SUI Group Holdings Ltd. 10-K

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item Page Reports of Independent Registered Public Accounting Firm (PCAOB ID: 542 ) F-2 Balance Sheets — December 31, 2022 and December 31, 2021 F-4 Statements of Operations — Years ended December 31, 2022 and December 31, 2021 F-5 Statements of Shareholders’ Equity — Years ended December 31, 2022 and December 31, 2021 F-6 Statements of Cash Flows — Years ended December 31, 2022 and December 31, 2021 F-7 Investment Schedules — December 31, 2022 and December 31, 2021 F-8 Notes to Financial Statements F-10 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. 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: · 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. · We involved senior, more experienced audit team members to perform audit procedures. · 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. · We considered other information obtained during the audit that corroborated or contradicted the Company’s inputs or fair value measurements. · 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. Boulay PLLP We have served as the Company’s auditor since 2019 Minneapolis, Minnesota April 17, 2023 F-3 Table of Contents Mill City Ventures III, Ltd. Balance Sheets December 31, 2022 December 31, 2021 ASSETS Investments, at fair value: $ 16,708,432 $ 14,098,675 Non-control/non-affiliate investments (cost: $ 17,359,804 and $ 13,933,057 respectively) Cash 1,089,641 1,936,148 Note receivable, related party 250,000 250,000 Prepaid expenses 49,219 83,674 Interest and dividend receivables 250,879 324,350 Right-of-use operating lease asset 16,398 4,984 Deferred taxes 201,000 - Total Assets $ 18,565,569 $ 16,697,831 LIABILITIES Accounts payable $ 136,514 $ 64,028 Dividend payable - 100 Payable for purchase of investments - 1,900,000 Operating lease liability 16,562 5,654 Deferred interest income 70,154 - Accrued income tax - 1,269,000 Deferred taxes - 45,000 Total Liabilities 223,230 3,283,782 Commitments and Contingencies SHAREHOLDERS EQUITY (NET ASSETS) Common stock, par value $ 0.001 per share ( 111,111,111 authorized; 6,185,255 and 4,795,739 outstanding) 12,215 10,790 Additional paid-in capital 15,043,291 10,694,163 Accumulated deficit ( 1,159,665 ) ( 1,159,665 ) Accumulated undistributed investment loss ( 615,960 ) ( 1,877,667 ) Accumulated undistributed net realized gains on investment transactions 5,713,829 5,580,810 Net unrealized appreciation (depreciation) in value of investments ( 651,371 ) 165,618 Total Shareholders' Equity (Net Assets) 18,342,339 13,414,049 Total Liabilities and Shareholders' Equity $ 18,565,569 $ 16,697,831 Net Asset Value Per Common Share $ 2.97 $ 2.80 The accompanying notes are an integral part of these financial statements. F-4 Table of Contents Mill City Ventures III, Ltd. Statements of Operations Year Ended December 31, 2022 December 31, 2021 Investment Income Interest income $ 4,199,453 $ 2,656,201 Total Investment Income 4,199,453 2,656,201 Operating Expenses Professional fees 1,592,218 453,440 Payroll 541,590 556,432 Insurance 111,110 108,165 Occupancy 73,146 66,459 Director's fees 177,073 120,000 Interest expense 195,893 9,511 Other general and administrative 67,847 40,744 Total Operating Expenses 2,758,877 1,354,751 Net Investment Gain 1,440,576 1,301,450 Realized and Unrealized Gain (Loss) on Investments Net realized gain on investments 133,019 4,118,001 Net change in unrealized depreciation on investments ( 816,989 ) ( 1,533,703 ) Net Realized and Unrealized Gain (Loss) on Investments ( 683,970 ) 2,584,298 Net Increase in Net Assets Resulting from Operations Before Taxes 756,606 3,885,748 Provision For Income Taxes 178,869 1,054,698 Net Increase in Net Assets Resulting from Operations $ 577,737 $ 2,831,050 Net Increase in Net Assets Resulting from Operations per share: Basic