |||
Financial - 52% secured loans |
|
|
|
|
|
|
|
| % | |||
Financial - 12% secured loans |
|
|
|
|
|
|
|
| % | |||
Litigation Financing - 23% secured loans |
|
|
|
|
|
|
|
|
|
|
|
|
The Cross Law Firm, LLC |
|
|
|
|
|
|
|
| % | |||
Real Estate - 15% secured loans |
|
|
|
|
|
|
|
| % | |||
Tailwinds, LLC |
|
|
|
|
|
|
|
| % | |||
Real Estate - 12% secured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Alatus Development, LLC |
|
|
|
|
|
|
|
| % | |||
Total Short-Term Non-Banking Loans |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services |
|
|
|
|
|
|
|
| % | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
| $ |
|
| $ |
|
|
| % | |||
The accompanying notes are an integral part of these financial statements.
| F-9 |
| Table of Contents |
NOTE 1 — ORGANIZATION
In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.
We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. We engage in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio investments” caption below, and “Note 7 – Fair Value of Financial Instruments” below. The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946.
The presentation of certain items in the financial statements for the year ended December 31, 2021, has been changed to conform to the classifications used in 2022. These reclassifications had no effect on shareholders’ equity or net increase in net assets as previously recorded.
Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.
Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by the our Board of Directors based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures.
Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.
Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the relative observability of inputs used in the valuation. The three levels are defined as follows:
| · | Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
|
|
| · | Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets. |
|
|
|
| · | Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances. |
| F-10 |
| Table of Contents |
Our valuation policy and procedures: Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value. For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted. In the case of traded debt securities the prices for which are not readily available, we may value those securities using a discounted cash flows approach, at their weighted-average yield to maturity.
The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors. In general, we value our Level 3 equity investments at cost unless circumstances warrant a different approach. Examples of these circumstances includes a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors). Other facts and circumstances that may serve as an input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional.
When valuing preferred equity investments, we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion.
When valuing warrants, our valuation policy and procedures indicate that value will generally be the difference between the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero.
For non-traded (Level 3) debt instruments with a residual maturity less than or equal to 60 days, we will generally value such instruments based on a discounted cash flows approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. For level 3 non-banking loans with a maturity in excess of 60 days, fair value is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the financial strength of the creditor and changes in interest rates in the high-yield credit markets.
On a quarterly basis, our management provides members of our Board of Directors with recommendations, if any, to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. In such a case, the Board of Directors would then discuss these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.
We made no changes to our valuation policy and procedures during the reporting period.
Income taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for the tax year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income for the period that includes the enactment date.
| F-11 |
| Table of Contents |
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. In the event we were to determine we would not be able to realize our deferred income tax assets, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2019 through 2021, which are the tax years that remain subject to examination by the tax jurisdictions as of December 31, 2022.
Revenue recognition: Realized gains or losses on the sale of investments are calculated using the specific investment method.
Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection.
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal or stated value of the investment on the respective interest- or dividend-payment dates rather than being paid in cash, and generally becomes due at maturity or upon being repurchased by the issuer. PIK interest or dividends is recorded as interest or dividend income, as applicable. If at any point we believe that PIK interest or dividends is not expected be realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment in placed on non-accrual status.
Allocation of net gains and losses: All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned.
Management and service fees: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.
NOTE 3 — NET GAIN PER COMMON SHARE
Basic net gain (loss) per common share is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain per common share follows:
|
| For the Year Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Numerator: Net increase in net assets resulting from operations |
| $ |
|
| $ |
| ||
Denominator: Weighted-average number of common shares outstanding |
|
|
|
|
|
| ||
Basic and diluted net gain per common share |
| $ |
|
| $ |
| ||
| F-12 |
| Table of Contents |
At December 31, 2022 and 2021, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares other than conditional option grants (for an aggregate of
NOTE 4 — LEASES
We are subject to two non-cancelable operating leases for office space expiring April 2, 2023. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew.
Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as of December 31, 2022 and December 31, 2021 was
Rent expense for office facilities for the year ended December 31, 2022 and 2021 was $
The components of our operating leases were as follows for the years ended December 31:
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Operating lease costs |
| $ |
|
| $ |
| ||
Variable lease cost |
|
|
|
|
|
| ||
Short-term lease cost |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
Supplemental balance sheet information consisted of the following at December 31:
Operating Lease |
| 2022 |
|
| 2021 |
| ||
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 December 31:
|
| 2022 |
|
| 2021 |
| ||
2022 |
| $ |
|
| $ |
| ||
2023 |
|
|
|
|
|
| ||
Total lease payments |
|
|
|
|
|
| ||
Less: Present value discount |
|
| ( | ) |
|
| ( | ) |
Present value of lease liabilities |
| $ |
|
| $ |
| ||
Supplemental cash flow information related to leases for the years ended December 31:
|
| 2022 |
|
| 2021 |
| ||
Operating cash outflow from operating leases |
| $ |
|
| $ |
| ||
| F-13 |
| Table of Contents |
NOTE 5—SHAREHOLDERS’ EQUITY
At December 31, 2022 a total of
On August 9, 2022, the Company effected a stock combination (reverse stock split) of its
On August 11, 2022, the Company completed its public offer and sale of
In connection with the public offering, the Company issued a five-year warrant to the underwriter. The warrant allows the underwriter to purchase up to
During 2022, there were
NOTE 6 — INVESTMENTS
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2022 (together with the corresponding percentage of total portfolio investments):
|
| As of December 31, 2022 |
| |||||||||||||
|
| Investments at Amortized Cost |
|
| Percentage of Amortized Cost |
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term Non-banking Loans |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
| |
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
|
| 100.0 | % |
| $ |
|
|
| 100.0 | % | ||
The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2021 (together with the corresponding percentage of total portfolio investments):
|
| As of December 31, 2021 |
| |||||||||||||
|
| Investments at Amortized Cost |
|
| Percentage of Amortized Cost |
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||||
|
|
|
|
|
|
| ||||||||||
Short-term Non-banking Loans |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
| |
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
|
| 100.0 | % |
| $ |
|
|
| 100.0 | % | ||
| F-14 |
| Table of Contents |
The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2022:
|
| As of December 31, 2022 |
| |||||
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||
|
|
|
|
| ||||
Business Services |
| $ |
|
|
| % | ||
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, 2021:
|
| As of December 31, 2021 |
| |||||
|
| Investments at Fair Value |
|
| Percentage of Fair Value |
| ||
|
|
|
|
| ||||
Consumer |
| $ |
|
|
| % | ||
Financial |
|
|
|
|
|
| ||
Information Technology |
|
|
|
|
|
| ||
Real Estate |
|
|
|
|
|
| ||
Total |
| $ |
|
|
| % | ||
NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS
Level 3 valuation information: Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investment portfolio as of December 31, 2022 and 2021 may differ materially from values that would have been used had a readily available market for the securities existed.
The following table presents the fair value measurements of our portfolio investments by major class, as 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 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| F-15 |
| Table of Contents |
The following table presents the fair value measurements of our portfolio investments by major class, as of December 31, 2021, according to the fair value hierarchy:
|
| As of December 31, 2021 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
|
|
|
|
|
|
| ||||||||||
Short-term Non-banking Loans |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
| ||||
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 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 is $
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2021:
|
| For the year ended December 31, 2021 |
|
|
|
| ||||||||||||||
|
| ST Non-banking Loans |
|
| Preferred Stock |
|
| Common Stock |
|
| Warrants |
|
| Other Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance as of January 1, 2021 |
| $ |
|
| $ |
|
| $ | — |
|
| $ | — |
|
| $ |
| |||
Net change in unrealized appreciation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Purchases and other adjustments to cost |
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
|
| |||
Sales and redemptions |
|
| ( | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| ( | ) |
Balance as of December 31, 2021 |
| $ |
|
| $ |
|
| $ | — |
|
| $ | — |
|
| $ |
| |||
The net change in unrealized appreciation for the year ended December 31, 2021 attributable to Level 3 portfolio investments still held as of December 31, 2021 is $
| F-16 |
| Table of Contents |
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 |
|
| ||
|
| $ |
|
|
|
|
|
|
| ||
The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2021:
Security Type |
| 12/31/21 FMV |
|
| Valuation Technique |
| Unobservable Inputs |
| Range | ||
ST Non-banking Loans |
| $ |
|
| discounted cash flow |
| determining private company credit rating |
| % | ||
Other Equity |
|
|
|
| last secured funding known by company |
| economic changes since last funding |
|
| ||
Preferred Stock |
|
|
|
| last funding secured by company |
| economic changes since last funding |
|
| ||
|
| $ |
|
|
|
|
|
|
| ||
There were no transfers between levels during the years ended December 31, 2022 and 2021.
NOTE 8 – 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 June 30, 2022, the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash.
