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, 2023 and December 31, 2022 F-4 Statements of Operations — Years ended December 31, 2023 and December 31, 2022 F-5 Statements of Shareholders’ Equity — Years ended December 31, 2023 and December 31, 2022 F-6 Statements of Cash Flows — Years ended December 31, 2023 and December 31, 2022 F-7 Investment Schedules — December 31, 2023 and December 31, 2022 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, 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 $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. 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. 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 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. F-2 Table of Contents Valuation of investments which utilize significant unobservable inputs Description of the Matter 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 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 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 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 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. Minneapolis, Minnesota April 1, 2024 F-3 Table of Contents Mill City Ventures III, Ltd. Balance Sheets December 31, 2023 December 31, 2022 ASSETS Investments, at fair value (cost: $ 18,577,481 and $ 17,359,804 , respectively) $ 17,284,676 $ 16,708,432 Cash 376,024 1,089,641 Note receivable, related party 250,000 250,000 Prepaid expenses 165,301 218,440 Interest and dividend receivables 264,413 250,879 Right-of-use operating lease asset 9,283 16,398 Deferred taxes 757,000 201,000 Total Assets $ 19,106,697 $ 18,734,790 LIABILITIES Accounts payable $ 71,702 $ 136,514 Accrued payroll liabilities 435,449 640,000 Operating lease liability 9,283 16,562 Deferred interest income — 70,154 Total Liabilities 516,434 863,230 Commitments and Contingencies SHAREHOLDERS EQUITY (NET ASSETS) Common stock, par value $ 0.001 per share ( 111,111,111 authorized; 6,385,255 and 6,185,255 issued and outstanding) 6,385 6,185 Additional paid-in capital 15,473,121 15,049,321 Additional paid-in capital - stock options 1,460,209 — Accumulated deficit ( 1,159,665 ) ( 1,159,665 ) Accumulated undistributed investment loss ( 1,052,183 ) ( 1,086,739 ) Accumulated undistributed net realized gains on investment transactions 5,155,200 5,713,829 Net unrealized depreciation in value of investments ( 1,292,804 ) ( 651,371 ) Total Shareholders' Equity (Net Assets) 18,590,263 17,871,560 Total Liabilities and Shareholders' Equity $ 19,106,697 $ 18,734,790 Net Asset Value Per Common Share $ 2.91 $ 2.89 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, 2023 December 31, 2022 Investment Income Interest income $ 3,298,635 $ 4,199,453 Total Investment Income 3,298,635 4,199,453 Operating Expenses Professional fees 761,525 1,592,218 Payroll 1,848,393 941,590 Insurance 108,039 111,110 Occupancy 68,421 73,146 Director's fees 772,968 417,073 Interest expense 78,000 195,893 Other general and administrative 81,287 67,847 Total Operating Expenses 3,718,633 3,398,877 Net Investment Gain (Loss) ( 419,998 ) 800,576 Realized and Unrealized Gain (Loss) on Investments Net realized gain (loss) on investments ( 558,629 ) 133,019 Net change in unrealized depreciation on investments ( 641,433 ) ( 816,989 ) Net Realized and Unrealized Loss on Investments ( 1,200,062 ) ( 683,970 ) Net Increase (Decrease) in Net Assets Resulting from Operations Before Taxes ( 1,620,060 ) 116,606 Provision For (Benefit From) Income Taxes ( 454,554 ) 9,648 Net Increase (Decrease) in Net Assets Resulting from Operations $ ( 1,165,506 ) $ 106,958 Net Increase (Decrease) in Net Assets Resulting from Operations per share: Basic and diluted $ ( 0.18 ) $ 0.02 Weighted-average number of common shares outstanding - basic and diluted 6,249,913 5,333,028 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 Year Ended December 31, 2023 Common Shares Par Value Additional Paid In Capital Accumulated Deficit Accumulated Undistributed Net Investment Loss Accumulated Undistributed Net Realized Gain (Loss) on Investment Transactions Net Unrealized Depreciation in value of Investments Total Shareholders' Equity Balance as of December 31, 2022 6,185,255 $ 6,185 $ 15,049,321 $ ( 1,159,665 ) $ ( 1,086,739 ) $ 5,713,829 $ ( 651,371 ) $ 17,871,560 Stock-based compensation — — 1,460,209 — — — — 1,460,209 Exercise of stock