ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Management’s
Discussion and Analysis of Financial Condition and Results of Operations set forth below should be read in conjunction with our
audited financial statements, and notes thereto, filed together with this Form 10-K.
Cautionary
Note Regarding Forward-Looking Statements
Some of
the statements made in this section of our report are forward-looking statements. These forward-looking statements generally relate
to and are based upon our current plans, expectations, assumptions and projections about future events. Our management currently
believes that the various plans, expectations, and assumptions reflected in or suggested by these forward-looking statements are
reasonable. Nevertheless, all forward-looking statements involve risks and uncertainties and our actual actions or future results
may be materially different from the plans, objectives or expectations, or our assumptions and projections underlying our present
plans, objectives and expectations, which are expressed in this report. An example of specific factors that might cause our actual
results to differ from our current expectations include but are not limited to:
• The risks surrounding the new types of financing solutions we provide.
The foregoing list is not exhaustive, and
readers are urged to read carefully and consider the risk factors described elsewhere in this report. In light of the foregoing,
prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove to be inaccurate—even
materially inaccurate. Because of the significant uncertainties inherent in such forward-looking statements, the inclusion of such
information should not be regarded as a representation or warranty by the Company or any other person that our objectives, plans,
expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever.
5
Results of Operations
For the Year Ended December 31,
Investment Income:
Operating Expenses:
For the year ended December 31, 2020, we earned
$44,026 in interest payments from one investment— DBR Enclave US Investors, LLC;— an aggregate of $993,795 from
six promissory note investments; an aggregate of $26,994 in bank interest on cash balances and note receivable; an aggregate
of $217,360 in origination fees; and an aggregate of $15,462 in dividend payments from four
investments—Manning & Napier, Inc., Educational Development Corp., Manhattan Bridge Capital, Inc.;
and Windstream Holdings, Inc.
For the year ended December 31, 2019, we earned
$78,264 in interest payments from one eligible portfolio company— DBR Enclave US Investors, LLC — an additional
$33,925 in bank interest on cash balances and note receivable; an aggregate of $46,293 in dividend payments from five
eligible portfolio companies—Manning & Napier, Inc., Simulations Plus, Inc., Tessco
Technologies, Inc., Educational Development Corp., and Taitron Components, Inc.; and $3,180 in dividends received
from non-eligible portfolio companies.
As the
table above indicates, we incurred operating expenses aggregating $735,790 for the year ended December 31, 2020, and $834,430
for the year ended December 31, 2019. A discussion of the various components of our operating expenses for these periods is
set forth below.
General Operating Expenses. Our
general operating expenses were $83,447 for the year ended December 31, 2020 and $111,757 for the year ended December 31,
2019. The decrease in the current period is primarily related to expenses incurred in 2019 for an off-site board meeting as well
as a decrease in our office lease premiums for the year 2020.
Legal and Accounting Expenses.
Our legal and accounting expenses were $175,612 for the year ended December 31, 2020 and $209,897 for the year ended December 31,
2019. The decrease in the current period is primarily related to costs we incurred during 2019 related to the process of planning
for, seeking, and obtaining authority for, the withdrawal of our BDC election.
Executive Management Compensation.
Our executive management compensation was $301,494 for the year ended December 31, 2020 and $340,003 for the year ended December 31,
2019. The decrease in the current period is primarily related to a one-time bonus payment made during the year 2019.
For the
year ended December 31, 2020 our net investment gain was $561,847. For the year ended December 31, 2019, our net investment
loss was $672,768. The increased net investment gain during 2020 was primarily the result of higher interest income earned during
2020 from the short-term specialty finance solutions we provided in the form of short-term promissory notes bearing higher rates
of interest and return, including related origination fees, than we were able to obtain when operating as a BDC.
6
Financial
Condition
For the
year ended December 31, 2020, we had an increase in net assets of $1,572,354. This increase in net assets was primarily due
to the appreciation of our portfolio holdings. Our net assets decreased by $1,210,356 for the year ended December 31, 2019,
primarily due to our payment of a dividend during 2019.