and diluted $ 0.11 $ 0.59 Weighted-average number of common shares outstanding - basic and diluted 5,333,028 4,795,242 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 4,795,739 $ 10,790 $ 10,694,163 $ ( 1,159,665 ) $ ( 1,877,667 ) $ 5,580,810 $ 165,618 $ 13,414,049 Common shares issued in public offering net of underwriting costs and warrants 1,250,000 1,250 3,839,372 — — 3,840,622 Warramts issued to underwriter 201,173 201,173 Common shares issued in reverse stock split rounding 735 — — — Common shares issued in stock-based compensation 61,004 97 149,218 — — 149,315 Common shares issued in consideration for expense payment 77,777 78 159,365 — — 159,443 Undistributed net investment gain — — — 1,261,707 — — 1,261,707 Undistributed net realized gain on investment transactions — — — — 133,019 — 133,019 Depreciation in value of investments — — — — — ( 816,989 ) ( 816,989 ) Balance as of December 31, 2022 6,185,255 $ 12,215 $ 15,043,291 $ ( 1,159,665 ) $ ( 615,960 ) $ 5,713,829 $ ( 651,371 ) $ 18,342,339 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 4,793,739 $ 10,786 $ 10,673,014 $ ( 1,159,665 ) $ ( 2,124,419 ) $ 2,541,850 $ 1,699,321 $ 11,640,887 Dividend Declared — — — — ( 1,079,041 ) — ( 1,079,041 ) Common shares issued in consideration for expense payment 2,000 4 21,149 — — 21,153 Undistributed net investment gain — — — 246,752 — — 246,752 Undistributed net realized gain on investment transactions — — — — 4,118,001 — 4,118,001 Depreciation in value of investments — — — — — ( 1,533,703 ) ( 1,533,703 ) 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 $ 577,737 $ 2,831,050 Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: Net change in unrealized depreciation on investments 816,989 1,533,703 Net realized gain on investments ( 133,019 ) ( 4,118,001 ) Purchases of investments ( 23,558,458 ) ( 27,029,292 ) Proceeds from sales of investments 20,264,731 22,188,562 Deferred income taxes ( 246,000 ) ( 213,000 ) Stock-based compensation to employees and vendors 308,758 15,403 Changes in operating assets and liabilities: Prepaid expenses and other assets 23,041 ( 21,475 ) Interest and dividends receivable 73,471 ( 258,439 ) Receivable for investment sales — 19,313 Payable for investment purchase ( 1,900,000 ) 1,900,000 Accounts payable and other liabilities 83,294 10,804 Deferred interest income 70,154 — Accrued income taxes ( 1,269,000 ) 1,255,278 Net cash used in operating activities ( 4,888,302 ) ( 1,886,094 ) Cash flows from financing activities: Proceeds from public offering, net of underwriting discounts and offering costs 4,041,795 — Proceeds from line of credit 9,793,800 — Repayments on line of credit ( 9,793,800 ) — Payments for common stock dividend — ( 1,618,337 ) Net cash provided (used) by 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 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 428,948 $ 32,398 Cash paid for interest $ 195,894 $ 9,511 Non-cash financing activities: Common shares issued as consideration for investment $ - $ 5,750 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. $ 2,250,000 $ 2,255,625 12.30 % Business Services - 15% secured loans Mustang Litigation Funding 5,000,000 4,975,955 27.13 % Consumer - 15% secured loans 400,000 398,635 2.17 % Intelligent Mapping, LLC 2,900,000 2,873,893 15.67 % Financial - 33% secured loans Benton Financial, LLC 2,479,125 2,478,030 13.51 % Financial - 12% secured loans 500,000 345,421 1.88 % Information Technology - 15% convertible note 212,500 213,656 1.16 % Real Estate - 15% secured loans 745,000 746,354 4.07 % Real Estate - 12% secured loans Alatus Development Corp 1,000,000 998,363 5.44 % Total Short-Term Non-Banking Loans 15,486,625 15,285,932 83.33 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 900,000 4.91 % Information Technology 150,000 300,000 1.64 % Total Preferred Stock 1,050,000 