SUI Group Holdings Ltd. 10-Q

ITEM 1. FINANCIAL STATEMENTS MILL CITY VENTURES III, LTD. CONDENSED BALANCE SHEETS September 30, 2023 (unaudited) December 31, 2022 ASSETS Investments, at fair value: $ 17,555,601 $ 16,708,432 Non-control/non-affiliate investments (cost: $ 17,577,481 and $ 17,359,804 respectively) Cash 962,860 1,089,641 Note receivable 250,000 250,000 Prepaid expenses 217,422 218,440 Interest and dividend receivables 219,205 250,879 Right-of-use lease asset 14,716 16,398 Deferred taxes 397,000 201,000 Total Assets $ 19,616,804 $ 18,734,790 LIABILITIES Accounts payable $ 124,082 $ 776,514 Operating lease liability 14,716 16,562 Deferred interest income — 70,154 Total Liabilities 138,798 863,230 SHAREHOLDERS EQUITY (NET ASSETS) Common stock, par value $ 0.001 per share ( 111,111,111 authorized; 6,385,255 and 6,185,255 outstanding) 12,415 12,215 Additional paid-in capital 15,467,091 15,043,291 Additional paid-in capital - stock options 1,460,209 — Accumulated deficit ( 1,159,665 ) ( 1,159,665 ) Accumulated undistributed investment loss ( 1,435,364 ) ( 1,086,739 ) Accumulated undistributed net realized gains on investment transactions 5,155,200 5,713,829 Net unrealized depreciation in value of investments ( 21,880 ) ( 651,371 ) Total Shareholders' Equity (Net Assets) 19,478,006 17,871,560 Total Liabilities and Shareholders' Equity $ 19,616,804 $ 18,734,790 Net Asset Value Per Common Share $ 3.05 $ 2.89 See accompanying Notes to Financial Statements 3 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Investment Income Interest income $ 725,158 $ 1,115,224 $ 2,496,688 $ 3,351,935 Total Investment Income 725,158 1,115,224 2,496,688 3,351,935 Operating Expenses Professional fees 184,008 916,359 601,184 1,309,348 Payroll 141,040 122,477 1,418,640 433,461 Insurance 26,452 27,016 79,974 84,092 Occupancy 14,890 18,589 55,005 54,542 Director's fees 30,000 30,000 592,968 147,073 Interest expense — 46,779 78,000 164,632 Other general and administrative 24,983 18,572 57,464 34,717 Total Operating Expenses 421,373 1,179,792 2,883,235 2,227,865 Net Investment Gain (Loss) 303,785 ( 64,568 ) ( 386,547 ) $ 1,124,070 Realized and Unrealized Gain (Loss) on Investments Net realized gain (loss) on investments — — ( 558,629 ) 133,020 Net change in unrealized appreciation (depreciation) on investments 2,175 — 629,491 ( 16,297 ) Net Realized and Unrealized Gain (Loss) on Investments 2,175 — 70,862 116,723 Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes $ 305,960 $ ( 64,568 ) $ ( 315,685 ) $ 1,240,793 Provision for (Benefit from) Income Taxes ( 63,600 ) ( 28,442 ) ( 37,922 ) 346,800 Net Increase (Decrease) in Net Assets Resulting from Operations $ 369,560 $ ( 36,126 ) $ ( 277,763 ) 893,993 Net Increase (Decrease) in Net Assets Resulting from Operations per share: Basic $ 0.06 $ ( 0.01 ) $ ( 0.04 ) $ 0.18 Diluted $ 0.06 $ ( 0.01 ) $ ( 0.04 ) $ 0.18 See accompanying Notes to Financial Statements 4 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) Three Months Ended September 30, 2023 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain (Loss) on Investments Transactions Net Unrealized Appreciation in value of Investments Total Shareholders' Equity Balance as of June 30, 2023 6,185,255 $ 12,215 $ 16,503,500 $ ( 1,159,665 ) $ ( 1,802,749 ) $ 5,155,200 $ ( 24,055 ) $ 18,684,446 Exercise of stock options 200,000 200 423,800 — — — — 424,000 Undistributed net investment gain — — — 367,385 — — 367,385 Depreciation in value of investments — — — — — 2,175 2,175 Balance as of September 30, 2023 6,385,255 $ 12,415 $ 16,927,300 $ ( 1,159,665 ) $ ( 1,435,364 ) $ 5,155,200 $ ( 21,880 ) $ 19,478,006 Three Months Ended September 30, 2022 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain on Investments Transactions Net Unrealized Appreciation in value of Investments Total Shareholders' Equity Balance as of June 30, 2022 4,824,628 $ 10,855 $ 10,776,537 $ ( 1,159,665 ) $ ( 1,064,271 ) $ 5,713,830 $ 149,321 $ 14,426,607 Common shares issued in public offering 1,250,000 1,250 4,040,545 — — — — 4,041,795 Common shares issued in reverse stock split rounding 735 — — — — — — — Common shares issued in stock-based compensation 32,115 32 66,844 — — — — 66,876 Common shares issued in consideration for expense payment 77,777 78 159,365 — — — — 159,443 Undistributed net investment loss — — — ( 36,126 ) — — ( 36,126 ) Balance as of September 30, 2022 6,185,255 $ 12,215 $ 15,043,291 $ ( 1,159,665 ) $ ( 1,100,397 ) $ 5,713,830 $ 149,321 $ 18,658,595 Nine Months Ended