Liquidity
and Capital Resources
Summary
cash flow data is as follows:
Cash flows provided (used) by:
We are
not a party to any credit facilities or other sources of liquidity, and we have no present plans to become party to any credit
facility. As a result, our $5,440,579 of cash at the end fiscal 2020 and our $8,066,656 of cash at the end of fiscal 2019 constituted
our sole source of liquidity. Management believes cash on hand is sufficient to fund our anticipated operational and financing
activities through fiscal 2021.
Capital
Expenditures
We did
not have any material commitments for capital expenditures in fiscal 2020 and we do not anticipate any such capital expenditures
for fiscal 2021.
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.
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 or, during our time as BDC,
by the Valuation Committee of our Board of Directors, based on, among other things, the input of our executive management,
Audit Committee and independent third party valuation expert that may be engaged by management to assist in the valuation of
our portfolio investments. Valuation determinations are in all cases made in conformity with the written valuation policies
and procedures respecting the valuation of Company investments.
7
Use
of Estimates
Our financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The
application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly
from these estimates.
8
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item Page
Reports of Independent Registered Public Accounting Firm 10
Statements of Cash Flows — Years ended December 31, 2020 December 31, 2019 15
Notes to Financial Statements 18
9
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, 2020 and 2019, 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, 2020 and 2019, 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,
2020 and 2019, 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 $3,367,897 and $834,200 for 2020 and 2019, respectively,
whose fair values have been estimated by the valuation committee and 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, 2020 and 2019 of $3,367,897 and
$834,200, 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.
10
Valuation of investments which utilize
significant unobservable inputs
Boulay PLLP
We have served as the Company’s auditor
since 2019
Minneapolis, Minnesota
March 10, 2021
11
Mill City
Ventures III, Ltd.
Balance
Sheets
ASSETS
Receivable for sale of investments 19,313 —
Interest and dividend receivables 65,911 6,500
Property and equipment, net — 2,071
LIABILITIES
Accrued tax expense 13,722 —
Long-term deferred taxes 258,000 —
Commitments and Contingencies
SHAREHOLDERS EQUITY (NET ASSETS)
Net Asset Value Per Common Share $ 1.08 $ 0.91
The accompanying notes are an integral part
of these financial statements.
12
Mill City
Ventures III, Ltd.
Statements
of Operations
Year Ended
Investment Income
Operating Expenses
Depreciation and amortization 2,071 2,574
Realized and Unrealized Gain (Loss) on Investments
Net Realized and Unrealized Gain (Loss) on Investments 1,940,124 15,782
Provision for Income Taxes 288,401 —
Net Increase (Decrease) in Net Assets Resulting from Operations per share:
Basic and diluted $ 0.20 $ (0.06 )
The accompanying
notes are an integral part of these financial statements.
13
Mill City Ventures III, Ltd.
Statements of Shareholders’ Equity
For
the years ended December 31, 2020 and 2019
Net realized gain on investment transactions — — — — 5,330 — 5,330
Net realized gain on investment transactions — — — — 3,252,620 — 3,252,620
Depreciation in value of investments — — — — — (3,236,838 ) (3,236,838 )
The accompanying notes are an integral part
of these financial statements.
14
Mill
City Ventures III, Ltd.
Statements of Cash Flows
Year Ended
Cash flows from operating activities:
Proceeds from sales of investments sold short — 30,119
Stock-based compensation 61,000 —
Depreciation & amortization expense 2,071 2,574
Deferred income taxes 271,722 —
Changes in operating assets and liabilities:
Prepaid expenses and other assets 5,197 32,299
Payable for investment purchase —
Accounts payable and other liabilities (10,993 ) (28,677 )
Net cash provided (used) in operating activities (2,463,157 ) 7,653,905
Cash flows from financing activities:
Payments for repurchase of common stock (162,920 ) —
Payments for common stock dividend — (553,370 )
Supplemental disclosure of cash flow information:
Non-cash financing activities:
Dividend to common stock shareholders $ 539,296 $ —
The accompanying notes are an integral part
of these financial statements.