At December 31, 2022, the balance outstanding on the line was $
NOTE 9 – RELATED-PARTY TRANSACTIONS
We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with 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 $ |
| F-17 |
| Table of Contents |
NOTE 10 — RETIREMENT SAVINGS PLANS
Our three full-time employees are eligible to participate in a qualified defined contribution 401(k) plan whereby they may elect to have a specified portion of their salary contributed to the plan. We will make a safe harbor match equal to 100% of their elective deferrals up to a maximum of 5% of eligible earnings in addition to our option to make discretionary contributions to the plan. We made aggregate contributions to the plan totaling $
NOTE 11 — INCOME TAXES
Presently, we are a “C-corporation” for tax purposes and have booked an income tax provision for the years ended December 31, 2022 and 2021. Income taxes as of December 31, 2022, and 2021 are described below.
|
| December 31 |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Current taxes |
|
|
|
|
|
| ||
Federal |
| $ |
|
| $ |
| ||
State |
|
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|
|
| ||
Deferred taxes |
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|
|
|
|
|
Federal |
|
| ( | ) |
|
| ( | ) |
State |
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|
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| ||
Provision for income taxes |
| $ |
|
| $ |
| ||
A reconciliation of income tax provisions at the U.S. statutory rate for fiscal year 2022 and 2021 is as follows:
|
| 2022 |
|
| 2021 |
| ||
Rate reconciliation: |
|
|
|
|
|
| ||
Tax expense at U.S. statutory rate |
| $ |
|
| $ |
| ||
Change in deferred tax rate |
|
|
|
| ( | ) | ||
Provision-to-return reconciliation |
|
| ( | ) |
|
| ( | ) |
Other |
|
|
|
|
| ( | ) | |
Income tax provision |
| $ |
|
| $ |
| ||
| F-18 |
| Table of Contents |
As of December 31, 2022 and 2021 we had a deferred tax asset of $
|
| December 31 |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Deferred tax components |
|
|
|
|
|
| ||
Unrealized (gain) loss on marketable securities |
| $ |
|
| $ | ( | ) | |
Depreciation |
|
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|
|
| ||
R&D and foreign credits |
|
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|
|
| ||
Lease liability |
|
| ( | ) |
|
|
| |
Other |
|
| ( | ) |
|
| ( | ) |
Net deferred tax asset (liability) |
| $ |
|
| $ | ( | ) | |
NOTE 12 — FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the years ended December 31, 2022 through 2018:
|
| Year Ended December 31, |
| |||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
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| 2019 |
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| 2018 |
| |||||
Per Share Data (1) |
|
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| |||||
Net asset value at beginning of period |
| $ |
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| |||||
Net investment gain (loss) |
|
|
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|
| ( | ) |
|
| ( | ) | |||
Net realized and unrealized gains |
|
| ( | ) |
|
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| ||||
Provision for income taxes |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
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|
| ||
Stock-based compensation |
|
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| ( | ) |
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| ||||
Repurchase of common stock |
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Other changes in equity |
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| |||||
Payment of common stock dividend |
|
|
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|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
| ||
Net asset value at end of period |
| $ |
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Ratio / Supplemental Data |
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Per share market value of investments at end of period |
| $ |
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| |||||
Shares outstanding at end of period |
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Average weighted shares outstanding for the period |
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| |||||
Net assets at end of period |
| $ |
|
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Average net assets (2) |
| $ |
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| |||||
Total investment return |
|
| % |
|
| % |
|
| % |
|
| ( | )% |
|
| % | ||||
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 weighted-average number of shares outstanding for the period. |
(2) | Based on the monthly average of net assets as of the beginning and end of each period presented. |
(3) | Ratios are annualized. |
NOTE 13 — SUBSEQUENT EVENTS
On January 26, 2022, we made a loan in the principal amount of $
| F-19 |
| Table of Contents |
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
As of December 31, 2022, our Chief Executive Officer and Chief Financial Officer in conjunction with our Chief Compliance Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of December 31, 2022.
Report of Management on Internal Control Over Financial Reporting
Board of Directors and Shareholders Mill City Ventures III, Ltd.:
The management of Mill City Ventures III, Ltd. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, the Company’s management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2022 based on the framework set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022. Boulay PLLP, an independent registered public accounting firm, is not required to issue, and thus has not issued, an attestation report on the Company’s internal control over financial reporting as of December 31, 2022.
Changes in Internal Control
There were no changes in our internal control over financial reporting during the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
/s/ Douglas M. Polinsky
Chairman, President and Chief Executive Officer
/s/ Joseph A. Geraci, II
Chief Financial Officer
| 21 |
| Table of Contents |
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers, Promoters, and Control Persons
Name |
| Age |
| Positions |
Douglas M. Polinsky |
| 63 |
| Chairman, Chief Executive Officer and President |
Joseph A. Geraci, II |
| 53 |
| Director and Chief Financial Officer |
Howard Liszt |
| 77 |
| Director |
Lyle Berman |
| 81 |
| Director |
Laurence Zipkin |
| 83 |
| Director |
Douglas M. Polinsky co-founded the Company in January 2006 and since that time has been the Chairman and Chief Executive Officer of the Company. Since 1994, Mr. Polinsky has been the President of Great North Capital Consultants, Inc., a financial advisory and investment company that he founded. Great North Capital Consultants, Inc. primarily engages in the business of investing in hard money lending with collateral on the loans being first or second mortgages in both residential and commercial properties. In addition, Great North Capital Consultants, Inc. makes direct investments into public and private companies. Since 2015, Mr. Polinsky has been an independent director of Liberated Syndication, Inc., a Nevada corporation with its operations in Pennsylvania. Liberated Syndication, Inc. is a host and publisher of podcasts. Mr. Polinsky is a member of the Audit and Compensation Committees of the Board of Directors of Liberated Syndication. Mr. Polinsky earned a Bachelor of Science degree in hotel administration at the University of Nevada, Las Vegas in 1981.
Joseph A. Geraci, II co-founded the Company in January 2006 and has been a director and the Chief Financial Officer of the
Company since that time. Since February 2002 through the present time, Mr. Geraci has been managing member of Isles Capital, LLC, an advisory and consulting firm that assists small businesses, both public and private, in business development. In March 2005, Mr. Geraci also became the managing member of Mill City Advisors, LLC, the general partner of Mill City Ventures, LP, and Mill City Ventures II, LP, each a Minnesota limited partnership that invested directly into both private and public companies. From January 2005 until August 2005, Mr. Geraci served as the Director of Finance for Gelstat Corporation, a purveyor of homeopathic remedies, based in Bloomington, Minnesota. Mr. Geraci provided investment advice to clients as a stockbroker and Vice President of Oak Ridge Financial Services, Inc., a Minneapolis-based broker-dealer firm, from June 2000 to December 2004. While at Oak Ridge Financial Services, Mr. Geraci’s business was focused on structuring and negotiating debt and equity private placements with both private and publicly held companies. Mr. Geraci was employed at other Minneapolis brokerage firms from July 1991 to June 2000. From his career and investment experiences, Mr. Geraci has established networks of colleagues, clients, co-investors, and the officers and directors of public and private companies. These networks offer a range of contacts across a number of sectors and companies that may provide opportunities for investment, including many that meet the Company’s screening criteria.
In August 2003, the National Association of Securities Dealers (NASD) found in an administrative hearing that Mr. Geraci, while employed by and affiliated with a NASD member, had violated NASD Conduct Rule 2110 and SEC Rule 10b-5 in August 1999, and barred him from associating with any NASD member in the future.
Howard Liszt served as Chief Executive Officer of Campbell Mithun, a national marketing communications agency he joined in 1976, until 2001. Under his leadership, Campbell Mithun grew to be one of the 20 largest agencies in the world. He currently serves on the board of : Eggland’s Best. Mr. Liszt has served as a Board member for several industry-leading companies including Land O' Lakes, ShuffleMaster, Ocular Sciences, and Coleman Natural Foods. Mr. Liszt holds a Bachelor of Arts in Journalism and Marketing and a Masters of Science in Marketing from the University of Minnesota, Minneapolis.
| 22 |
| Table of Contents |
Lyle Berman is a 1964 graduate of the University of Minnesota with a degree in Business Administration. Mr. Berman began his career with Berman Buckskin, his family's leather business. He helped grow the business into a major specialty retailer with 27 outlets. In 1990, Mr. Berman participated in the founding of Grand Casinos, Inc. Mr. Berman is credited as one of the early visionaries in the development of casinos outside of the traditional gaming markets of Las Vegas and Atlantic City. In less than five years, the company opened eight casino resorts in four states. In 1994, Mr. Berman financed the initial development of Rainforest Cafe. He served as the Chairman and CEO from 1994 until 2000. In October 1995, Mr. Berman was honored with the B'nai B'rith "Great American Traditions Award." In April 1996, he received the Gaming Executive of the Year Award; in 2004, Mr. Berman was inducted into the Poker Hall of Fame; and in 2009, he received the Casino Lifetime Achievement Award from Raving Consulting & Casino Journal. In 1998, Lakes Entertainment, Inc. was formed. In 2002, as Chairman of the Board and CEO of Lakes Entertainment, Inc., Mr. Berman was instrumental in creating the World Poker Tour. Since January 2005, Mr. Berman has also served as Chairman of the Board of Pokertek, Inc.
Laurence Zipkin is nationally recognized for his expertise in the gaming industry, restaurants, and emerging small growth companies. From 1996 to 2006, Mr. Zipkin owned Oakridge Securities, Inc. where, as an investment banker, he successfully raised capital for various early growth-stage companies and advising clients with regard to private placements, initial public offerings, mergers, debt offerings, bridge and bank financings, developing business plans and evaluating cash needs and resources. He has extensive experience in the merger and acquisition field and has represented companies on both the buy and sell side. Since 2006, Mr. Zipkin has been self-employed, engaging in various consulting activities, owning and operating two restaurant properties, and purchasing distressed real estate. Mr. Zipkin is a licensed insurance agent for both life and health insurance. Mr. Zipkin attended the University of Pennsylvania Wharton School of Finance.
Under the Company’s bylaws, the directors serve for indefinite terms expiring upon the next annual meeting of the Company’s shareholders.
When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the
Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director. With regard to Messrs. Polinsky and Geraci, the Board of Directors considered their significant experience, expertise and background with regard to investing in general and the Company in particular. With regard to Mr. Berman, the Board of Directors considered his background and experience with the public securities markets and his former employment and experience in operational capacities. With regard to Mr. Liszt, the Board of Directors considered his experience on other boards of public companies, his past experience in the communications and advertising fields, and his organizational experience. With regard to Mr. Zipkin, the Board of Directors considered his knowledge, experience and skills in the finance, public securities and investment banking fields.