September 30, 2023 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain on Investments Transactions Net Unrealized Appreciation (Depreciation) in value of Investments Total Shareholders' Equity Balance as of December 31, 2022 6,185,255 $ 12,215 $ 15,043,291 $ ( 1,159,665 ) $ ( 1,086,739 ) $ 5,713,829 $ ( 651,371 ) $ 17,871,560 Issuance of stock options — 1,460,209 — — — — 1,460,209 Exercise of stock options 200,000 200 423,800 — — — — 424,000 Net investment loss, net of tax benefit of $139,300 — — — ( 348,625 ) — — ( 348,625 ) Undistributed net realized loss on investment transactions — — — — ( 558,629 ) — ( 558,629 ) Appreciation in value of investments — — — — — 629,491 629,491 Balance as of September 30, 2023 6,385,255 $ 12,415 $ 16,927,300 $ ( 1,159,665 ) $ ( 1,435,364 ) $ 5,155,200 $ ( 21,880 ) $ 19,478,006 Nine Months Ended September 30, 2022 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain on Investments Transactions Net Unrealized Appreciation in value of Investments Total Shareholders' Equity Balance as of December 31, 2021 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 1,250,000 1,250 4,040,545 — — — — 4,041,795 Common shares issued in reverse stock split rounding 735 — — — — — — — Common shares issued in stock-based compensation 31,248 97 149,218 — — — — 149,315 Common shares issued in consideration for expense payment 107,533 78 159,365 — — — — 159,443 Undistributed net investment gain — — — 777,270 — — 777,270 Undistributed net realized gain on investment transactions — — — — 133,020 — 133,020 Depreciation in value of investments — — — — — ( 16,297 ) ( 16,297 ) Balance as of September 30, 2022 6,185,255 $ 12,215 $ 15,043,291 $ ( 1,159,665 ) $ ( 1,100,397 ) $ 5,713,830 $ 149,321 $ 18,658,595 See accompanying Notes to Financial Statements 5 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) STATEMENT OF CASH FLOWS Nine Months Ended September 30, 2023 September 30, 2022 Cash flows from operating activities: Net increase (decrease) in net assets resulting from operations $ ( 277,763 ) $ 893,993 Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: Net change in unrealized (appreciation) depreciation on investments ( 629,491 ) 16,297 Net realized (gain) loss on investments 558,629 ( 133,020 ) Purchases of investments ( 11,900,500 ) ( 13,924,333 ) Proceeds from sales of investments 11,124,193 10,076,483 Issuance of stock options 1,460,209 — Deferred income taxes ( 196,000 ) — Common shares issued as consideration for expense payment — 308,758 Changes in operating assets and liabilities: Prepaid expenses and other assets 2,700 ( 21,225 ) Interest and dividends receivable 31,674 ( 614,949 ) Payable for investment purchase — ( 1,900,000 ) Accounts payable and other liabilities ( 654,278 ) 53,903 Income taxes payable — ( 1,185,200 ) Deferred interest income ( 70,154 ) — Net cash used in operating activities ( 550,781 ) ( 6,429,293 ) Cash flows from financing activities: Proceeds from public offering — 4,041,795 Proceeds from stock option exercise 424,000 Proceeds from line of credit 2,750,000 8,414,000 Repayments on line of credit ( 2,750,000 ) ( 6,101,000 ) Net cash provided by financing activities 424,000 6,354,795 Net increase (decrease) in cash ( 126,781 ) ( 74,498 ) Cash, beginning of period 1,089,641 1,936,148 Cash, end of period $ 962,860 $ 1,861,650 Supplemental disclosure of cash flow information: Cash paid for interest $ 78,010 $ — Non-cash investing activities: See accompanying Notes to Financial Statements 6 Table of Contents MILL CITY VENTURES III, LTD. CONDENSED SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 2023 Investment / Industry Cost Fair Value Percentage of Net Assets Short-Term Non-banking Loans Business Services - 15% secured loans Mustang Litigation Funding $ 10,000,000 $ 10,030,569 51.50 % Consumer - 18% secured loans Intelligent Mapping, LLC 2,900,000 2,899,757 14.89 % Financial - 12% secured loans 500,000 405,166 2.08 % Information Technology - 15% convertible note 212,500 214,021 1.10 % Real Estate - 18% secured loans 745,000 745,650 3.82 % Real Estate - 12% secured loans Alatus Development Corp 2,000,000 2,001,823 10.28 % Total Short-Term Non-Banking Loans 16,357,500 16,296,986 83.67 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 900,000 4.62 % Information Technology 150,000 300,000 1.54 % Total Preferred Stock 1,050,000 1,200,000 6.16 % Common Stock Consumer 159,302 48,615 0.25 % Warrants Healthcare 679 — 0.00 % Other Equity Financial 10,000 10,000 0.05 % Total Investments $ 17,577,481 $ 17,555,601 90.13 % Total Cash 962,860 962,860 4.94 % Total Investments and Cash $ $ 18,540,341 $ $ 18,518,461 95.07 % See accompanying Notes to the Financial Statements 7 Table of Contents MILL CITY VENTURES III, LTD. SCHEDULE OF INVESTMENTS DECEMBER 31, 2022 Investment / Industry Cost Fair Value Percentage of Net Assets Short-Term Non-banking Loans Business Services - 18% secured loans Liberated Syndication Inc. $ 2,250,000 $ 2,255,625 12.62 % Business Services - 15% secured loans Mustang Litigation Funding 5,000,000 4,975,955 27.84 % Consumer - 15% secured loans 400,000 398,635 2.23 % Intelligent Mapping, LLC 2,900,000 2,873,893 16.08 % Financial - 33% secured loans Benton Financial, LLC 2,479,125 2,478,030 13.87 % Financial - 12% secured loans 500,000 345,421 1.93 % Information Technology - 15% convertible note 212,500 213,656 1.20 % Real Estate - 15% secured loans 745,000 746,354 4.17 % Real Estate - 12% secured loans Alatus Development Corp 1,000,000 998,363 5.59 % Total Short-Term Non-Banking Loans 15,486,625 15,285,932 85.53 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 900,000 5.04 % Information Technology 150,000 300,000 1.68 % Total Preferred Stock 1,050,000 1,200,000 6.72 % Warrants Healthcare 679 — 0.00 % Other Equity Consumer 212,500 212,500 1.19 % Financial 610,000 10,000 0.06 % Total Other Equity 822,500 222,500 1.25 % Total Investments $ 17,359,804 $ 16,708,432 93.50 % Total Cash 1,089,641 1,089,641 6.10 % Total Investments and Cash $ $ 18,449,445 $ $ 17,798,073 99.60 % See accompanying Notes to the Financial Statements 8 Table of Contents NOTE 1 – ORGANIZATION In this report, we generally refer to Mill City Ventures III, Ltd. in the first person “we.” On occasion, we refer to our company in the third person as “Mill City Ventures” or the “Company.” The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946. We were incorporated in Minnesota in January 2006. Until December 13, 2012, we were a development-stage company that focused on promoting and placing a proprietary poker game online and into casinos and entertainment facilities nationwide. In 2013, we elected to become a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have remained a public reporting company filing periodic reports with the SEC. We engage in the business of providing short-term specialty finance solutions, typically in the form of short-term loans, primarily to small businesses, both private and public, and high-net-worth individuals. To avoid regulation under the 1940 Act, we generally seek to structure our investments so they do not constitute “securities” for purposes of federal securities laws, and we monitor our investments as a whole to ensure that no more than 40 % of our total assets consist of “investment securities” as defined under the 1940 Act. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Basis of presentation : The accompanying unaudited condensed financial statements of Mill City Ventures have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The condensed balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2022. Use of estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board members to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. The Company presents its financial statements as an investment company following accounting and reporting guidance in ASC 946. Cash deposits: We maintain our cash balances in financial institutions and with regulated financial investment brokers. Cash on deposit in excess of FDIC and similar coverage is subject to the usual banking risk of funds in excess of those limits. Valuation of portfolio investments: We carry our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the Financial Accounting Standards Board (“FASB”), which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments are measured at fair value as determined by our Board of Directors, based on, among other things, the input of our executive management, the Audit Committee of our Board of Directors, and any independent third-party valuation experts that may be engaged by management to assist in the valuation of our portfolio investments, but in all cases consistent with our written valuation policies and procedures. Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. In addition, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. Accounting guidance establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the relative observability of inputs used in the valuation. The three levels are defined as follows: 9 Table of Contents · Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities. · Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets. · Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances. Our valuation policy and procedures : Under our valuation policies and procedures, we evaluate the source of inputs, including any markets in which our investments are trading, and then apply the resulting information in determining fair value. For our Level 1 investment assets, our valuation policy generally requires us to use a market approach, considering the last quoted closing price of a security we own that is listed on a securities exchange, and in a case where a security we own is listed on an over-the-counter market, to average the last quoted bid and ask price on the most active market on which the security is quoted. In the case of traded debt securities the prices for which are not readily available, we may value those securities using a discounted cash flows approach, at their weighted-average yield to maturity. The estimated fair value of our Level 3 investment assets is determined on a quarterly basis by our Board of Directors. In general, we value our Level 3 equity investments at fair value certain circumstances however, impact the qualitative factors that we use in determining fair value. Examples of these circumstances includes a situation in which a portfolio company has engaged in a subsequent financing of more than a de minimis size involving sophisticated investors (in which case we may use the price involved in that financing as a determinative input absent other known factors), or when a portfolio company is engaged in the process of a transaction that we determine is reasonably likely to occur (in which case we may use the price involved in the pending transaction as a determinative input absent other known factors). Other facts and circumstances that may serve as an input supporting a change in the valuation of our Level 3 equity investments include (i) a third-party valuation conducted by an independent and qualified professional, (ii) changes in the performance of long-term financial prospects of the portfolio company, (iii) a subsequent financing that changes the distribution rights associated with the equity security we hold, or (iv) sale transactions involving comparable companies, but only if further supported by a third-party valuation conducted by an independent and qualified professional. When valuing preferred equity investments, we generally view intrinsic value as a key input. Intrinsic value means the value of any conversion feature (if the preferred investment is convertible) or the value of any liquidation or other preference. Discounts to intrinsic value may be applied in cases where the issuer’s financial condition is impaired or, in cases where intrinsic value relating to a conversion is determined to be a key input, to account for resale restrictions applicable to the securities issuable upon conversion. When valuing warrants, our valuation approach indicates that value will generally be the difference between the closing price of the underlying equity security and the exercise price, after applying an appropriate discount for restriction, if applicable, in situations where the underlying security is marketable. If the underlying security is not marketable, then intrinsic value will be considered consistent with the principles described above. Generally, “out-of-the-money” warrants will be valued at cost or zero. For non-traded (Level 3) debt instruments with a residual maturity less than or equal to 60 days, we will generally value such instruments based on a discounted cash flows approach, considering the straight-line amortized face value of the debt unless justification for impairment exists. For level 3 non-banking loans with a maturity in excess of 60 days, fair value is determined based on the initial purchase price and adjusted as necessary to reflect any changes in the financial strength of the creditor and changes in interest rates in the high-yield credit markets. We value Level 2 investments based on quoted prices for similar instruments or investments traded in active markets. If there are no active markets for similar instruments or investments, then we value our Level 2 investments based on quoted prices not traded in active markets, or on valuation models whose inputs or significant value drivers consist of observable market data. On a quarterly basis, our management provides members of our Board of Directors with recommendations, if any, to change any existing valuations of our portfolio investments or hierarchy levels for purposes of determining the fair value of such investments based upon the foregoing. In such a case, the Board of Directors would then discuss these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments. We made no changes to our valuation policy and procedures during the reporting period. Income taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. 