1,200,000 6.55 % Warrants Healthcare 679 — 0.00 % Other Equity Consumer 212,500 212,500 1.16 % Financial 610,000 10,000 0.05 % Total Other Equity 822,500 222,500 1.21 % Total Investments $ 17,359,804 $ 16,708,432 91.09 % Total Cash 1,089,641 1,089,641 5.94 % Total Investments and Cash $ 18,449,445 $ 17,798,073 97.03 % 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. $ 1,250,000 $ 1,250,000 9.32 % Financial - 52% secured loans 500,000 500,000 3.73 % Financial - 12% secured loans 500,000 500,000 3.73 % Litigation Financing - 23% secured loans The Cross Law Firm, LLC 1,805,750 1,800,000 13.42 % Real Estate - 15% secured loans 700,000 700,000 5.22 % Tailwinds, LLC 3,000,000 3,000,000 22.36 % Real Estate - 12% secured loans Alatus Development, LLC 3,900,000 3,900,000 29.07 % Total Short-Term Non-Banking Loans 11,655,750 11,650,000 86.85 % Common Stock Financial Services 414,128 436,175 3.25 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 900,000 6.71 % Information Technology 150,000 300,000 2.24 % Total Preferred Stock 1,050,000 1,200,000 8.95 % Warrants Healthcare 679 - 0.00 % Other Equity Consumer 212,500 212,500 1.58 % Financial 600,000 600,000 4.47 % Total Other Equity 812,500 812,500 6.05 % Total Investments $ 13,933,057 $ 14,098,675 105.10 % Total Cash 1,936,148 1,936,148 14.43 % Total Investments and Cash $ 15,869,205 $ 16,034,823 119.53 % 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 40 % of our total assets consist of “investment securities” as defined under the 1940 Act. 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 $ 577,737 $ 2,831,050 Denominator: Weighted-average number of common shares outstanding 5,333,028 4,795,242 Basic and diluted net gain per common share $ 0.11 $ 0.59 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 870,000 shares of common stock) that were, at December 31, 2022, unexercisable and subject to voiding in the absence of shareholder approval of the related 2022 Stock Incentive Plan. The Company’s shareholders subsequently approved the plan on January 20, 2023 at a special meeting of shareholders called for that purpose. 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 4.5 % and the weighted-average remaining lease term is one year. Rent expense for office facilities for the year ended December 31, 2022 and 2021 was $ 73,146 and $ 66,459 , respectively. The components of our operating leases were as follows for the years ended December 31: 2022 2021 Operating lease costs $ 21,291 $ 19,116 Variable lease cost 18,325 17,613 Short-term lease cost 33,530 29,730 Total $ 73,146 $ 66,459 Supplemental balance sheet information consisted of the following at December 31: Operating Lease 2022 2021 Right-of-use assets $ 16,398 $ 4,984 Operating Lease Liability $ 16,562 $ 5,654 Less: short term portion ( 16,562 ) ( 5,654 ) Long term portion $ — $ — Maturity analysis under lease agreements consisted of the following as of December 31: 2022 2021 2022 $ - $ 5,698 2023 16,675 — Total lease payments 16,675 5,698 Less: Present value discount ( 113 ) ( 44 ) Present value of lease liabilities $ 16,562 $ 5,654 Supplemental cash flow information related to leases for the years ended December 31: 2022 2021 Operating cash outflow from operating leases $ 75,146 $ 66,459 F-13 Table of Contents NOTE 5—SHAREHOLDERS’ EQUITY At December 31, 2022 a total of 6,185,255 shares of common stock were issued and outstanding. At December 31, 2021 a total of 4,795,739 shares of common stock were issued and outstanding. On August 9, 2022, the Company effected a stock combination (reverse stock split) of its common shares on a 1-for-2.25 basis such that every 2.25 shares of common stock issued and outstanding on that date were combined into one share of common stock. Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share. The reverse stock split was approved by the Company's Board of Directors in accordance with Minnesota law and resulted in a proportionate reduction in the number of authorized shares of capital stock available for issuance under the Company's articles of incorporation. This reduction was affected pursuant to the filing of articles of amendment with the Minnesota Secretary of State indicating that the Company, on a post-reverse-split basis, is authorized to issue up to 111,111,111 shares of capital stock. On August 11, 2022, the Company completed its public offer and sale of 1,250,000 common shares pursuant to a registration statement filed with the SEC and declared effective on August 9, 2022. Shares were sold by the Company at $ 4.00 per share, resulting in gross proceeds of $ 5,000,000 . As part of the registered public offering, the Company granted the underwriters a 45-day option to purchase up to 187,500 additional common shares at the offering price, less underwriting discounts which option was not exercised. In connection with the offering, the Company issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $ 5.00 . Net proceeds to the Company after the payment of underwriting discounts, underwriting expenses, and the Company's own offering-related expenses were approximately $ 4,041,000 . 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 75,000 common shares at $ 5.00 per share. This warrant is exercisable after 180 days, and expires on August 8, 2027. This warrant is equity-classified and the fair value was $ 201,173 on the offering date. During 2022, there were 1,389,516 shares issued by the Company. 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 $ 15,486,625 89.2 % $ 15,285,932 91.5 % Preferred Stock 1,050,000 6.1 1,200,000 7.2 Warrants 679 - - - Other Equity 822,500 4.7 222,500 1.3 Total $ 17,359,804 100.0 % $ 16,708,432 100.0 % 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 $ 11,655,750 83.7 % $ 11,650,000 82.6 % Preferred Stock 1,050,000 7.5 1,200,000 8.5 Common Stock 414,128 3.0 436,175 3.1 Warrants 679 - - - Other Equity 812,500 5.8 812,500 5.8 Total $ 13,933,057 100.0 % $ 14,098,675 100.0 % 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 $ 7,231,580 43.3 % Consumer 4,385,028 26.2 Financial 2,833,451 17.0 Information Technology 513,656 3.1 Real Estate 1,744,717 10.4 Total $ 16,708,432 100.0 % 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 $ 2,362,500 16.8 % Financial 3,836,175 27.2 Information Technology 300,000 2.1 Real Estate 7,600,000 53.9 Total $ 14,098,675 100.0 % 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 $ - $ - $ 15,285,932 $ 15,285,932 Preferred Stock - - 1,200,000 1,200,000 Warrants - - - - Other Equity - - 222,500 222,500 Total $ - $ - $ 16,708,432 $ 16,708,432 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 $ - $ - $ 11,650,000 $ 11,650,000 Preferred Stock - - 1,200,000 1,200,000 Common Stock 436,175 - - 436,175 Warrants - - - - Other Equity - - 812,500 812,500 Total $ 436,175 $ - $ 13,662,500 $ 14,098,675 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 $ 11,650,000 $ 1,200,000 $ - $ - $ 812,500 Net change in unrealized depreciation ( 200,693 ) - - - ( 600,000 ) Purchases and other adjustments to cost 23,548,458 - - - 10,000 Sales and redemptions ( 19,711,833 ) - - - - Balance as of December 31, 2022 $ 15,285,932 $ 1,200,000 $ - $ - $ 222,500 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 $ 651,371 , and is included in net change in unrealized 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, 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 $ 2,789,000 $ 300,000 $ — $ — $ 278,897 Net change in unrealized appreciation — — — — — Purchases and other adjustments to cost 24,765,333 900,000 — — 812,500 Sales and redemptions ( 15,904,333 ) — — — ( 278,897 ) Balance as of December 31, 2021 $ 11,650,000 $ 1,200,000 $ — $ — $ 812,500 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 $ 0 , and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations. 