Code of Ethics
Our Board of Directors adopted a Code of Ethics on August 5, 2008, and revised March 6, 2013 in connection with the Company’s election to become a BDC. The Code of Ethics includes our Company’s principal executive officer and principal financial officer, or persons performing similar functions, as required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. The Company formally revised the Code of Ethics again in March 2021, to reflect the Company’s withdrawal of its BDC election. Our Code of Ethics is available at our website, www.millcityventures3.com, or without charge, to any shareholder upon written request made to Mill City Ventures III, Ltd., Attention: Chief Executive Officer, 1907 Wayzata Blvd., Suite 205, Wayzata, MN 55391.
Changes to Board of Director Nomination Procedures
In March 2021, the Board of Directors formally created a Nominating and Governance Committee and adopted and associated charter. The charter alters the manner in which candidates for service as directors will be nominated for election or re-election and delegates that authority to the committee in lieu of the entire Board of Directors.
Communication with Board Members
Our Board of Directors has provided the following process for shareholders and interested parties to send communications to our board and/or individual directors. All communications should be addressed to Mill City Ventures III, Ltd., 1907 Wayzata Boulevard, Ste. 205, Wayzata, MN 55391, Attention: Chief Executive Officer. Communications to individual directors may also be made to such director at our company’s address. All communications sent to any individual director will be received directly by such individuals and will not be screened or reviewed by any company personnel. Any communications sent to the board in the care of the Chief Executive Officer will be reviewed by that officer to ensure that such communications relate to the business of the Company before being reviewed by the board.
| 23 |
| Table of Contents |
Committees of the Board of Directors; Audit Committee Financial Expert
The Board of Directors has an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee. The members of the Audit Committee are Laurence Zipkin, Howard Liszt and Lyle Berman., each of whom is independent for purposes of the Securities Exchange Act of 1934. Mr. Berman currently serves as chair of the Audit Committee. The board has adopted a charter for the Audit Committee a copy of which is available at the Company’s website at www.millcityventures3.com. The Audit Committee is responsible for approving the Company’s independent accountants and recommending them to the board (including a majority of the independent directors) for approval and submission to the shareholders for ratification, if any, reviewing with its independent accountants the plans and results of the audit engagement, approving professional services provided by its independent accountants, reviewing the independence of its independent accountants and reviewing the adequacy of its internal accounting controls. The Audit Committee is also responsible for discussing with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company's risk assessment and risk management policies. The board has determined that Mr. Berman is an “audit committee financial expert” within the meaning of the rules of the Commission. Mr. Berman’s relevant experience is detailed in his biography above. The Board of Directors has determined that each of the Audit Committee members is able to read and understand fundamental financial statements and that at least one member of the Audit Committee has past employment experience in finance or accounting.
The members of the Compensation Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934. Mr. Liszt currently serves as chair of the Compensation Committee. The compensation committee is responsible for approving the Company’s compensation arrangements with its executive management, including bonus-related decisions and employment agreements with respect to such individuals. The board has adopted a charter for the Compensation Committee, a copy of which is available at www.millcityventures3.com.
The members of the Nominating and Corporate Governance Committee are Messrs. Zipkin, Liszt and Berman, each of whom is independent for purposes of the Securities Exchange Act of 1934. Mr. Liszt currently serves as chair of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance committee is responsible for advising the Board on a broad range of issues surrounding the composition and operation of the Board of Directors and its committees, specifically including identifying criteria for suitable board candidates, identifying individuals suited to service on the board (consistent with those criteria), recommending director candidates to the board and to the shareholders, conducting annual reviews of corporate governance matters and making related recommendations to the Board of Directors and its committees. The board has adopted a charter for the Nominating and Corporate Governance Committee, a copy of which is available at www.millcityventures3.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the SEC certain reports regarding their ownership of common stock or any changes in such ownership. Based on our own review, we believe that there were no late filings during 2022 other than: Form 4s filed by directors and officers on May 19 and 20, 2022, reporting Compensation Committee- and board-approved stock grants made on April 11, 2022; a Form 4 filed by Mr. Polinsky on August 22, 2022, reporting open-market purchases of common stock on August 18 and 19, 2022.
| 24 |
| Table of Contents |
ITEM 11 EXECUTIVE AND DIRECTOR COMPENSATION
Executive Compensation — Summary Compensation Table
The following table sets forth the total compensation paid by the Company during its two most recent fiscal years ended December 31, 2022 and 2021 to those persons who served as the Company’s President or Chief Executive Officer and Chief Financial Officer during such periods (collectively, the “named executives”).
Name and Principal Position |
| Year |
| Salary |
|
| Cash Bonus |
|
| Stock Awards |
|
| Option Awards (1) |
|
| All Other Compensation |
|
| Total |
| ||||||
Douglas M. Polinsky, |
| 2022 |
| $ | 100,000 |
|
| $ | 50,000 |
|
| $ | 12,683 |
|
| $ | 530,000 |
|
| $ | 35,045 |
|
| $ | 727,728 |
|
Chief Executive Officer |
| 2021 |
| $ | 100,000 |
|
| $ | 100,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 34,984 |
|
| $ | 234,984 |
|
Joseph A. Geraci, II, |
| 2022 |
| $ | 150,000 |
|
| $ | 50,000 |
|
| $ | 12,683 |
|
| $ | 530,000 |
|
| $ | 44,042 |
|
| $ | 786,725 |
|
Chief Executive Officer |
| 2021 |
| $ | 150,000 |
|
| $ | 100,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 41,197 |
|
| $ | 291,197 |
|
*includes additional compensation of payment of health insurance premiums and 401(k) matching contributions under the employment retirement program.
On February 20, 2023, we entered into new executive employment agreements with Mr. Douglas M. Polinsky, our Chief Executive Officer, and Mr. Joseph A. Geraci, II, our Chief Financial Officer. Those two executives have been executive officers of our company since its founding.
Each employment agreement was effective as of January 1, 2023, and has a term that lasts for two full years thereafter, ending on December 31, 2024 (subject to extension by mutual agreement of the parties). Each employment agreement provides the executive with a base annual salary of $200,000. Each executive is also entitled to have health insurance provided by us and the ability to contribute to our 401(k) plan.
Each employment agreement contains two-year non-competition and non-solicitation covenants, as well as a customary covenants relating to the confidentiality of our company information. In the event that an executive is terminated for cause, as defined in the employment agreements, or in the event that an executive’s services are terminated due to death or disability, the terminated executive will be entitled to receive only his base annual salary through the date of termination. In the event of other non-cause terminations, we will be obligated to pay the terminated executive’s base annual salary through the remainder of the employment term.
Outstanding Equity Awards at Fiscal Year End
At December 31, 2022, we had issued to our named executive, and there were outstanding, an aggregate of 500,000 non-statutory ten-year stock options to purchase common stock at the purchase price of $2.12 per share, under our 2022 Stock Incentive Plan. These stock options and the plan itself were, at that time, subject to the approval of our shareholders. Subsequently, our shareholders did approve the plan on January 20, 2023, at a special shareholder meeting called for that purpose.
Director Compensation
For 2022, we paid a total of $177,072 in director fees to our independent directors. Presently, each such director receives an annualized cash fee of $40,000, generally paid in quarterly installments.
| 25 |
| Table of Contents |
Name |
| Year |
| Option Awards (1) |
|
| Compensation |
|
| Bonus |
|
| Total |
| ||||
Joseph A. Geraci, II |
| 2022 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Douglas M. Polinsky |
| 2022 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Lyle Berman |
| 2022 |
| $ | 212,000 |
|
| $ | 40,000 |
|
| $ | 19,024 |
|
| $ | 59,024 |
|
Howard P. Liszt |
| 2022 |
| $ | 212,000 |
|
| $ | 40,000 |
|
| $ | 19,024 |
|
| $ | 59,024 |
|
Laurence S. Zipkin |
| 2022 |
| $ | 212,000 |
|
| $ | 40,000 |
|
| $ | 19,024 |
|
| $ | 59,024 |
|
(1) Amount represents the grant date fair value in accordance with FASB ASC Topic 718.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table sets forth certain information, as of the date of this report, with respect to any person (including any “group,” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who is known to us to be the beneficial owner of more than 5% of any class of our voting securities, and as to those shares of our equity securities beneficially owned by each of our directors and executive officers and all of our directors and executive officers as a group. As of the date of this report, we had 6,185,255 shares of common stock outstanding.
Unless otherwise indicated in the table or its footnotes, the business address of each of the following persons or entities is 1907 Wayzata Blvd., Suite 205, Wayzata, Minnesota 55391, and each such person or entity has sole voting and investment power with respect to the shares of common stock set forth opposite their respective name.