15
Mill City Ventures III, Ltd.
Investment Schedule
As of December 31, 2020
Investment / Industry Cost Fair Value Percentage of Net Assets
Short-Term Non-banking Loans
Real Estate - 15% secured loans
Common Stock
Consumer
Preferred Stock
Warrants
Other Equity
16
Investment Schedule
As of December 31,
2019
Equity Investments
Advertising
Consumer
Financial
Healthcare
Information Technology
Leisure & Hospitality
Oil & Gas
Publishing
(2) Interest is presented on a per annum basis.
(8) Investment is not an income-producing investment.
The accompanying notes are an integral part
of these financial statements.
17
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 1940 Act. We operated as a BDC until we withdrew our BDC
election on December 27, 2019. As of the time of this filing, we remain a public reporting company that files periodic reports
with the SEC. We offer short-term specialty finance solutions primarily to private businesses, small-cap public companies and high-net-worth
individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “investment
securities” for purposes of federal securities law, and we monitor our investments as a whole to ensure that no more than
40% of our total assets may consist of investment securities.
Because
we operated as a BDC or investment company from 2013 through December 27, 2019, the 2019 financial statements in this report
reflect our operations as a BDC subject to the 1940 Act including our December 31, 2019 balance sheet. During that time, we
were primarily focused on investing in or lending to privately held and small capitalization publicly traded U.S. companies, and
making managerial assistance available to such companies. A majority of our investments by dollar amount were structured as purchases
of preferred or common stock or loans evidenced by promissory notes that may have been convertible into stock by their terms or
that may have been accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investment objective
is to generate income and capital appreciation that ultimately became realized gains.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent
board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during
the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio
investments” caption below, and “Note 7 – Fair Value of Financial Instruments” below. The Company presents
its financial statements as an investment company following accounting and reporting guidance in ASC 946.
Cash
deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers.
Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits.
Valuation
of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements
and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which
defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.
Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations,
or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price
sources, investments are measured at fair value as determined by our Board of Directors or, during our time as BDC, by the
Valuation Committee of our Board of Directors, based on, among other things, the input of our executive management, the Audit
Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to
assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and
procedures.
Due to
the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have
been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments
are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced
or liquidation sale, we could realize significantly less than the value at which we have recorded it.
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:
18
Our
valuation policy and procedures: Under our valuation policies and procedures, we evaluate the source of inputs, including
any markets in which our investments are trading, and then apply the resulting information in determining fair value. For our Level
1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price
of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter
market, to average the last quoted bid and ask price on the most active market on which the security is quoted. In the case of
traded debt securities the prices for which are not readily available, we may value those securities using a present value approach,
at their weighted-average yield to maturity.
The estimated fair value of our Level
3 investment assets is determined on a quarterly basis by our Board of Directors, pursuant to our written Valuation Policy
and Procedures. During our time as a BDC, this function was performed by a Valuation Committee of our Board of Directors.
These policies and procedures generally require that we value our Level 3 equity investments at cost plus any accrued
interest, unless circumstances warrant a different approach. Our Valuation Policy and Procedures provide examples of these
circumstances, such as when a portfolio company has engaged in a subsequent financing of more than 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 situations identified in our Valuation Policy and Procedures that may serve as input
supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by
an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the
portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security
we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party
valuation conducted by an independent and qualified professional.
When valuing preferred equity investments,
we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment
is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where
the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to
be a key input, to account for resale restrictions applicable to the securities issuable upon conversion.
When valuing warrants, our Valuation Policy
and Procedures indicate that value will generally be the difference between closing price of the underlying equity security and
the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security
is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles
described above. Generally, “out-of-the-money” warrants will be valued at cost or zero.
For non-traded (Level 3) debt securities
with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering
the straight-line amortized face value of the debt unless justification for impairment exists.
