Item 7. Management’s Discussion and Analysis
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.
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.
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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,
2021
2020
Investment Income:
Interest Income
$
2,656,201
$
1,282,175
Dividend Income
—
15,462
Operating Expenses:
General Operating Expenses
116,714
83,447
Legal and Accounting Expenses
453,440
175,612
Executive Management Compensation
556,432
301,494
Insurance Expense
108,165
85,237
Director's Fees
120,000
90,000
Net Investment Gain
$
1,301,450
$
561,847
For the year ended December 31, 2021, we earned $11,480 in interest payments from one eligible portfolio company- DBR Enclave US Investors, LLC - an aggregate of $2,099,684 from twenty-six promissory note investments; an additional $25,037 in bank interest on cash balances and note receivable; an aggregate of $467,500 in origination fees; and an additional $52,500 in late fee penalties.
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.
As the table above indicates, we incurred operating expenses aggregating $1,354,751 for the year ended December 31, 2021, and $735,790 for the year ended December 31, 2020. 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 $116,714 for the year ended December 31, 2021 and $83,447 for the year ended December 31, 2020. The increase in the current period is primarily related to an increase in corporate franchise taxes.
Legal and Accounting Expenses. Our legal and accounting expenses were $453,440 for the year ended December 31, 2021 and $175,612 for the year ended December 31, 2020. The increase in the current period is primarily related to increased costs incurred on consulting and underwriting endeavors, as well as an increased cost in our audit and tax services.
Executive Management Compensation. Our executive management compensation was $556,432 for the year ended December 31, 2020 and $301,494 for the year ended December 31, 2020. The increase in the current period is primarily related to a one-time bonus payment made during the year 2021.
For the year ended December 31, 2021 our net investment gain was $1,301,450. For the year ended December 31, 2020, our net investment gain was $561,847. The increased net investment gain during 2021 was primarily the result of higher interest income earned during 2021 from the short-term specialty finance solutions we provided in the form of short-term promissory notes bearing higher rates of interest and return, including related origination fees, than we were able to obtain when operating as a BDC.
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Financial Condition
For the year ended December 31, 2021, we had an increase in net assets of $1,773,162. This increase in net assets was primarily due to the increase in our interest income earned from short-term specialty financing. Our net assets increased by $1,572,354 for the year ended December 31, 2020, primarily due to the appreciation of our portfolio holdings.
Liquidity and Capital Resources
Summary cash flow data is as follows:
For the Year Ended December 31,
2021
2020
Cash flows used by:
Operating activities
$
(1,886,094)
$
(2,463,157)
Financing activities
(1,618,337)
(162,920)
Net decrease in cash
(3,504,431)
(2,626,077)
Cash, beginning of period
5,440,579
8,066,656
Cash, end of period
$
1,936,148
$
5,440,579
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 will accrue interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets. The Loan Agreement, together with our cash and cash equivalents, together comprises our sources of liquidity. Management believes that these sources of liquidity, together with cash obtained through maturing investments earlier made, will be sufficient for the Company to fund its operations through the entirety of fiscal 2022. Accordingly, at present we have no definitive plans to obtain other sources of liquidity through borrowing.
On February 11, 2022, we filed a registration statement on Form S-1 seeking to register an offering of five-year common stock warrants we intend to distribute to our shareholders as a dividend, and up to 2,697,603 shares of our common stock purchasable upon the exercise of the warrants. The warrants are contemplated to be exercisable at a price of $4.00 per share of common stock. We intend to apply to have the warrants listed for trading on the OTC Markets.
The offering is subject to the effectiveness of the S-1 registration statement. Accordingly, no record date has been established for the associated dividend contemplated as part of the offering. The warrants will not be issued until the registration statement is declared effective, and the warrants will not be exercisable unless such registration statement remains effective. If the offering is consummated, we expect to use net proceeds from the offering for general corporate purposes, including but not limited to extending specialty finance solutions and credit to borrowers and repaying credit facility borrowings.
Capital Expenditures
We did not have any material commitments for capital expenditures in fiscal 2021 and we do not anticipate any such capital expenditures for fiscal 2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, nor are we a party to any contract or other obligation not included on its balance sheet that has, or is reasonably likely to have, a current or future effect on our financial condition.
Critical Accounting Policies
Critical accounting policies are policies that are both most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about
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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 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.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.