|
| Number of Shares Beneficially Owned (1) |
|
| Percentage of Outstanding Shares (1) |
| ||
Douglas M. Polinsky (2) |
|
| 676,981 |
|
|
| 10.52 | % |
Joseph A. Geraci, II (3) |
|
| 712,518 |
|
|
| 11.07 | % |
Howard Liszt (4) |
|
| 125,434 |
|
|
| 2.00 | % |
Lyle Berman (5) |
|
| 315,556 |
|
|
| 5.02 | % |
Laurence Zipkin (6) |
|
| 156,761 |
|
|
| 2.49 | % |
Neal Linnihan SEP/IRA (8) |
|
| 1,088,036 |
|
|
| 17.59 | % |
Scott and Elizabeth Zbikowski (9) |
|
| 768,445 |
|
|
| 12.42 | % |
David Bester (10) |
|
| 444,445 |
|
|
| 7.19 | % |
Patrick Kinney (11) |
|
| 418,794 |
|
|
| 6.77 | % |
All current directors and executive officers as a group (7) (five persons) |
|
| 1,858,335 |
|
|
| 26.60 | % |
| 26 |
| Table of Contents |
(1) | The number of shares of common stock beneficially owned by each person is determined under the rules of the Commission and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which such person has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after the date hereof, through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. |
|
|
(2) | Mr. Polinsky is our Chairman and Chief Executive Officer. Figure includes 128,915 shares of common stock held by Lantern Advisers, LLC, a Minnesota limited liability company co-owned by Messrs. Polinsky and Geraci; 292,407 shares of common stock held individually and directly by Mr. Polinsky. The reported figure also includes a presently exercisable non-statutory stock option for the purchase of up to 250,000 shares of common stock. |
|
|
(3) | Mr. Geraci is a director our company and our Chief Financial Officer. Figure includes 128,915 shares of common stock held by Lantern Advisers, LLC, a Minnesota limited liability company co-owned by Messrs. Geraci and Polinsky; 325,481 shares of common stock held individually and directly by Mr. Geraci; 7,677 shares of common stock held individually by Mr. Geraci’s spouse, and 445 shares of common stock held by Mr. Geraci’s minor child. The reported figure also includes a presently exercisable non-statutory stock option for the purchase of up to 250,000 shares of common stock. |
|
|
(4) | Mr. Liszt is a director of our Company. The reported figures include a presently exercisable non-statutory stock option for the purchase of up to 100,000 shares of common stock. |
|
|
(5) | Mr. Berman is a director of our Company. The reported figures include a presently exercisable non-statutory stock option for the purchase of up to 100,000 shares of common stock. |
|
|
(6) | Mr. Zipkin is a director of our Company. The reported figures include a presently exercisable non-statutory stock option for the purchase of up to 100,000 shares of common stock. |
|
|
(7) | Consists of Messrs. Polinsky, Geraci, Liszt, Berman and Zipkin. |
|
|
(8) | Based upon a Schedule 13G filed by Mr. Linnihan, and subsequent information obtained by the Company. |
|
|
(9) | Based upon a Schedule 13G filed by Mr. and Mrs. Zbikowski, and subsequent information obtained by the Company. |
|
|
(10) | Based upon a Schedule 13G filed by Mr. Bester, and subsequent information obtained by the Company. |
|
|
(11) | Based upon a Schedule 13G filed by Mr. Kinney (including shares held by Mr. Kinney as a custodian for grandchildren), and subsequent information obtained by the Company. |
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| Table of Contents |
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons and Certain Conflict Disclosures
Our Board of Directors has adopted a policy to require our disclosure of instances in our periodic filings with the SEC. Our related-party transactions requiring disclosure under this policy are as follows:
| · | On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately 534,445 shares of our common stock. In the transaction, we obtained a two-year promissory note in the principal amount of $250,000, which was subsequently amended such that the note presently matures in August 2023. The promissory note bears interest payable monthly at the rate of 10% per annum. The note is secured by the debtors’ pledge to us of 277,778 shares of our common stock. The pledged shares are held in physical custody for us by Millennium Trust Company, as our custodial agent. |
|
|
|
| · | On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our company. Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets. |
|
|
|
|
| As a Lender, Mr. Berman is obligated to furnish only one-half of the aggregate $5 million available under the Loan Agreement. The Loan Agreement has a five-year term ending on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. In the event that a Lender, including Mr. Berman, terminates its lending obligations, the Loan Agreement requires that we repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments. |
|
|
|
|
| The Loan Agreement provides for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. |
Related-Party Transaction Policy
The Board of Directors has adopted a written Conflict of Interest and Related Party Transaction Policy. That policy governs the approval of all related-party transactions, subject only to certain customary exceptions (e.g., compensation, certain charitable donations, transactions made available to all employees generally, etc.). The policy contains a minimum dollar threshold of $5,000.
The entire Board of Directors administers the policy and approves any related-party transactions. In general, after full disclosure of all material facts, review and discussion, the board approves or disapproves related-party transactions by a vote of a majority of the directors who have no direct or indirect interest in such transaction. Procedurally, no director is allowed vote in any approval of a related-party transaction for which he or she is the related party, except that such a director may otherwise participate in a related discussion and shall provide to the board all material information concerning the related-party transaction and the director’s interest therein. If a related-party transaction will be ongoing, the board may establish guidelines for management to follow in its ongoing dealings with the related party.
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| Table of Contents |
Director Independence
The Company currently has five directors, and our Board of Directors has determined that three of our directors—Messrs. Liszt, Berman and Zipkin—qualify as independent directors in accordance with the published listing requirements of the Nasdaq Capital Market. The Nasdaq independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board of Directors has made a subjective determination as to each director that no relationships exist which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the fees for professional audit services provided by (i) Boulay PLLP for the audit of the Company’s annual financial statements for the year ended December 31, 2022 and December 31, 2021, as well as the fees billed for other services rendered by Boulay PLLP during year ended December 31, 2022.
|
|
| 2022 |
|
|
| 2021 |
|
Audit Fees |
| $ | 136,803 |
|
| $ | 89,031 |
|
Audit-Related Fees |
|
| 91,940 |
|
|
| 11,150 |
|
Tax Fees |
|
| — |
|
|
| 18,975 |
|
Total |
| $ | 228,743 |
|
| $ | 119,156 |
|
Audit Fees. The fees identified under this caption were for professional services rendered by Boulay PLLP for the years ended 2022 and 2021 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered accounting firm in connection with statutory and regulatory filings and engagements for the years identified.
Audit-Related Fees. The fees identified under this caption were for assurance and related services that were related to the performance of the audit or review of our financial statements and were not reported under the caption “Audit Fees.” This category may include fees related to the performance of audits and attestation services not required by statute or regulations, and accounting consultations about the application of generally accepted accounting principles to proposed transactions.
Tax Fees. The fees identified under this caption were for tax compliance and corporate tax services. Corporate tax services encompass a variety of permissible services, including technical tax advice related to tax matters; assistance with state and local taxes.
Approval Policy. The Audit Committee of our Board of Directors approves in advance all services provided by our independent registered public accounting firm. All engagements of our independent registered public accounting firm in years ended 2022 and 2021 were pre-approved by the Audit Committee.
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| Table of Contents |
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
Exhibit |
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Number |
| Description |
| ||
| ||
| ||
| ||
| ||
|
_______________
* Filed electronically herewith.
| 30 |
| Table of Contents |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MILL CITY VENTURES III, LTD. |
|
|
|
|
| /s/ Douglas Polinsky |
|
| Douglas Polinsky |
|
| Chief Executive Officer |
|
|
|
|
| Dated: April 17, 2023 |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Douglas M. Polinsky | Chief Executive Officer, President and |
| April 17, 2023 | |
Douglas M. Polinsky | Director (principal executive officer) |
|
| |
|
|
|
| |
/s/ Joseph A. Geraci, II | Chief Financial Officer and Director |
| April 17, 2023 | |
Joseph A. Geraci, II | (principal accounting and financial officer) |
|
| |
|
|
|
| |
/s/ Lyle Berman |
| Director |
| April 17, 2023 |
Lyle Berman |
|
|
|
|
|
|
|
|
|
/s/ Howard Liszt |
| Director |
| April 17, 2023 |
Howard Liszt |
|
|
|
|
|
|
|
|
|
/s/ Laurence Zipkin |
| Director |
| April 17, 2023 |
| 31 |
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (“Agreement”) is made and entered into as of January 1, 2023, between Mill City Ventures III, LTD (the “Company”) and Douglas M. Polinsky, individually (the “Executive”).
RECITALS
WHEREAS, the Company desires to assure itself of the Executive’s employment during the period specified herein to maintain and grow the company’s business ventures and reputation in the industry;
WHEREAS, the Company further desires to ensure that confidential information or information that may give the Company competitive advantages be held in strict confidence. The marketplace in which Company does business is extremely competitive. In addition, the Company regards it to be vital to its interest that its employees, its customers, its venders and its prospective customers, and those of its associated companies, be free from recruitment, inducement and solicitation from Executive (other than in the course of Company business) and that the Company be protected against competition of the Executive;
WHEREAS, the Company and the Executive have been involved in negotiations regarding the creation of an employment relationship between the Company and the Executive;
WHEREAS, the negotiations between the Company and the Executive have been conducted on a good faith, arm’s-length basis by the Compensation Committee of the Company’s Board of Directors and the Executive;
WHEREAS, the Executive is prepared to enter into this Agreement and give the Company the assurance it desires; and
WHEREAS, based upon such negotiations and as a result thereof, the Company and the Executive have determined to enter into an employment relationship and to document the terms thereof.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, the parties agree as follows:
1. Term. The Executive’s employment hereunder shall be effective as of January 1, 2023 (the “Effective Date”) and shall continue for Twenty-Four (24) months (“Term End Date”), unless terminated earlier pursuant to Section 9 of this Agreement, and that on such Term End Date the Agreement may be extended, upon the same terms and conditions, for an additional one (1) year as mutually agreed to by the Parties unless notice, at least sixty (60) days before the Term End date is given by one party to the other. The period during which the Executive is employed by the Company hereunder is hereinafter referred to as the “Employment Term.”
| 1 |
2. Employment. The Company hereby employs the Executive, and the Executive hereby accepts employment and shall serve as a Chief Executive Officer (“CEO”) of Company reporting to the Company Board of Directors. The Executive admits and acknowledges that prior to accepting the offer of employment from the Company, the Executive was advised that the employment involved agreeing to both a Restrictive Covenant agreement and a Confidential Information agreement and that terms of the Restrictive Covenant agreement and Confidential Information agreement were conveyed to and known by the Executive at the time the Executive accepted the Company’s offer of employment. The Executive thus acknowledges that the employment and increase in salary associated with the employment constitutes fair and adequate consideration for the Restrictive Covenant agreement and Confidential Information provisions. In addition, the Executive agrees, during the term hereof, to discharge faithfully, diligently and to the best of the Executive’s ability the responsibilities of a CEO of the Company as set forth in this Agreement or as defined from time to time by the Board of Directors of Company.
a. Duties. During the Employment Term, the Executive shall be responsible for Company operations and those relationships with Company established by the Board of Directors or as other duties and responsibilities established by the Company Board of Directors.
