What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-04-02 compared with 2023-04-17 · 145 added, 94 removed, 485 unchanged (33% of the section changed)

29 unchanged sentences

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.

As explained in Note 7 to the financial statements, the accompanying financial statements include investments valued at $17,284,676 and $16,708,432 as of December 31, 2023 and 2022, 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 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.

The investments are valued based on unobservable inputs as of December 31, 2023 and 2022.

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate significantly over short periods of time.

1 unchanged sentence

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 critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, 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.

2 unchanged sentences

At December 31, 2023, the balances of the Company’s investments, at fair value, categorized as Level 3 within the fair value hierarchy totaled $17,236,766.

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.

The fair values of these investments are 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 and judgement 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

2 unchanged sentences

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 also consulted with our valuation specialist to ascertain that the Company’s valuation method was widely accepted.

We assigned senior, more experienced audit team members to perform audit procedures related to the valuation of investments.

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.

We considered the other information obtained during the audit that corroborated or contradicted the Company’s inputs or fair value measurements.

For investments sold during the year or subsequent to year-end, we compared the transaction price to the Company’s fair value estimate to assess the reasonableness of management’s fair value estimates.

/s/ Boulay PLLP

We have served as the Company’s auditor since 2019.

3 unchanged sentences

Balance Sheets

Investments, at fair value:

Non-control/non-affiliate investments (cost:

December 31, 2023

December 31, 2022

Investments, at fair value (cost:

$ 18,577,481 and $ 17,359,804 , respectively)

5 unchanged sentences

Accounts payable

Dividend payable

Payable for purchase of investments

Accrued payroll liabilities

Operating lease liability

Deferred interest income

Accrued income tax

Deferred taxes

Total Liabilities

2 unchanged sentences

Common stock, par value $ 0.001 per share ( 111,111,111 authorized;

6,185,255 and 4,795,739 outstanding)

6,385,255 and 6,185,255 issued and outstanding)

Additional paid-in capital

Additional paid-in capital - stock options

Accumulated deficit

3 unchanged sentences

( 1,052,183 )

( 1,086,739 )

Accumulated undistributed net realized gains on investment transactions

Net unrealized appreciation (depreciation) in value of investments

Net unrealized depreciation in value of investments

( 1,292,804 )

Total Shareholders' Equity (Net Assets)

13 unchanged sentences

Total Operating Expenses

Net Investment Gain

Net Investment Gain (Loss)

Realized and Unrealized Gain (Loss) on Investments

Net realized gain on investments

Net realized gain (loss) on investments

Net change in unrealized depreciation on investments

Net Realized and Unrealized Loss on Investments

( 1,200,062 )

Net Realized and Unrealized Gain (Loss) on Investments

Net Increase in Net Assets Resulting from Operations Before Taxes

Provision For Income Taxes

Net Increase in Net Assets Resulting from Operations

Net Increase in Net Assets Resulting from Operations per share:

Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes

( 1,620,060 )

Provision For (Benefit From) Income Taxes

Net Increase (Decrease) in Net Assets Resulting from Operations

$ ( 1,165,506 )

Net Increase (Decrease) in Net Assets Resulting from Operations per share:

Basic and diluted

3 unchanged sentences

Statements of Shareholders’ Equity

For the years ended December 31, 2022 and 2021

Year Ended December 31, 2023

3 unchanged sentences

Accumulated Undistributed Net Investment Loss

Accumulated Undistributed Net Realized Gain on Investments Transactions

Net Unrealized Appreciation (Depreciation) in value of Investments

Accumulated Undistributed Net Realized Gain (Loss) on Investment Transactions

Net Unrealized Depreciation in value of Investments

Total Shareholders' Equity

2 unchanged sentences

$ ( 1,086,739 )

Common shares issued in public offering net of underwriting costs and warrants

Warramts issued to underwriter

Common shares issued in reverse stock split rounding

Common shares issued in stock-based compensation

Common shares issued in consideration for expense payment

$ ( 651,371 )

Stock-based compensation

Exercise of stock options

Undistributed net investment gain

Undistributed net realized gain on investment transactions

Undistributed net realized loss on investment transactions

Depreciation in value of investments

8 unchanged sentences

Accumulated Undistributed Net Investment Loss

Accumulated Undistributed Net Realized Gain on Investments Transactions

Accumulated Undistributed Net Realized Gain on Investment Transactions

Net Unrealized Appreciation (Depreciation) in value of Investments

3 unchanged sentences

$ ( 1,877,667 )

Dividend Declared

( 1,079,041 )

Common shares issued in public offering net of underwriting costs and warrants

Warrants issued to underwriter

Common shares issued in reverse stock split rounding

Common shares issued in stock-based compensation

Common shares issued in consideration for expense payment

2 unchanged sentences

Depreciation in value of investments

Balance as of December 31, 2022

$ ( 1,159,665 )

$ ( 1,086,739 )

$ ( 651,371 )

The accompanying notes are an integral part of these financial statements.