options 200,000 200 423,800 — — 424,000 Undistributed net investment gain — — — 34,556 — — 34,556 Undistributed net realized loss on investment transactions — — — — ( 558,629 ) — ( 558,629 ) Depreciation in value of investments — — — — — ( 641,433 ) ( 641,433 ) Balance as of December 31, 2023 6,385,255 $ 6,385 $ 16,933,330 $ ( 1,159,665 ) $ ( 1,052,183 ) $ 5,155,200 $ ( 1,292,804 ) $ 18,590,263 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 Investment Transactions Net Unrealized Appreciation (Depreciation) in value of Investments Total Shareholders' Equity Balance as of December 31, 2021 4,795,739 $ 4,760 $ 10,700,193 $ ( 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 Warrants 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 — — — 790,928 — — 790,928 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 $ 6,185 $ 15,049,321 $ ( 1,159,665 ) $ ( 1,086,739 ) $ 5,713,829 $ ( 651,371 ) $ 17,871,560 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, 2023 December 31, 2022 Cash flows from operating activities: Net increase (decrease) in net assets resulting from operations $ ( 1,165,506 ) $ 106,958 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 641,433 816,989 Net realized (gain) loss on investments 558,629 ( 133,019 ) Purchases of investments ( 12,900,500 ) ( 23,558,458 ) Proceeds from sales of investments 11,124,194 20,264,731 Stock-based compensation 1,460,209 — Deferred income taxes ( 556,000 ) ( 246,000 ) Stock-based compensation to employees and vendors — 308,758 Changes in operating assets and liabilities: Prepaid expenses and other assets 60,254 ( 146,180 ) Interest and dividends receivable ( 13,534 ) 73,471 Payable for investment purchase — ( 1,900,000 ) Accounts payable and other liabilities ( 276,642 ) 723,294 Deferred interest income ( 70,154 ) 70,154 Accrued income taxes — ( 1,269,000 ) Net cash used in operating activities ( 1,137,617 ) ( 4,888,302 ) Cash flows from financing activities: Proceeds from public offering, net of underwriting discounts and offering costs — 4,041,795 Proceeds from stock option exercise 424,000 — Proceeds from line of credit 2,750,000 9,793,800 Repayments on line of credit ( 2,750,000 ) ( 9,793,800 ) Net cash provided by financing activities 424,000 4,041,795 Net decrease in cash ( 713,617 ) ( 846,507 ) Cash, beginning of period 1,089,641 1,936,148 Cash, end of period $ 376,024 $ 1,089,641 Supplemental disclosure of cash flow information: Cash paid for income taxes $ — $ 428,948 Cash paid for interest $ 78,000 $ 195,894 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, 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 $ 10,069,354 54.16 % Consumer - 23% secured loans Intelligent Mapping, LLC 2,900,000 2,906,464 15.63 % Financial - 12% secured loans 500,000 - 0.00 % Information Technology - 15% convertible note 212,500 213,501 1.15 % Real Estate - 18% secured loans 745,000 760,119 4.09 % Tailwind, LLC 1,000,000 1,001,954 5.39 % Real Estate - 12% secured loans Alatus Development Corp 2,000,000 2,010,374 10.81 % Total Short-Term Non-Banking Loans 17,357,500 16,961,766 91.23 % Preferred Stock Consumer Wisdom Gaming, Inc 900,000 265,000 1.43 % Information Technology 150,000 - 0.00 % Total Preferred Stock 1,050,000 265,000 1.43 % Common Stock Consumer 159,302 47,910 0.26 % Warrants Healthcare 679 — 0.00 % Other Equity Financial 10,000 10,000 0.05 % Total Investments $ 18,577,481 $ 17,284,676 92.97 % Total Cash 376,024 376,024 2.02 % Total Investments and Cash $ 18,953,505 $ 17,660,700 94.99 % 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, 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 % 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”) Topic 946 “Financial Services – Investment Companies”. 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, 2022, has been changed to conform to the classifications used in 2023. 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, 2020 through 2022, which are the tax years that remain subject to examination by the tax jurisdictions as of December 31, 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 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. 