3. Extent of Services. The Executive shall devote a substantial amount of his business work related time and attention associated with his role with Company to the performance of the Executive’s duties hereunder and will not engage in any other business, profession, or occupation for compensation or otherwise which would conflict or interfere with the performance of such duties either directly or indirectly without the prior written consent of Company’s Board of Directors. Notwithstanding the foregoing, the Executive will be permitted to: (a) act or serve as a director, trustee, committee member, or principal of any type of business, civic, or charitable organization as long as such activities are disclosed in writing to the Company President; and (b) purchase or own less than five percent (5%) of the publicly-traded securities of any corporation, provided that such ownership represents a passive investment and that the Executive is not a controlling person of, or a member of a group that controls, such corporation, provided further that the activities described in clauses (a) and (b) do not interfere with the performance of the Executive’s duties and responsibilities to the Company as provided hereunder, including, but not limited to, the obligations set forth in Section 6 and Section 7 of this Agreement.
4. Compensation. The Company shall pay the Executive compensation as set forth on the attached Schedule A (“Salary”) which shall be paid in monthly installments, less withholdings required by state and federal law and other agreed-to withholdings, pursuant to customary payroll practices and applicable wage payment laws, but no less frequently than monthly. The Salary indicated in Schedule A may not be decreased without the Executive’s prior written consent.
| 2 |
5. Employment Benefits. During the term of the Executive’s employment hereunder, the Executive shall be entitled to the following benefits to the extent that the Company offers and continues to offer them:
a. Health and 401K as available and offered by the Company from time to time.
b. As provided for in Company’s operating budget each year, reimbursement for business out-of-pocket expenses reasonably incurred and approved pursuant to Company’s standard business expense approval process, and aligned with the operating budget in the performance of the Executive’s services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by the Executive upon submission of any request for reimbursement, and in a format and manner consistent with the Company’s expense reporting policy.
c. Up to three weeks of paid time off (“PTO”) and other executive level benefits as provided by the Company from time to time, and in addition the following paid holidays: New Years Day, Fourth of July, Thanksgiving Day as well as the day after Thanksgiving, Memorial Day, Labor Day and Christmas. Any of these holidays that land on a Saturday, the paid day off will be the preceding Friday and any such holiday landing on a Sunday, the paid day off will be the following Monday.
6. Restrictive Covenants. For the purpose of this Section 6 only, the definition of the “Company” as identified above is expanded to include the Company and any entity that owns any portion of Company or any company owned by Company. During the term of this Agreement and for a period of two (2) years thereafter, the Executive shall not indirectly or directly, in any capacity, including but not limited to, as an owner, partner, shareholder, director, officer, manager, employee, agent, adviser or consultant, in any business, firm, organizations, partnership, corporation or other entity located anywhere in the United States of America in which the Company does, or has done, business in or identified for expansion into, with the preceding twelve months of Executives employment ending with the Company:
a. directly or indirectly, engage, participate or become involved in the business of litigation funding that the Company is engaged in;
b. directly or indirectly sell, for himself or for, or through another, contract with, solicit, accept business from, provide products or services to or accept employment, or attempt to contract, solicit, accept business, or accept employment with, or from, any Customer of the Company that did business with the Company, or was provided services by the Company, while Executive was employed by the Company or any Customer that had done so with the Company within twelve (12) months of the commencement of Executive’s employment with Company or provide services to or support or aid another in any way that is providing products or services that are the same or similar to those provided by the Company to a customer of the Company that did business with the Company while the Executive was employed by the Company or did business with the Company within twelve (12) months of the commencement of Executive’s employment with Company. The Executive acknowledges and agrees that all customers of the Company are the property and assets of the Company, regardless of whether any customer became a customer of Company through the Executive or not;
| 3 |
c. directly or indirectly induce or attempt to induce any employee of the Company to leave the employ of the Company, or any affiliated company, or any consultant, vendor, or other independent contractor for the Company to change or terminate any relationship between that person or entity and the Company or employee any such employee for themselves or for any other person or company they are associated with directly or indirectly;
d. assign or otherwise transfer, whether or not for consideration, any customer or employee lists, internal memoranda, bills, receipts, confidential information, or any other form of business records or documents, or any tangible materials concerning the Company; or
e. directly or indirectly assist or support, or encourage, or attempt to assist or encourage, any other person or entity in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 6 if such activity were carried out by the Executive, directly or indirectly, or induce any employee of the Company to carry out, directly or indirectly, any such activity.
7. Duty Not To Disclose Confidential Information.
a. Disclosure or Use of Confidential Information. The Executive agrees that the Executive will not use, directly or indirectly, the Company’s Confidential Information for the benefit of any person, entity or organization other than the Company or allow such to occur or disclose such Confidential Information without the written authorization of the Company Board of Directors, either during or after the term of this Agreement, for as long as such information retains the characteristics of Confidential Information as deemed by the Company, or except as expressly permitted by this Agreement or as required by applicable law, subpoena or other legal process. The Executive will be solely responsible for causing the compliance of, and any breach of, the confidentiality obligations set forth in this Agreement by the Executive’s agents or other representatives. In the event that the Executive is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, the Executive will notify the Company promptly of the request or requirement so that the Company may seek an appropriate protective order or waive compliance with the provisions of this Section. If, in the absence of a protective order or a duly given waiver by the Company, the Executive is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt or otherwise be in violation of applicable law, the Executive may disclose such Confidential Information to the tribunal; provided, however, that the Executive will use his reasonable efforts to obtain, at the written request of the Company, an order for filing under seal or other assurance that confidential treatment will be accorded to the Confidential Information required to be disclosed.
| 4 |
b. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under applicable state trade secret law and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Executive waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.
c. Confidential Information Defined. For purposes of this Agreement, the term “Confidential Information” means oral or written knowledge and information not generally known whether presently existing or developed in the future, including trade secrets, about the Company’s methods, processes, technology, intellectual property, expansion, planned expansion, expected markets, market projections, Company projections and revenue, suppliers and venders’ margins, products and services, costs and shipping prices, payment and credit information, customer profiles and analysis, prospect tracking recording, financial information, budget and financial plans, costing, pricing, billing information, tax data, sales and marketing information, business strategies and plans, technical information including software, research, product development information; personnel information such as salaries, phone numbers, titles, benefits, bonuses, employment histories, shareholder information and stock data; and any discoveries, inventions, ideas, methods, products, equipment, developments, improvements or programs including but not limited to information relating to such matters as research and development, inventions, designs, formulas, pricing, margins, suppliers, studies, plans, specifications or components pertaining to or used in connection with any and all, products and services contemplated, under development or developed (in whole or in part) by the Company’s processes, techniques, composition of materials, applications for particular technologies, materials or designs, business relationships and expansions, including projected or anticipated expansions, of the Company (including proposed relationships with suppliers, distributors, licensees and licensors), vendor names, customer lists, management systems, financial data, financial statements and sales and marketing and expansion plans. All information which Executive acquires or becomes acquainted with during employment with Company whether developed by Executive or by others, which the Executive has a reasonable basis to believe to be Confidential Information of the Company or which is treated by the Company as being confidential, will be presumed to be Confidential Information. The term “Confidential Information” does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Executive or his agents or other representatives, or (ii) relates to any business pursuit that the Company has abandoned or that the Board of Directors of the Company has determined to wind down.
d. The Executive expressly undertakes to retain in confidence all confidential and proprietary information including, but not limited to, information identified above provided to the Executive by the Company, the Company’s agents, or customers, or any other information that the Executive may have or may acquire or become acquainted with during the term of his employment with the Company, whether developed by the Executive or with the assistance of others. The Executive further expressly agrees that he or she shall not during the term of his employment or at any time thereafter divulge or furnish or make accessible to anyone or use in any way, other than for benefit of the Company, in the ordinary course of business of the Company, any and all confidential information transmitted to the Executive by the Company, the Company’s agents or clients or any other information the Executive may have or has acquired or become acquainted with, during the term of his or her employment with the Company whether developed by him or her or with the assistance of others.
| 5 |
e. Executive further shall make no attempts nor assist any other parties in attempting to download, transfer, print or otherwise transfer, or print, or copy any of the Company’s confidential information or trade secrets or reverse compile, disassemble, or otherwise reverse engineer the Company’s confidential information or trade secrets provided by the Company or the Company’s clients, nor shall the Executive knowingly permit others to do so.
8. Relief. In agreeing to the restrictive covenant agreement and confidential information provision described in Section 6 and Section 7, respectively, the Executive acknowledges that the Company would not enter into employment with the Executive but for the Restrictive Covenant and Confidential Information provisions and that such provisions and this Agreement are material terms of this Agreement, and further agrees that in the event of a violation of the Restrictive Covenant and Confidential Information provisions set forth herein, such will be deemed a breach of this Agreement and the Company shall be entitled to obtain injunctive or other equitable relief against the Executive including damages if available and ascertainable. In the event that any court of competent jurisdiction determines that the any of the Restrictive Covenant and Confidential Information provisions of this Agreement are determined to be unenforceable for any reason, then such court is hereby authorized by the parties hereto to amend such provision to the extent required for such provision to be enforceable.