10 Table of Contents We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine we would be able to realize our deferred income tax assets in the future in excess of their recorded amount, we would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. We file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months. Our evaluation was performed for the tax years ended December 31, 2020 through 2022, which are the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2023. Revenue recognition : Realized gains or losses on the sale of investments are calculated using the specific investment method. Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection. Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal or stated value of the investment on the respective interest- or dividend-payment dates rather than being paid in cash, and generally becomes due at maturity or upon being repurchased by the issuer. PIK interest or dividends is recorded as interest or dividend income, as applicable. If at any point we believe that PIK interest or dividends is not expected be realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment is placed on non-accrual status. Allocation of net gains and losses: All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned. Stock-based compensation: The Company’s stock-based compensation consists of stock options issued to certain employees and directors of the Company. The Company recognizes compensation expense based on an estimated grant date fair value using the Black Sholes option-pricing method. If the factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future. The Company recognizes stock-based compensation expense for these options on a straight-line basis over the requisite service period. The Company has elected to account for forfeitures as they occur. Management and service fees: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities. NOTE 3 – INVESTMENTS The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of September 30, 2023 (together with the corresponding percentage of the fair value of our total portfolio of investments): As of September 30, 2023 Investments at Amortized Cost Percentage of Amortized Cost Investments at Fair Value Percentage of Fair Value Short-term Non-banking Loans $ 16,357,500 93.0 % $ 16,296,986 92.8 % Preferred Stock 1,050,000 6.0 1,200,000 6.8 Common Stock 159,302 0.9 48,615 0.3 Warrants 679 — — — Other Equity 10,000 0.1 10,000 0.1 Total $ 17,577,481 100 .0 % $ 17,555,601 100 .0 % The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2022 (together with the corresponding percentage of the fair value of our total investments): As of December 31, 2022 Investments at Amortized Cost Percentage of Amortized Cost Investments at Fair Value Percentage of Fair Value Short-term Non-banking Loans $ 15,486,625 89.2 % $ 15,285,932 91.5 % Preferred Stock 1,050,000 6.1 1,200,000 7.2 Common Stock — — — — 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 industry grouping, based on fair value as of September 30, 2023: As of September 30, 2023 Investments at Fair Value Percentage of Fair Value Business Services $ 10,030,569 57.1 % Consumer 3,848,372 21.9 Financial 415,166 2.4 Information Technology 514,021 2.9 Real Estate 2,747,473 15.7 Total $ 17,555,601 100 .0 % 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 % NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS Level 3 valuation information : Due to the inherent uncertainty in the valuation process, the estimate of the fair value of our investments portfolio as of September 30, 2023 may differ materially from values that would have been used had a readily available market for the investments existed. 