On a quarterly basis, our management
provides members of our Board of Directors (or Valuation Committee, prior to 2020) with (i) valuation reports for each
portfolio investment (which reports include our cost,, the most recent prior valuation and any current proposed valuation,
and an indication of the valuation methodology used, together with any other supporting materials); (ii) Mill City
Ventures’ bank and other statements pertaining to our cash and cash equivalents; (iii) quarter- or period-end
statements from our custodial firms holding any of our portfolio investments; and (iv) recommendations to change any
existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such
investments based upon the foregoing. The board or committee then discusses these materials and, consistent with the policies
and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio
investments.
19
We made no changes to our Valuation
Policy and Procedures during the reporting period other than to have our entire Board of Directors involved in implementing
and discharging those policies and procedures.
Income taxes:
Due to our change in business model, we now account for income
taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount
and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
We record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such determination, we consider all available evidence, including future
reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial
operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess
of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
We file
income tax returns in the U.S. federal jurisdiction and various state jurisdictions. 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, 2017 through 2020, which are the tax years that remain subject to examination by major tax jurisdictions
as of December 31, 2020.
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.
20
Management
and service fees: We do not incur expenses related to management and service fees. Our executive management team
manages our investments as part of their employment responsibilities.
Recently
Adopted Accounting Pronouncements:
In August 2018,
the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.
This ASU removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities
will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy,
the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be
required to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements
held at the end of the reporting period. The amendments in this ASU are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU.
The adoption of the ASU effective January 1, 2020 did not have a material impact on our financial statements.
New
Accounting Standards Not Yet Adopted:
In December 2019,
the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12
is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends
existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15,
2020 and interim periods within those fiscal years, which is fiscal 2021 for us, with early adoption permitted. We do not expect
adoption of the new guidance to have a significant impact on our financial statements.
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 vested common shares outstanding
during the period. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain per
common share follows:
For the Year Ended December 31,
Basic and diluted net gain (loss) per common share $ 0.20 $ (0.06 )
At December 31,
2020 and 2019, the Company did not have any options or warrants outstanding or any other dilutive common equivalent shares.
NOTE
4—LEASES
We are subject to two non-cancelable operating leases for office
space expiring March 31, 2022. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements,
or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to
renew.
Because
our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease
payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow
an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted average discount rate as
of December 31, 2020 was 4.5% and the weighted average remaining lease term is one year.
Under
ASC 840, rent expense for office facilities for the year ended December 31, 2020 and December 31, 2019 was $66,307 and
$73,685, respectively.
21
The components
of our operating leases were as follows for the twelve months ended December 31, 2020 and 2019:
Year Ended
Supplemental
balance sheet information consisted of the following at December 31, 2020:
Operating Lease
Right-of-use assets $ 23,345
Operating Lease Liability $ 26,061
Less: short term portion (20,406 )
Long term portion $ 5,655
Maturity analysis under lease agreements
consisted of the following as of December 31, 2020:
Operating Leases
Total minimum lease payments 26,558
Less: present value discount (497 )
Present value of net minimum lease payments $ 26,061
NOTE 5—SHAREHOLDERS’ EQUITY
At December 31,
2020 a total of 10,785,913 shares of common stock were issued and outstanding. At December 31, 2019 a total of 11,067,402
shares of common stock were issued and outstanding.
During
2020, there were 381,489 shares repurchased and 100,000 shares issued by the Company.
On October 26,
2020, the Board of Directors approved a stock repurchase program of up to $400,000 of the Company’s outstanding shares of
common stock. Repurchases may be completed in public or private transactions. The repurchase program does not require the Company
to acquire any specific number of shares, and may be suspended from time to time in accordance with the Company's insider trading
policy and existing best practices, or it may be discontinued. Repurchases completed under the program are expected to be funded
from available working capital.