9. Termination of Employment. Anything herein contained to the contrary notwithstanding, the Company and the Executive shall have the following rights with respect to termination of the Executive's employment under this Agreement:
a. Death or Disability of Executive. If the Executive dies or becomes disabled during the Employment Period, then the Executive’s employment hereunder shall terminate, in which event any unpaid Salary accrued to the date of the Executive’s death or disability shall be paid to the Executive’s legal representative. The Company shall have no further obligation to the Executive or his legal representative under this Agreement except for the Executive’s obligations under the restrictive covenant agreement of Section 6, the confidentiality provisions of Section 7, and the provisions of Section 11, each of which shall survive this Agreement in such event.
| 6 |
i. For purposes of this Agreement, “Disability” shall mean a physical or mental impairment of Executive that prohibits or would prohibit Executive, with or without reasonable accommodation, from performing the material duties of his employment under this Agreement for more than ninety (90) days in the aggregate during any 12-month period, excluding absences resulting from ordinary transitory illnesses or injury or vacation or holidays; provided however, in the event that the Company temporarily replaces the Executive, or transfers the Executive’s duties or responsibilities to another individual on account of the Executive’s inability to perform such duties due to a mental or physical incapacity which is, or is reasonably expected to become, a Disability, then the Executive’s employment shall not be deemed terminated by the Company. Any question as to the existence of the Executive’s Disability as to which the Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to the Executive and the Company. If the Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and the Executive shall be final and conclusive for all purposes of this Agreement.
b. Termination by the Company for Due Cause. The Company may terminate the Executive’s employment immediately under this Agreement for Due Cause as defined in Section 9(c). If the Company terminates the Executive’s employment for Due Cause, then in such case the Executive shall be entitled to payment of his accrued and unpaid Salary under Section 4 to the date of such termination and neither the Company nor the Executive shall have any further obligation to the other under this Agreement, except for the restrictive covenants in Section 6, the confidentiality provisions in Section 7, the and the provisions of Section 11, each of which shall survive this Agreement in such event.
c. Definition of Due Cause. As used in this Agreement, the term “Due Cause” shall mean: (a) the continued failure by the Executive to perform or substantially perform the Executive’s duties hereunder or to comply with Company policies, other than by reason of Disability as determined by Company; (b) the Executive’s failure to comply with any valid and legal directive of Company’s Board of Directors; (c) the knowing engagement by the Executive in conduct injurious to the Company or its reputation, (d) the Executive’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes at a minimum a misdemeanor involving moral turpitude; (e) the Executive’s habitual alcohol or controlled substance abuse; (f) the Executive’s embezzlement, misappropriation, or fraud, whether or not related to the Executive’s employment with the Company; (g) the Executive’s material breach of any material obligation under this Agreement; (h) any material failure by the Executive to comply with the Company’s written policies or rules, as they may be in effect from time to time during the Employment Term, after written warning thereof provided by the Company’s Board of Directors; or (i) violation by the Executive of the terms of the restrictive covenant agreement of Section 6 or the confidentiality provisions of Section 7. In the event of any act or event which the Company believes constitutes Due Cause under this Section, the Executive shall be given written notice by the Company that it intends to terminate the Executive’s employment for Due Cause, which written notice shall specify the act or event upon the basis of which the Company intends so to terminate the Executive’s employment, and the Executive shall thereupon have ten days to cure any acts or omissions constituting Due Cause (but only under clauses b, g, h, or i above, and then only to the extent any such acts or omissions are capable of cure).
| 7 |
d. Mutual Agreement. Executive and Company can mutually agree in writing to the termination of this Agreement and Executives employment, in which event any unpaid Salary accrued to the date of Executive last day of employment, along with any amounts still owed and payable pursuant to such mutual agreement, shall be paid to Executive and the Company shall have no further obligation to the Executive or his or her legal representative under this Agreement except for Executive’s obligations under the restrictive covenants agreement of Section 6, the confidentiality provisions of Section 7 and the provisions of Section 11, each of which shall survive this Agreement in such event.
10. Entire Agreement; Modification; Waiver. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. There are no warranties, representations or agreements among the parties in connection with the subject matter hereof, except as set forth or referred to herein. No supplement, modification, waiver or termination of this Agreement or any of its provisions shall be binding unless executed in writing by the parties to be bound. No waiver of any of the provisions of this Agreement shall constitute a waiver of any other provision, and no such waiver shall constitute a continuing waiver unless otherwise expressly provided.
11. Cooperation. The parties agree that certain matters in which the Executive will be involved during the Employment Term may necessitate the Executive’s cooperation in the future. Accordingly, following the termination of the Executive’s employment for any reason, to the extent reasonably requested by Company Board of Directors, the Executive shall cooperate with the Company in connection with matters arising out of the Executive’s service to the Company’s business; provided that, the Company shall make reasonable efforts to minimize disruption of the Executive’s other activities. The Company shall reimburse the Executive for reasonable expenses.
12. Proprietary Rights and Work Product. The Executive acknowledges and agrees that all right, title, and interest in and to all writings, works of authorship, technology, inventions, discoveries, processes, techniques, methods, ideas, concepts, research, proposals, materials, and all other work product of any nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived, or reduced to practice by the Executive individually or jointly with others during the period of his employment by the Company and relate in any way to the business or contemplated business, products, activities, research, expansion or development of the Company or result from any work performed by the Executive for the Company (in each case, regardless of when or where prepared or whose equipment or other resources is used in preparing the same), all rights and claims related to the foregoing, and all printed, physical and electronic copies, and other tangible embodiments thereof (collectively, “Work Product”), as well as any and all rights in and to any US and foreign: (a) patents, patent disclosures and inventions (whether patentable or not); (b) trademarks, service marks, trade dress, trade names, logos, corporate names, and domain names, and other similar designations of source or origin, together with the goodwill symbolized by any of the foregoing; (c) copyrights and copyrightable works (including computer programs) and rights in data and databases; (d) trade secrets, know-how, and other confidential information; and (e) all other intellectual property rights, in each case whether registered or unregistered and including all registrations and applications for, and renewals and extensions of, such rights, all improvements thereto and all similar or equivalent rights or forms of protection in any part of the world (collectively, “Intellectual Property Rights”), shall be the sole and exclusive property of the Company.
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13. Contract Formation; Governing Law, Jurisdiction, and Venue. The Parties agree this Agreement was formed in the State of Minnesota. All of the terms, conditions, and other provisions of this Agreement shall be interpreted and governed by reference to the laws of the State of Minnesota, without giving effect to choice of law principles thereof, and any dispute arising herefrom and the remedies available shall be determined in accordance with such laws, and any litigation or other proceeding shall be venued in the Fourth Judicial District Court for the State of Minnesota in Minneapolis, Minnesota. Reasonable attorneys’ fees under the circumstances, costs, and disbursements shall be awarded to the prevailing party in any action brought under this Agreement.
14. Severability. If any provision of this Agreement or the application of such provision to any person or circumstance shall be held invalid, the remainder of this Agreement or the application of such provision to persons or circumstances other than those to which it is held invalid shall not be affected thereby.
15. Indebtedness. If, during the course of the Executive’s employment under this Agreement, the Executive becomes indebted to the Company for any reason, the Executive agrees that it will provide to the Company written permission after the debt arises that provides that the Company may, if it so elects, set off any sum due to the Company from the Executive and collect from the Executive any remaining balance.
16. Counterparts. This Agreement may be executed in any number of counterparts, any one of which shall be deemed to be an original, but all of which shall constitute but one and the same instrument.
17. Not Assignable. This Agreement is not assignable, except that the Company may assign this Agreement to any parent, subsidiary, other affiliated corporation or upon a sale of Company’s to a bonafide buyer.
18. Headings. Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| THE EXECUTIVE |
| THE COMPANY |
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| MILL CITY VENTURES III, LTD |
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| /s/ Douglas M. Polinsky |
| By: | /s/ Howard P. Liszt |
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| Douglas M. Polinsky |
| Its: | Chair of Compensation Committee |
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Schedule A
For the period of January 1, 2023 to December 31, 2024, executive’s personal compensation plan is outlined below:
| · | Your Base gross salary is $200,000.00 per year. |
| · | Bonuses are at the discretion of the Company. |
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EXHIBIT 10.3
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (“Agreement”) is made and entered into as of January 1, 2023, between Mill City Ventures III, LTD (the “Company”) and Jospeh A. Geraci, individually (the “Executive”).
RECITALS
WHEREAS, the Company desires to assure itself of the Executive’s employment during the period specified herein to maintain and grow the company’s business ventures and reputation in the industry;
WHEREAS, the Company further desires to ensure that confidential information or information that may give the Company competitive advantages be held in strict confidence. The marketplace in which Company does business is extremely competitive. In addition, the Company regards it to be vital to its interest that its employees, its customers, its venders and its prospective customers, and those of its associated companies, be free from recruitment, inducement and solicitation from Executive (other than in the course of Company business) and that the Company be protected against competition of the Executive;
WHEREAS, the Company and the Executive have been involved in negotiations regarding the creation of an employment relationship between the Company and the Executive;
WHEREAS, the negotiations between the Company and the Executive have been conducted on a good faith, arm’s-length basis by the Compensation Committee of the Company’s Board of Directors and the Executive;
WHEREAS, the Executive is prepared to enter into this Agreement and give the Company the assurance it desires; and
WHEREAS, based upon such negotiations and as a result thereof, the Company and the Executive have determined to enter into an employment relationship and to document the terms thereof.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, the parties agree as follows:
1. Term. The Executive’s employment hereunder shall be effective as of January 1, 2023 (the “Effective Date”) and shall continue for Twenty-Four (24) months (“Term End Date”), unless terminated earlier pursuant to Section 9 of this Agreement, and that on such Term End Date the Agreement may be extended, upon the same terms and conditions, for an additional one (1) year as mutually agreed to by the Parties unless notice, at least sixty (60) days before the Term End date is given by one party to the other. The period during which the Executive is employed by the Company hereunder is hereinafter referred to as the “Employment Term.”