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 $ 15,285,932 discounted cash flow determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness 12 - 33 % Other Equity 222,500 last secured funding known by company Preferred Stock 1,200,000 last funding secured by company economic changes since last funding $ 16,708,432 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 $ 11,650,000 discounted cash flow determining private company credit rating 12 - 44 % Other Equity 812,500 last secured funding known by company economic changes since last funding Preferred Stock 1,200,000 last funding secured by company economic changes since last funding $ 13,662,500 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 $ 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. 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 $ 0 . 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 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 on August 30, 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. See note 8 above for further details. 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 $ 14,063 and $ 11,250 for the years ended 2022 and 2021, respectively. 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 $ 406,700 $ 909,530 State 18,169 358,168 Deferred taxes Federal ( 246,000 ) ( 213,000 ) State — — Provision for income taxes $ 178,869 $ 1,054,698 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 $ 185,887 $ 1,080,213 Change in deferred tax rate 450 ( 8,796 ) Provision-to-return reconciliation ( 18,536 ) ( 14,743 ) Other 11,068 ( 1,976 ) Income tax provision $ 178,869 $ 1,054,698 F-18 Table of Contents As of December 31, 2022 and 2021 we had a deferred tax asset of $ 201,000 and a deferred tax liability of $ 45,000 , respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows: December 31 2022 2021 Deferred tax components Unrealized (gain) loss on marketable securities $ 156,550 $ ( 46,660 ) Depreciation 1,781 2,458 R&D and foreign credits 43,828 — Lease liability ( 39 ) — Other ( 1,120 ) ( 798 ) Net deferred tax asset (liability) $ 201,000 $ ( 45,000 ) 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 2019 2018 Per Share Data (1) Net asset value at beginning of period $ 2.80 2.44 2.05 2.30 1.96 Net investment gain (loss) 0.23 0.27 0.11 ( 0.14 ) ( 0.11 ) Net realized and unrealized gains ( 0.11 ) 0.54 0.41 0.00 0.45 Provision for income taxes ( 0.03 ) ( 0.23 ) ( 0.05 ) 0.00 0.00 Stock-based compensation 0.05 0.00 ( 0.02 ) 0.00 0.00 Repurchase of common stock 0.00 0.00 0.05 0.00 0.00 Other changes in equity 0.03 0.00 0.00 0.00 0.00 Payment of common stock dividend 0.00 ( 0.22 ) ( 0.11 ) ( 0.11 ) 0.00 Net asset value at end of period $ 2.97 2.80 2.44 2.05 2.30 Ratio / Supplemental Data Per share market value of investments at end of period $ 2.73 2.95 1.40 0.36 2.03 Shares outstanding at end of period 6,185,255 4,795,739 4,793,739 4,918,845 4,918,845 Average weighted shares outstanding for the period 5,333,028 4,795,242 4,830,691 4,918,845 4,918,845 Net assets at end of period $ 18,342,339 13,414,049 11,640,887 10,068,533 11,278,889 Average net assets (2) $ 15,733,550 13,155,207 10,504,563 11,473,535 10,341,702 Total investment return 3.57 % 24.07 % 23.08 % ( 5.88 )% 17.24 % Portfolio turnover rate (3) 128.80 % 168.67 % 61.11 % 7.63 % 26.93 % Ratio of operating expenses to average net assets (3) ( 17.53 )% ( 10.30 )% ( 7.16 )% ( 7.27 )% ( 6.59 )% Ratio of net investment income (loss) to average net assets (3) 9.16 % 9.89 % 5.35 % ( 5.86 )% ( 5.13 )% (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 $ 2,500,000 and obtained a 180-day promissory note bearing interest at 18 % per annum. F-19 Table of Contents ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.