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: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities. F-12 Table of Contents 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 December 31, 2023 2022 Numerator: Net increase (decrease) in net assets resulting from operations $ ( 1,165,506 ) $ 106,958 Denominator: Weighted-average number of common shares outstanding 6,249,913 5,333,028 Basic and diluted net gain (loss) per common share $ ( 0.18 ) $ 0.02 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 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. 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, 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. The components of our operating leases were as follows for the years ended December 31: 2023 2022 Operating lease costs $ 21,975 $ 21,291 Variable lease cost 19,572 18,325 Short-term lease cost 26,874 33,530 Total $ 68,421 $ 73,146 Supplemental balance sheet information consisted of the following at December 31: Operating Lease 2023 2022 Right-of-use assets $ 9,283 $ 16,398 Operating Lease Liability $ 9,283 $ 16,562 Less: short term portion ( 9,283 ) ( 16,562 ) Long term portion $ — $ — F-13 Table of Contents Maturity analysis under lease agreements consisted of the following as of December 31: 2023 2022 2023 $ — $ 16,675 2024 $ 9,353 $ — Total lease payments 9,353 16,675 Less: Present value discount ( 70 ) ( 113 ) Present value of lease liabilities $ 9,283 $ 16,562 Supplemental cash flow information related to leases for the years ended December 31: 2023 2022 Operating cash outflow from operating leases $ 69,743 $ 75,146 NOTE 5—SHAREHOLDERS’ EQUITY At December 31, 2023 a total of 6,385,255 shares of common stock were issued and outstanding. At December 31, 2022 a total of 6,185,255 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 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. 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 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. F-14 Table of Contents 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, 2023 (together with the corresponding percentage of total portfolio investments): As of December 31, 2023 Investments at Amortized Cost Percentage of Amortized Cost Investments at Fair Value Percentage of Fair Value Short-term Non-banking Loans $ 17,357,500 93.4 % $ 16,961,766 98.1 % Preferred Stock 1,050,000 5.6 265,000 1.5 Common Stock 159,302 0.9 47,910 0.3 Warrants 679 — — — Other Equity 10,000 0.1 10,000 0.1 Total $ 18,577,481 100.0 % $ 17,284,676 100.0 % 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 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 industry grouping, based on fair value as of December 31, 2023: As of December 31, 2023 Investments at Fair Value Percentage of Fair Value Business Services $ 10,069,354 58.3 % Consumer 3,219,374 18.6 Financial 10,000 0.1 Information Technology 213,501 1.2 Real Estate 3,772,447 21.8 Total $ 17,284,676 100.0 % 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 % F-15 Table of Contents 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, 2023 and 2022 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, 2023, according to the fair value hierarchy: As of December 31, 2023 Level 1 Level 2 Level 3 Total Short-term Non-banking Loans $ — $ — $ 16,961,766 $ 16,961,766 Preferred Stock — — 265,000 265,000 Common Stock 47,910 — — 47,910 Warrants — — — — Other Equity — — 10,000 10,000 Total $ 47,910 $ — $ 17,236,766 $ 17,284,676 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 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, 2023: For the year ended December 31, 2023 ST Non-banking Loans Preferred Stock Other Equity Balance as of January 1, 2023 $ 15,285,932 $ 1,200,000 $ 222,500 Net change in unrealized depreciation ( 195,041 ) ( 935,000 ) 600,000 Purchases and other adjustments to cost 12,900,500 — — Sales and redemptions ( 11,029,625 ) — — Realized gain (loss) — — ( 600,000 ) Transfers between level 3 and level 1 — — ( 212,500 ) Balance as of December 31, 2023 $ 16,961,766 $ 265,000 $ 10,000 The net change in unrealized depreciation for the year ended December 31, 2023 attributable to Level 3 portfolio investments still held as of December 31, 2023 is $ 1,126,877 , and is included in net change in unrealized depreciation on investments on the statement of operations. F-16 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 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 lists our Level 3 investments held as of December 31, 2023 and the unobservable inputs used to determine their valuation: Security Type 12/31/23 FMV Valuation Technique