2 unchanged sentences

Cash flows from operating activities:

Net increase in net assets resulting from operations

Adjustments to reconcile net increase in net assets resulting

Net increase (decrease) in net assets resulting from operations

$ ( 1,165,506 )

Adjustments to reconcile net increase (decrease) in net assets resulting

from operations to net cash used in operating activities:

Net change in unrealized depreciation on investments

Net realized gain on investments

( 4,118,001 )

Net realized (gain) loss on investments

Purchases of investments

2 unchanged sentences

Proceeds from sales of investments

Stock-based compensation

Deferred income taxes

3 unchanged sentences

Interest and dividends receivable

Receivable for investment sales

Payable for investment purchase

9 unchanged sentences

Proceeds from public offering, net of underwriting discounts and offering costs

Proceeds from stock option exercise

Proceeds from line of credit

1 unchanged sentence

( 2,750,000 )

Payments for common stock dividend

( 9,793,800 )

Net cash provided (used) by financing activities

( 1,618,337 )

Net cash provided by financing activities

Net decrease in cash

( 3,504,431 )

Cash, beginning of period

3 unchanged sentences

Cash paid for interest

Non-cash financing activities:

Common shares issued as consideration for investment

The accompanying notes are an integral part of these financial statements.

6 unchanged sentences

Business Services - 15% secured loans

Liberated Syndication Inc.

Business Services - 15% secured loans

Mustang Litigation Funding

2 unchanged sentences

Financial - 12% secured loans

Benton Financial, LLC

Financial - 12% secured loans

Information Technology - 15% convertible note

Real Estate - 18% secured loans

Tailwind, LLC

Real Estate - 12% secured loans

5 unchanged sentences

Total Preferred Stock

Total Other Equity

Total Investments

7 unchanged sentences

Short-Term Non-banking Loans

Business Services - 18% secured loans

Liberated Syndication Inc.

Business Services - 15% secured loans

Mustang Litigation Funding

Consumer - 15% secured loans

AirDog Supplies, Inc.

Intelligent Mapping, LLC

Financial - 33% secured loans

Benton Financial, LLC

Financial - 12% secured loans

Litigation Financing - 23% secured loans

The Cross Law Firm, LLC

Information Technology - 15% convertible note

Real Estate - 15% secured loans

Tailwinds, LLC

Real Estate - 12% secured loans

Alatus Development, LLC

Alatus Development Corp

Total Short-Term Non-Banking Loans

Financial Services

Preferred Stock

8 unchanged sentences

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.

82 unchanged sentences

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 Scholes 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:

1 unchanged sentence

Our executive management team manages our investments as part of their employment responsibilities.

NOTE 3 — NET GAIN PER COMMON SHARE

NOTE 3 — NET GAIN (LOSS) 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

Net increase in net assets resulting from operations

For the Year Ended December 31,

Net increase (decrease) in net assets resulting from operations

$ ( 1,165,506 )

Weighted-average number of common shares outstanding

Basic and diluted net gain per common share

Basic and diluted net gain (loss) per common share

At December 31, 2023 and 2022, 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.

At December 31, 2023, options issued under the plan for the purchase of 670,000 common shares remained outstanding.

For the year ended December 31, 2023, the common shares underlying the stock options have been excluded from the calculation because their effect would be anti-dilutive.

Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per common share are the same.

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.

We are subject to two non-cancelable operating leases for office space expiring May 31, 2024.

These leases do not have significant payment escalations, holidays, concessions, leasehold improvements, or other build-out clauses.

Further, the leases do not contain contingent rent provisions.

2 unchanged sentences

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.

The weighted-average discount rate as of December 31, 2023 and December 31, 2022 was 4.5 % and the weighted-average remaining lease term was less than one year, and one year, respectively.

Rent expense for office facilities for the year ended December 31, 2023 and 2022 was $ 68,421 and $ 73,146 , respectively.

20 unchanged sentences

Any fractional share resulting from the reverse stock split was rounded up to the nearest whole share.