22
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, 2020 (together with the corresponding percentage
of total portfolio investments):
Warrants 679 — — —
The following table shows the composition of our investment
portfolio by major class, at amortized cost and fair value, as of December 31, 2019 (together with the corresponding percentage
of total portfolio investments):
Warrants 679 — — —
The following table shows the composition of our investment
portfolio by industry grouping, based on fair value as of December 31, 2020:
Investments at Fair Value Percentage of Fair Value
The following table shows the composition of our investment
portfolio by industry grouping, based on fair value as of December 31, 2019:
Investments at Fair Value Percentage of Fair Value
23
We did not and do not, “control,”
and we were not and are not, an “affiliate” (as each of those terms is defined in the 1940 Act), of any of our portfolio
companies as of December 31, 2020 or 2019. Under the 1940 Act, we would generally be presumed to have had “control”
over a portfolio company if we owned more than 25% of its voting securities, and to have been an “affiliate” of a portfolio
company in which we owned at least 5% and up to 25% of its voting securities.
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, 2020 and 2019 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, 2020, according to the fair value hierarchy:
Level 1 Level 2 Level 3 Total
Warrants — — — —
The following table presents the fair value
measurements of our portfolio investments by major class, as of December 31, 2019, according to the fair value hierarchy:
Level 1 Level 2 Level 3 Total
Warrants — — — —
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,
2020:
For the year ended December 31, 2020
ST Non-banking Loans Preferred Stock Common Stock Warrants Other Equity
Net change in unrealized appreciation — — — — 486,018
Purchases and other adjustments to cost 7,543,000 — — — —
Net realized loss — — — — (650,008 )
24
The net change in unrealized appreciation
for the year ended December 31, 2020 attributable to Level 3 portfolio investments still held as of December 31, 2020
is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
The following table presents a reconciliation
of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31,
2019:
For the year ended December 31, 2019
Preferred Stock Common Stock Warrants Other Equity
Purchases and other adjustments to cost — — — —
The net change in unrealized appreciation
for the year ended December 31, 2019 attributable to Level 3 portfolio investments still held as of December 31, 2019
is $348,629, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.
The following table lists our Level 3 investments
held as of December 31, 2020 and the unobservable inputs used to determine their valuation:
Security Type 12/31/20 FMV Valuation Technique Unobservable Inputs Range
The following table presents a reconciliation
of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31,
2019:
Security Type 12/31/19 FMV Valuation Technique Unobservable Inputs Range
There were no transfers between levels
during the years ended December 31, 2020 and 2019.
25
NOTE
8 – RELATED-PARTY TRANSACTIONS
We maintain a Code of Ethics and certain
other policies relating to conflicts of interest and related-party transactions, as well as policies and procedures relating to
what regulations applicable. Nevertheless, from time to time we may hold investments in portfolio companies in which certain members
of our manageme, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested. Our Board
of Directors has adopted a policy to require our disclosure of these instances in our periodic filings with the SEC. Our only related-party
transaction requiring disclosure under this policy relates to an August 10, 2018 loan transaction we entered into with Elizabeth
Zbikowski. Ms. Zbikowski, along with her husband Scott Zbikowski, owns approximately 1,765,000 shares of our common stock.
In the transaction, we obtained a two-year promissory note in the principal amount of $250,000. The promissory note was subsequently
amended such that it matures in August 2021. The note bears interest payable monthly at the rate of 10% per annum and is secured
by the debtors’ pledge to us of 625,000 shares of our common stock. The pledged shares are held in physical custody
for us by our custodial agent Millennium Trust Company.
NOTE
9 — RETIREMENT SAVINGS PLANS
Our two
employees, Messrs. Geraci and Polinsky, are eligible to participate in a qualified defined contribution 401(k) plan whereby
they may elect to have a specified portion of their salary contributed to the plan. We will make a safe harbor match equal to 100%
of their elective deferrals up to 5% of eligible earnings in addition to our option to make discretionary contributions to the
plan. We made contributions totaling $10,550 and $10,000 to the plans for the years ended 2020 and 2019, respectively.
NOTE
10 — INCOME TAXES