11 Table of Contents The following table presents the fair value measurements of our portfolio investments by major class, as of September 30, 2023, according to the fair value hierarchy: As of September 30, 2023 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ — $ — $ 16,296,986 $ 16,296,986 Preferred Stock 1,200,000 1,200,000 Common Stock 48,615 — — 48,615 Warrants — — — — Other Equity — — 10,000 10,000 Total $ 48,615 $ — $ 17,506,986 $ 17,555,601 The following table presents the fair value measurements of our investment portfolio by major class, as of December 31, 2022, according to the fair value hierarchy: As of December 31, 2022 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ — $ — $ 15,285,932 $ 15,285,932 Preferred Stock — — 1,200,000 1,200,000 Common Stock — — — — Other Equity — — 222,500 222,500 Total $ — $ — $ 16,708,432 $ 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 nine months ended September 30, 2023: For the nine months ended September 30, 2023 ST Non-banking Loans Preferred Stock Common Stock Warrants Other Equity Balance as of January 1, 2023 $ 15,285,932 $ 1,200,000 $ — $ — $ 222,500 Net change in unrealized appreciation 140,179 — — — 600,000 Purchases and other adjustments to cost 11,900,500 — — — — Sales and redemptions ( 11,029,625 ) — — — — Net realized loss — — — — ( 600,000 ) Transfers out of level 3 — — — — ( 212,500 ) Balance as of September 30, 2023 $ 16,296,986 $ 1,200,000 $ — $ — $ 10,000 The net change in unrealized appreciation for the nine months ended September 30, 2023 attributable to Level 3 portfolio investments still held as of September 30, 2023 is $ 89,486 . The following table lists our Level 3 investments held as of September 30, 2023 and the unobservable inputs used to determine their valuation: Investement Type 9/30/23 FMV Valuation Technique Unobservable Inputs Range ST Non-banking Loans $ 16,296,986 discounted cash flow determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness 12 - 18 % Other Equity 10,000 last secured funding known by company data obtained from issuer, and stated value of instrument (if any), less assumed transaction costs. Preferred Stock 1,200,000 last funding secured by company data obtained from issuer, and stated value of instrument (if any), less assumed transaction costs. $ 17,506,986 12 Table of Contents The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment assets for the year ended December 31, 2022: For the year ended December 31, 2022 ST Non-banking Loans Preferred Stock Common Stock Warrants Other Equity Balance as of January 1, 2022 $ 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 was $ 651,371 . 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 NOTE 5 – RELATED-PARTY TRANSACTIONS We maintain a conflicts of interest and related-party transactions policy requiring (i) certain disclosures be made to our Board of Directors in relation to situations where officers, directors, significant shareholders, or any of their affiliates may enter into transactions with us, and (ii) certain disclosures appear in the reports we prepare and file with the SEC. In this regard, during the period covered by this report we entered into, or remained a party to, the following related-party transactions: · · On August 10, 2018, we entered into a loan transaction with Elizabeth Zbikowski who, along with her husband Scott Zbikowski, owned and continues to own approximately 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 December 31, 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 7 below for further details. 13 Table of Contents NOTE 6 – INCOME TAXES We are a C-Corporation for tax purposes and have booked an income tax provision for the periods described below. As of September 30, 2023 and December 31, 2022, we have a deferred tax asset of $ 397,000 and $ 201,000 , respectively. As of September 2023, our net deferred tax asset consists of foreign tax credit carryforwards, unrealized investment gain/loss, non-qualified stock option expenses, net operating losses (NOL), and right of use assets. Our determination of the realizable deferred tax assets and liabilities requires the exercise of significant judgment, based in part on business plans and expectations about future outcomes. As of September 30, 2023 and December 31, 2022 we had prepaid income taxes of $ 139,200 and $ 179,300 , respectively. We recorded a decrease of income taxes of $ 38,000 ( 27 percent effective tax rate) and an increase of income taxes of $ 346,000 ( 27 percent effective tax rate) during the nine months ended September 2023 and September 2022, respectively. As of September 30, 2023, we had a federal NOL of approximately $277,000. The federal NOL may be carried forward to offset future taxable income, subject to applicable provisions of the Internal Revenue Code. Due to tax