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2. Employment. The Company hereby employs the Executive, and the Executive hereby accepts employment and shall serve as a Chief Financial Officer (“CFO”) of Company reporting to the Company Board of Directors or the Chief Executive Officer (“CEO”). The Executive admits and acknowledges that prior to accepting the offer of employment from the Company, the Executive was advised that the employment involved agreeing to both a Restrictive Covenant agreement and a Confidential Information agreement and that terms of the Restrictive Covenant agreement and Confidential Information agreement were conveyed to and known by the Executive at the time the Executive accepted the Company’s offer of employment. The Executive thus acknowledges that the employment and increase in salary associated with the employment constitutes fair and adequate consideration for the Restrictive Covenant agreement and Confidential Information provisions. In addition, the Executive agrees, during the term hereof, to discharge faithfully, diligently and to the best of the Executive’s ability the responsibilities of a CFO of the Company as set forth in this Agreement or as defined from time to time by the Board of Directors of Company or the CEO.
a. Duties. During the Employment Term, the Executive shall be responsible for Company operations and those relationships with Company established by the Board of Directors CEO or as other duties and responsibilities established by the Company Board of Directors or the CEO.
3. Extent of Services. The Executive shall devote a substantial amount of his business work related time and attention associated with his role with Company to the performance of the Executive’s duties hereunder and will not engage in any other business, profession, or occupation for compensation or otherwise which would conflict or interfere with the performance of such duties either directly or indirectly without the prior written consent of Company’s Board of Directors. Notwithstanding the foregoing, the Executive will be permitted to: (a) act or serve as a director, trustee, committee member, or principal of any type of business, civic, or charitable organization as long as such activities are disclosed in writing to the Company President; and (b) purchase or own less than five percent (5%) of the publicly-traded securities of any corporation, provided that such ownership represents a passive investment and that the Executive is not a controlling person of, or a member of a group that controls, such corporation, provided further that the activities described in clauses (a) and (b) do not interfere with the performance of the Executive’s duties and responsibilities to the Company as provided hereunder, including, but not limited to, the obligations set forth in Section 6 and Section 7 of this Agreement.
4. Compensation. The Company shall pay the Executive compensation as set forth on the attached Schedule A (“Salary”) which shall be paid in monthly installments, less withholdings required by state and federal law and other agreed-to withholdings, pursuant to customary payroll practices and applicable wage payment laws, but no less frequently than monthly. The Salary indicated in Schedule A may not be decreased without the Executive’s prior written consent.
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5. Employment Benefits. During the term of the Executive’s employment hereunder, the Executive shall be entitled to the following benefits to the extent that the Company offers and continues to offer them:
a. Health and 401K as available and offered by the Company from time to time.
b. As provided for in Company’s operating budget each year, reimbursement for business out-of-pocket expenses reasonably incurred and approved pursuant to Company’s standard business expense approval process, and aligned with the operating budget in the performance of the Executive’s services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by the Executive upon submission of any request for reimbursement, and in a format and manner consistent with the Company’s expense reporting policy.
c. Up to three weeks of paid time off (“PTO”) and other executive level benefits as provided by the Company from time to time, and in addition the following paid holidays: New Years Day, Fourth of July, Thanksgiving Day as well as the day after Thanksgiving, Memorial Day, Labor Day and Christmas. Any of these holidays that land on a Saturday, the paid day off will be the preceding Friday and any such holiday landing on a Sunday, the paid day off will be the following Monday.
6. Restrictive Covenants. For the purpose of this Section 6 only, the definition of the “Company” as identified above is expanded to include the Company and any entity that owns any portion of Company or any company owned by Company. During the term of this Agreement and for a period of two (2) years thereafter, the Executive shall not indirectly or directly, in any capacity, including but not limited to, as an owner, partner, shareholder, director, officer, manager, employee, agent, adviser or consultant, in any business, firm, organizations, partnership, corporation or other entity located anywhere in the United States of America in which the Company does, or has done, business in or identified for expansion into, with the preceding twelve months of Executives employment ending with the Company:
a. directly or indirectly, engage, participate or become involved in the business of litigation funding that the Company is engaged in;
b. directly or indirectly sell, for himself or for, or through another, contract with, solicit, accept business from, provide products or services to or accept employment, or attempt to contract, solicit, accept business, or accept employment with, or from, any Customer of the Company that did business with the Company, or was provided services by the Company, while Executive was employed by the Company or any Customer that had done so with the Company within twelve (12) months of the commencement of Executive’s employment with Company or provide services to or support or aid another in any way that is providing products or services that are the same or similar to those provided by the Company to a customer of the Company that did business with the Company while the Executive was employed by the Company or did business with the Company within twelve (12) months of the commencement of Executive’s employment with Company. The Executive acknowledges and agrees that all customers of the Company are the property and assets of the Company, regardless of whether any customer became a customer of Company through the Executive or not;
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c. directly or indirectly induce or attempt to induce any employee of the Company to leave the employ of the Company, or any affiliated company, or any consultant, vendor, or other independent contractor for the Company to change or terminate any relationship between that person or entity and the Company or employee any such employee for themselves or for any other person or company they are associated with directly or indirectly;
d. assign or otherwise transfer, whether or not for consideration, any customer or employee lists, internal memoranda, bills, receipts, confidential information, or any other form of business records or documents, or any tangible materials concerning the Company; or
e. directly or indirectly assist or support, or encourage, or attempt to assist or encourage, any other person or entity in carrying out, directly or indirectly, any activity that would be prohibited by the above provisions of this Section 6 if such activity were carried out by the Executive, directly or indirectly, or induce any employee of the Company to carry out, directly or indirectly, any such activity.
7. Duty Not To Disclose Confidential Information.
a. Disclosure or Use of Confidential Information. The Executive agrees that the Executive will not use, directly or indirectly, the Company’s Confidential Information for the benefit of any person, entity or organization other than the Company or allow such to occur or disclose such Confidential Information without the written authorization of the Company Board of Directors, either during or after the term of this Agreement, for as long as such information retains the characteristics of Confidential Information as deemed by the Company, or except as expressly permitted by this Agreement or as required by applicable law, subpoena or other legal process. The Executive will be solely responsible for causing the compliance of, and any breach of, the confidentiality obligations set forth in this Agreement by the Executive’s agents or other representatives. In the event that the Executive is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, the Executive will notify the Company promptly of the request or requirement so that the Company may seek an appropriate protective order or waive compliance with the provisions of this Section. If, in the absence of a protective order or a duly given waiver by the Company, the Executive is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt or otherwise be in violation of applicable law, the Executive may disclose such Confidential Information to the tribunal; provided, however, that the Executive will use his reasonable efforts to obtain, at the written request of the Company, an order for filing under seal or other assurance that confidential treatment will be accorded to the Confidential Information required to be disclosed.
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b. Trade Secrets. Any trade secrets of the Company will be entitled to all of the protections and benefits under applicable state trade secret law and any other applicable law. If any information that the Company deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Executive waives any requirement that the Company submit proof of the economic value of any trade secret or post a bond or other security.
c. Confidential Information Defined. For purposes of this Agreement, the term “Confidential Information” means oral or written knowledge and information not generally known whether presently existing or developed in the future, including trade secrets, about the Company’s methods, processes, technology, intellectual property, expansion, planned expansion, expected markets, market projections, Company projections and revenue, suppliers and venders’ margins, products and services, costs and shipping prices, payment and credit information, customer profiles and analysis, prospect tracking recording, financial information, budget and financial plans, costing, pricing, billing information, tax data, sales and marketing information, business strategies and plans, technical information including software, research, product development information; personnel information such as salaries, phone numbers, titles, benefits, bonuses, employment histories, shareholder information and stock data; and any discoveries, inventions, ideas, methods, products, equipment, developments, improvements or programs including but not limited to information relating to such matters as research and development, inventions, designs, formulas, pricing, margins, suppliers, studies, plans, specifications or components pertaining to or used in connection with any and all, products and services contemplated, under development or developed (in whole or in part) by the Company’s processes, techniques, composition of materials, applications for particular technologies, materials or designs, business relationships and expansions, including projected or anticipated expansions, of the Company (including proposed relationships with suppliers, distributors, licensees and licensors), vendor names, customer lists, management systems, financial data, financial statements and sales and marketing and expansion plans. All information which Executive acquires or becomes acquainted with during employment with Company whether developed by Executive or by others, which the Executive has a reasonable basis to believe to be Confidential Information of the Company or which is treated by the Company as being confidential, will be presumed to be Confidential Information. The term “Confidential Information” does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Executive or his agents or other representatives, or (ii) relates to any business pursuit that the Company has abandoned or that the Board of Directors of the Company has determined to wind down.
d. The Executive expressly undertakes to retain in confidence all confidential and proprietary information including, but not limited to, information identified above provided to the Executive by the Company, the Company’s agents, or customers, or any other information that the Executive may have or may acquire or become acquainted with during the term of his employment with the Company, whether developed by the Executive or with the assistance of others. The Executive further expressly agrees that he or she shall not during the term of his employment or at any time thereafter divulge or furnish or make accessible to anyone or use in any way, other than for benefit of the Company, in the ordinary course of business of the Company, any and all confidential information transmitted to the Executive by the Company, the Company’s agents or clients or any other information the Executive may have or has acquired or become acquainted with, during the term of his or her employment with the Company whether developed by him or her or with the assistance of others.
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e. Executive further shall make no attempts nor assist any other parties in attempting to download, transfer, print or otherwise transfer, or print, or copy any of the Company’s confidential information or trade secrets or reverse compile, disassemble, or otherwise reverse engineer the Company’s confidential information or trade secrets provided by the Company or the Company’s clients, nor shall the Executive knowingly permit others to do so.