The reverse stock split was retroactively applied to prior periods, which reduced common stock by approximately $6,000 as part of the reverse stock split for the reduction in common shares outstanding, and increased additional paid-in capital by approximately $6,000 as of December 31, 2021.

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.

9 unchanged sentences

This warrant is equity-classified and the fair value was $ 201,173 on the offering date.

During 2023 there were 200,000 shares issued related to the exercise of stock options.

During 2022, there were 1,389,516 shares issued by the Company.

26 unchanged sentences

Percentage of

Business Services

Information Technology

19 unchanged sentences

( 11,029,625 )

Realized gain (loss)

Transfers between level 3 and level 1

Balance as of December 31, 2023

5 unchanged sentences

Balance as of January 1, 2022

Net change in unrealized appreciation

Net change in unrealized depreciation

Purchases and other adjustments to cost

2 unchanged sentences

Balance as of December 31, 2022

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.

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 lists our Level 3 investments held as of December 31, 2023 and the unobservable inputs used to determine their valuation:

15 unchanged sentences

discounted cash flow

determining private company credit rating

determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness

last secured funding known by company

economic changes since last funding

Preferred Stock

1 unchanged sentence

economic changes since last funding

There were no transfers between levels during the years ended December 31, 2022 and 2021.

There was one transfer between levels during 2023 due to an initial public offering of a previously privately held security.

The shares of that security are now free trading.

There were no transfers between levels during the years ended December 31, 2022.

NOTE 8 – LINE OF CREDIT

4 unchanged sentences

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.

Amounts drawn under the Loan Agreement accrued interest at the per annum rate of 8 %, and all our obligations under the Loan Agreement were 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;

Berman was obligated to furnish only one-half of the aggregate $ 5 million available under the Loan Agreement.

The Loan Agreement had a five-year term ending on January 3, 2027, at which time all amounts owing under the Loan Agreement were to 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 .

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 initially required 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.

Beginning July 1, 2022, however, we became obligated under the Loan Agreement to pay the quarterly unused commitment fee in cash.

At December 31, 2023 and 2022, the balance outstanding on the line was $0.

In January 2024, we terminated the Loan Agreement having earlier satisfied all amounts owing thereunder.

Any applicable fees related to early termination of the Agreement were waived.

NOTE 9 – 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 December 31, 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 year ended December 31, 2023:

Weighted Average Exercise Price

Options outstanding at beginning of year

Balance at December 31, 2023

Options exercisable at December 31:

Grant Date Fair Value for options granted during the period:

The following table summarizes additional information about stock options outstanding and exercisable at December 31, 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

The Company recognized stock-based compensation expense for stock options of $ 1,460,209 for the year ended December 31, 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 year ended December 31, 2023:

Risk-free interest rate

Expected volatility

Expected life (years)

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.

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 10 – RELATED-PARTY TRANSACTIONS

2 unchanged sentences

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 534,000 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.

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 July 1, 2024.

The promissory note bears interest payable monthly at the rate of 10 % per annum.

6 unchanged sentences

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.

The Loan Agreement was terminated in January 2024.

See note 8 above for further details.

5 unchanged sentences

Presently, we are a “C-corporation” for tax purposes and have booked an income tax provision for the years ended December 31, 2023 and 2022.

Income taxes as of December 31, 2022, and 2021 are described below.

Income taxes for the year ended December 31, 2023, and 2022 are described below.

Current taxes

Deferred taxes

Provision for income taxes

Provision for (benefit from) income taxes

$ ( 454,554 )

A reconciliation of income tax provisions at the U.S.

3 unchanged sentences

statutory rate

$ ( 431,776 )

Change in deferred tax rate

Prior year over / under accrual

Provision-to-return reconciliation

Temporary differences

Income tax provision

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.

$ ( 454,554 )

As of December 31, 2023 and 2022 we had a deferred tax asset of $ 757,000 and $ 201,000 , 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.

4 unchanged sentences

Lease liability

Net deferred tax asset (liability)

Stock options

Acquisition costs

Accrued bonuses

Net deferred tax asset

NOTE 13 — FINANCIAL HIGHLIGHTS

4 unchanged sentences

Net investment gain (loss)

Net realized and unrealized gains

Provision for income taxes

Net realized and unrealized gain (loss)

(Provision for) benefit from income taxes

Issuance of common stock

Stock-based compensation

13 unchanged sentences

Ratio of net investment income (loss) to average net assets (3)

Ratio of realized gains (losses) to average net assets (3)

(1) Per-share data was derived using the weighted-average number of shares outstanding for the period.

2 unchanged sentences

NOTE 14 — 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.

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data