reform enacted in 2017, NOLs created after 2017 carry forward indefinitely. The estimated federal NOL that does not expire included in the total above is $277,000. States vary in their treatment of post-2017 NOLs. The state NOL of $200,000 is expected to be used by December 31, 2024. The remaining state NOL carryforwards may expire in 2038 if not used . NOTE 7 – LINE OF CREDIT On January 3, 2022, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company. Under the Loan Agreement, the Lenders made available to us a $ 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 September 30, 2022, the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement in the form of shares of our common stock based on our net asset value per share on the last day of the applicable fiscal quarter. The Loan Agreement grants the Lenders piggyback registration rights subject to customary terms, conditions and exceptions. Beginning July 1, 2022, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash. As of September 30, 2023 and December 31, 2022, there was no balance outstanding on the line. NOTE 8 – STOCK-BASED COMPENSATION The Company’s 2022 Stock Incentive Plan (the “Plan”) authorized the issuance of incentives relating to 900,000 shares of common stock. As of September 30, 2023, incentives relating to the issuance of 870,000 shares have been issued under the Plan, leaving 30,000 shares available for issuance. The Plan was amended by the Board of Directors on August 14, 2023, and a registration statement on Form S-8 respecting the Plan was filed with the SEC on August 23, 2023. The following table summarizes the activity for all stock options outstanding for the nine months ended September 30, 2023: Shares Weighted Average Exercise Price Options outstanding at beginning of year — $ — Granted 870,000 2.11 Exercised ( 200,000 ) 2.12 Forfeited — — Balance at September 30, 2023 670,000 $ 2.11 Options exercisable at September 30: 670,000 $ 2.11 Grant Date Fair Value for options granted during the period: $ 1,242,902 14 Table of Contents The following table summarizes additional information about stock options outstanding and exercisable at September 30, 2023: Options Outstanding Options Exercisable Options Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Aggregate Intrinsic Value Options Exercisable Weighted Average Exercise Price Aggregate Intrinsic Value 670,000 9.17 $ 2.11 $ 632,900 670,000 $ 2.11 $ 632,900 The Company recognized stock-based compensation expense for stock options of $ 1,460,209 for the nine months ended September 30, 2023. The Black-Scholes option-pricing model was used to estimate the fair value of equity-based awards with the following weighted-average assumptions for the nine months ended September 30, 2023: 2023 Risk-free interest rate 4.59 % Expected volatility 90 .00 % Expected life (years) 5 .0 Expected dividend yield — % The inputs for the Black-Scholes valuation model require management’s significant assumptions. The price per share of common stock is determined by using the closing market price on the Nasdaq Capital Market on the grant date. The risk-free interest rates are based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life is based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility is estimated based on historical volatility information of peer companies that are publicly available in combination with the Company’s calculated volatility. NOTE 9 – SHAREHOLDERS’ EQUITY At September 30, 2023, we had 6,385,255 shares of common stock 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. All share and per share information has been retrospectively adjusted to reflect the reverse stock split. NOTE 10 – PER-SHARE INFORMATION Basic net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of common shares outstanding during the period. Diluted net gain (loss) per common share is computed by dividing net increase in net assets resulting from operations by the weighted-average number of dilutive common shares outstanding during the period calculated using the Treasury Stock method. The Treasury Stock method assumes that the proceeds received upon exercise of stock options are used to repurchase stock at the average market price during the period, thereby increasing the number of shares to be added in computing diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net gain (loss) per common share is set forth below: 15 Table of Contents For the Three Months Ended September 30, 2023 2022 Basic Diluted Basic Diluted Numerator: Net increase in net assets resulting from operations $ 369,560 $ 369,560 $ ( 36,126 ) $ ( 36,126 ) Denominator: Weighted-average number of common shares outstanding 6,241,777 6,358,345 5,512,737 5,512,737 Basic and diluted net gain (loss) per common share $ 0.06 $ 0.06 $ ( 0.01 ) $ ( 0.01 ) For the Nine Months Ended September 30, 2023 2022 Basic Diluted Basic Diluted Numerator: Net increase (decrease) in net assets resulting from operations $ ( 277,763 ) $ ( 277,763 ) $ 893,993 $ 893,993 Denominator: Weighted-average number of common shares outstanding 6,204,303 6,204,303 5,045,830 5,045,830 Basic and diluted net gain (loss) per common share $ ( 0.04 ) $ ( 0.04 ) $ 0.18 $ 0.18 NOTE 11 – OPERATING LEASES We are a party to two non-cancelable operating leases for office space expiring May 31, 2024. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew. Because our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as of September 30, 2023 and September 30, 2022 was 4.5 % and the weighted-average remaining lease term is one year . Rent expense for office facilities for the nine months ended September 30, 2023 and September 30, 2022 was $ 55,005 and $ 54,542 , respectively. The components of our operating lease were as follows for the three and nine months ended September 30, 2023: Three Months Ended Nine Months Ended September 30, 2023 September 30, 2023 Operating lease costs $ 5,504 $ 16,512 Variable lease cost 4,886 14,619 Short-term lease cost 4,500 23,874 Total $ 14,890 $ 55,005 16 Table of Contents Supplemental balance sheet information consisted of the following at September 30: Operating Lease 2023 2022 Right-of-use assets $ 14,716 $ 21,563 Operating Lease Liability $ 14,716 $ 21,672 Less: short term portion ( 14,716 ) ( 21,672 ) Long term portion $ — $ — Maturity analysis under lease agreements consisted of the following as of September 30: 2023 2022 2022 $ — $ 6,357 2023 7,428 14,859 2024 7,482 — Total lease payments 14,910 21,216 Less: Present value discount ( 194 ) 456 Present value of lease liabilities $ 14,716 $ 21,672 NOTE 12 – FINANCIAL HIGHLIGHTS The following is a schedule of financial highlights for the nine months ended September 30, 2023 through 2019: Nine Months Ended September 30, 2023 2022 2021 2020 2019 Per Share Data (1) Net asset value at beginning of period $ 2.89 2.80 2.43 2.05 2.30 Net investment income (loss) ( 0.06 ) 0.18 0.20 0.05 ( 0.11 ) Net realized and unrealized gains (losses) 0.01 0.02 0.54 0.14 0.02 Provision for income taxes 0.01 ( 0.05 ) ( 0.20 ) 0.00 0.00 Issuance of stock options 0.24 0.00 0.00 0.00 0.00 Issuance of common stock 0.05 0.00 0.00 0.00 0.00 Stock-based compensation 0.00 0.05 0.00 0.00 0.00 Repurchase of common stock 0.00 0.00 0.00 0.05 0.00 Other changes in equity ( 0.09 ) 0.02 0.00 0.00 0.00 Payment of common stock dividend 0.00 0.00 ( 0.23 ) 0.00 ( 0.11 ) Net asset value at end of period $ 3.05 3.02 2.74 2.29 2.10 Ratio / Supplemental Data Per share market value of investments at end of period $ 2.75 2.92 2.30 1.71 1.58 Shares outstanding at end of period 6,385,255 6,185,255 4,795,739 4,754,104 4,918,845 Average weighted shares outstanding for the period - basic 6,204,303 5,045,830 4,795,075 4,836,170 4,918,845 Average weighted shares outstanding for the period - diluted 6,320,871 5,045,830 4,795,075 4,836,170 4,918,845 Net assets at end of period $ 19,478,006 18,658,595 13,140,835 10,805,062 10,588,689 Average net assets (2) $ 18,661,934 15,081,352 13,090,497 10,220,482 12,304,975 Total investment return (loss) ( 2.76 )% 6.07 % 22.22 % 8.79 % ( 8.82 )% Portfolio turnover rate (3) 59.61 % 66.81 % 124.55 % 18.18 % 7.11 % Ratio of operating expenses to average net assets (3) ( 20.10 )% ( 19.24 )% ( 10.31 )% ( 6.49 )% ( 7.70 )% Ratio of net investment income (loss) to average net assets (3) ( 2.76 )% 10.09 % 9.87 % 3.35 % ( 6.40 )% (1) Per-share data was derived using the ending number of shares outstanding for the period. (2) Based on the monthly average of net assets as of the beginning and end of each period presented. (3) Ratios are annualized. NOTE 13 – Subsequent Events At the Company's 2023 annual shareholder meeting held on October 31, 2023, the shareholders of the Company re-elected all directors to serve another term on our Board of Directors, approved on an advisory basis the executive compensation paid to the Company's named executives, and voted on an advisory basis in favor of future advisory votes on the Company's executive compensation every three years. 17 Table of Contents