8. Relief. In agreeing to the restrictive covenant agreement and confidential information provision described in Section 6 and Section 7, respectively, the Executive acknowledges that the Company would not enter into employment with the Executive but for the Restrictive Covenant and Confidential Information provisions and that such provisions and this Agreement are material terms of this Agreement, and further agrees that in the event of a violation of the Restrictive Covenant and Confidential Information provisions set forth herein, such will be deemed a breach of this Agreement and the Company shall be entitled to obtain injunctive or other equitable relief against the Executive including damages if available and ascertainable. In the event that any court of competent jurisdiction determines that the any of the Restrictive Covenant and Confidential Information provisions of this Agreement are determined to be unenforceable for any reason, then such court is hereby authorized by the parties hereto to amend such provision to the extent required for such provision to be enforceable.
9. Termination of Employment. Anything herein contained to the contrary notwithstanding, the Company and the Executive shall have the following rights with respect to termination of the Executive's employment under this Agreement:
a. Death or Disability of Executive. If the Executive dies or becomes disabled during the Employment Period, then the Executive’s employment hereunder shall terminate, in which event any unpaid Salary accrued to the date of the Executive’s death or disability shall be paid to the Executive’s legal representative. The Company shall have no further obligation to the Executive or his legal representative under this Agreement except for the Executive’s obligations under the restrictive covenant agreement of Section 6, the confidentiality provisions of Section 7, and the provisions of Section 11, each of which shall survive this Agreement in such event.
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i. For purposes of this Agreement, “Disability” shall mean a physical or mental impairment of Executive that prohibits or would prohibit Executive, with or without reasonable accommodation, from performing the material duties of his employment under this Agreement for more than ninety (90) days in the aggregate during any 12-month period, excluding absences resulting from ordinary transitory illnesses or injury or vacation or holidays; provided however, in the event that the Company temporarily replaces the Executive, or transfers the Executive’s duties or responsibilities to another individual on account of the Executive’s inability to perform such duties due to a mental or physical incapacity which is, or is reasonably expected to become, a Disability, then the Executive’s employment shall not be deemed terminated by the Company. Any question as to the existence of the Executive’s Disability as to which the Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to the Executive and the Company. If the Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and the Executive shall be final and conclusive for all purposes of this Agreement.
b. Termination by the Company for Due Cause. The Company may terminate the Executive’s employment immediately under this Agreement for Due Cause as defined in Section 9(c). If the Company terminates the Executive’s employment for Due Cause, then in such case the Executive shall be entitled to payment of his accrued and unpaid Salary under Section 4 to the date of such termination and neither the Company nor the Executive shall have any further obligation to the other under this Agreement, except for the restrictive covenants in Section 6, the confidentiality provisions in Section 7, the and the provisions of Section 11, each of which shall survive this Agreement in such event.
c. Definition of Due Cause. As used in this Agreement, the term “Due Cause” shall mean: (a) the continued failure by the Executive to perform or substantially perform the Executive’s duties hereunder or to comply with Company policies, other than by reason of Disability as determined by Company; (b) the Executive’s failure to comply with any valid and legal directive of Company’s Board of Directors; (c) the knowing engagement by the Executive in conduct injurious to the Company or its reputation, (d) the Executive’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes at a minimum a misdemeanor involving moral turpitude; (e) the Executive’s habitual alcohol or controlled substance abuse; (f) the Executive’s embezzlement, misappropriation, or fraud, whether or not related to the Executive’s employment with the Company; (g) the Executive’s material breach of any material obligation under this Agreement; (h) any material failure by the Executive to comply with the Company’s written policies or rules, as they may be in effect from time to time during the Employment Term, after written warning thereof provided by the Company’s Board of Directors; or (i) violation by the Executive of the terms of the restrictive covenant agreement of Section 6 or the confidentiality provisions of Section 7. In the event of any act or event which the Company believes constitutes Due Cause under this Section, the Executive shall be given written notice by the Company that it intends to terminate the Executive’s employment for Due Cause, which written notice shall specify the act or event upon the basis of which the Company intends so to terminate the Executive’s employment, and the Executive shall thereupon have ten days to cure any acts or omissions constituting Due Cause (but only under clauses b, g, h, or i above, and then only to the extent any such acts or omissions are capable of cure).
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d. Mutual Agreement. Executive and Company can mutually agree in writing to the termination of this Agreement and Executives employment, in which event any unpaid Salary accrued to the date of Executive last day of employment, along with any amounts still owed and payable pursuant to such mutual agreement, shall be paid to Executive and the Company shall have no further obligation to the Executive or his or her legal representative under this Agreement except for Executive’s obligations under the restrictive covenants agreement of Section 6, the confidentiality provisions of Section 7 and the provisions of Section 11, each of which shall survive this Agreement in such event.
10. Entire Agreement; Modification; Waiver. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. There are no warranties, representations or agreements among the parties in connection with the subject matter hereof, except as set forth or referred to herein. No supplement, modification, waiver or termination of this Agreement or any of its provisions shall be binding unless executed in writing by the parties to be bound. No waiver of any of the provisions of this Agreement shall constitute a waiver of any other provision, and no such waiver shall constitute a continuing waiver unless otherwise expressly provided.
11. Cooperation. The parties agree that certain matters in which the Executive will be involved during the Employment Term may necessitate the Executive’s cooperation in the future. Accordingly, following the termination of the Executive’s employment for any reason, to the extent reasonably requested by Company Board of Directors, the Executive shall cooperate with the Company in connection with matters arising out of the Executive’s service to the Company’s business; provided that, the Company shall make reasonable efforts to minimize disruption of the Executive’s other activities. The Company shall reimburse the Executive for reasonable expenses.
12. Proprietary Rights and Work Product. The Executive acknowledges and agrees that all right, title, and interest in and to all writings, works of authorship, technology, inventions, discoveries, processes, techniques, methods, ideas, concepts, research, proposals, materials, and all other work product of any nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived, or reduced to practice by the Executive individually or jointly with others during the period of his employment by the Company and relate in any way to the business or contemplated business, products, activities, research, expansion or development of the Company or result from any work performed by the Executive for the Company (in each case, regardless of when or where prepared or whose equipment or other resources is used in preparing the same), all rights and claims related to the foregoing, and all printed, physical and electronic copies, and other tangible embodiments thereof (collectively, “Work Product”), as well as any and all rights in and to any US and foreign: (a) patents, patent disclosures and inventions (whether patentable or not); (b) trademarks, service marks, trade dress, trade names, logos, corporate names, and domain names, and other similar designations of source or origin, together with the goodwill symbolized by any of the foregoing; (c) copyrights and copyrightable works (including computer programs) and rights in data and databases; (d) trade secrets, know-how, and other confidential information; and (e) all other intellectual property rights, in each case whether registered or unregistered and including all registrations and applications for, and renewals and extensions of, such rights, all improvements thereto and all similar or equivalent rights or forms of protection in any part of the world (collectively, “Intellectual Property Rights”), shall be the sole and exclusive property of the Company.
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13. Contract Formation; Governing Law, Jurisdiction, and Venue. The Parties agree this Agreement was formed in the State of Minnesota. All of the terms, conditions, and other provisions of this Agreement shall be interpreted and governed by reference to the laws of the State of Minnesota, without giving effect to choice of law principles thereof, and any dispute arising herefrom and the remedies available shall be determined in accordance with such laws, and any litigation or other proceeding shall be venued in the Fourth Judicial District Court for the State of Minnesota in Minneapolis, Minnesota. Reasonable attorneys’ fees under the circumstances, costs, and disbursements shall be awarded to the prevailing party in any action brought under this Agreement.
14. Severability. If any provision of this Agreement or the application of such provision to any person or circumstance shall be held invalid, the remainder of this Agreement or the application of such provision to persons or circumstances other than those to which it is held invalid shall not be affected thereby.
15. Indebtedness. If, during the course of the Executive’s employment under this Agreement, the Executive becomes indebted to the Company for any reason, the Executive agrees that it will provide to the Company written permission after the debt arises that provides that the Company may, if it so elects, set off any sum due to the Company from the Executive and collect from the Executive any remaining balance.
16. Counterparts. This Agreement may be executed in any number of counterparts, any one of which shall be deemed to be an original, but all of which shall constitute but one and the same instrument.
17. Not Assignable. This Agreement is not assignable, except that the Company may assign this Agreement to any parent, subsidiary, other affiliated corporation or upon a sale of Company’s to a bonafide buyer.
18. Headings. Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
| THE EXECUTIVE |
| THE COMPANY |
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| MILL CITY VENTURES III, LTD |
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| /s/ Joseph A. Geraci, II |
| By: | /s/ Howard P. Liszt |
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| Joseph A. Geraci |
| Its: | Chair of Compensation Committee |
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Schedule A
For the period of January 1, 2023 to December 31, 2024, executive’s personal compensation plan is outlined below:
| · | Your Base gross salary is $200,000.00 per year. |
| · | Bonuses are at the discretion of the Company. |
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EXHIBIT 31.1
CERTIFICATION
I, Douglas Polinsky, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Mill City Ventures III, Ltd.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for registrant and have: |
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| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): | |
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| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
| Dated: April 17,2023 | /s/ Douglas Polinsky |
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| Douglas Polinsky |
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| Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATION
I, Joseph A. Geraci, II, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Mill City Ventures III, Ltd.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for registrant and have: |
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| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): | |
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| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
| Dated: April 17, 2023 | /s/ Joseph A. Geraci, II |
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| Joseph A. Geraci, II |
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| Chief Financial Officer |
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EXHIBIT 32.1
Certification of
Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Mill City Ventures III, Ltd. do hereby certify that, to the best of his knowledge:
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| (a) | the Annual Report on Form 10-K of Mill City Ventures III, Ltd. for the year ended December 31, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (b) | information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Mill City Ventures III, Ltd. |
| April 17, 2023 |
| /s/ Douglas M. Polinsky |
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| Douglas M. Polinsky |
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| Chief Executive Officer |
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| April 17, 2023 |
| /s/ Joseph A. Geraci, II |
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| Joseph A. Geraci, II |
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| Chief Financial Officer |
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