Unobservable Inputs Range ST Non-banking Loans $ 16,961,766 discounted cash flow determining private company interest rate based on changes in market rates of instruments with comparable creditworthiness 12 - 23 % Other Equity 10,000 last secured funding known by company Preferred Stock 265,000 last funding secured by company economic changes since last funding $ 17,236,766 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: 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 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 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 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 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. 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. F-17 Table of Contents 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: Shares Weighted Average Exercise Price Options outstanding at beginning of year — $ — Granted 870,000 2.11 Exercised ( 200,000 ) 2.12 Forfeited — — Balance at December 31, 2023 670,000 $ 2.11 Options exercisable at December 31: 670,000 $ 2.11 Grant Date Fair Value for options granted during the period: $ 1,460,209 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 670,000 8.92 $ 2.11 $ 230,900 670,000 $ 2.11 $ 230,900 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: 2023 Risk-free interest rate 3.88 % Expected volatility 90.00 % Expected life (years) 5.0 Expected dividend yield — % F-18 Table of Contents 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 10 – 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 534,000 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 July 1, 2024. 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. The Loan Agreement was terminated in January 2024. See note 8 above for further details. NOTE 11 — 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 $ 23,750 and $ 14,063 for the years ended 2023 and 2022, respectively. NOTE 12 — INCOME TAXES 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 for the year ended December 31, 2023, and 2022 are described below. December 31 2023 2022 Current taxes Federal $ 83,402 $ 268,803 State 18,044 ( 13,155 ) Deferred taxes Federal ( 556,000 ) ( 246,000 ) State — — Provision for (benefit from) income taxes $ ( 454,554 ) $ 9,648 F-19 Table of Contents A reconciliation of income tax provisions at the U.S. statutory rate for fiscal year 2023 and 2022 is as follows: 2023 2022 Rate reconciliation: Tax expense at U.S. statutory rate $ ( 431,776 ) $ 97,503 Change in deferred tax rate ( 1,866 ) 450 Prior year over / under accrual 93,702 — Provision-to-return reconciliation ( 110,457 ) ( 18,536 ) Temporary differences — ( 71,856 ) Other ( 4,157 ) 2,087 Income tax provision $ ( 454,554 ) $ 9,648 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. Significant components of our deferred tax assets and liabilities as of December 31, 2023 and 2022 were as follows: December 31 2023 2022 Deferred tax components Unrealized (gain) loss on marketable securities $ 343,886 $ 156,590 Depreciation 1,619 1,781 R&D and foreign credits 40,820 43,828 Lease liability — ( 39 ) Stock options 275,632 — Acquisition costs 30,402 Accrued bonuses 66,500 — Other ( 1,859 ) ( 1,160 ) Net deferred tax asset $ 757,000 $ 201,000 F-20 Table of Contents NOTE 13 — FINANCIAL HIGHLIGHTS The following is a schedule of financial highlights for the years ended December 31, 2023 through 2019: Year Ended December 31, 2023 2022 2021 2020 2019 Per Share Data (1) Net asset value at beginning of period $ 2.89 2.80 2.44 2.05 2.30 Net investment gain (loss) ( 0.07 ) 0.13 0.27 0.11 ( 0.14 ) Net realized and unrealized gain (loss) ( 0.19 ) ( 0.11 ) 0.54 0.41 0.00 (Provision for) benefit from income taxes 0.07 0.00 ( 0.23 ) ( 0.05 ) 0.00 Issuance of common stock 0.07 0.00 0.00 0.00 0.00 Stock-based compensation 0.23 0.05 0.00 ( 0.02 ) 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 ( 0.22 ) ( 0.11 ) ( 0.11 ) Net asset value at end of period $ 2.91 2.89 2.80 2.44 2.05 Ratio / Supplemental Data Per share market value of investments at end of period $ 2.75 2.70 2.95 1.40 0.36 Shares outstanding at end of period 6,385,255 6,185,255 4,795,739 4,793,739 4,918,845 Average weighted shares outstanding for the period 6,366,481 5,333,028 4,795,242 4,830,691 4,918,845 Net assets at end of period $ 18,590,263 17,871,560 13,414,049 11,640,887 10,068,533 Average net assets (2) $ 18,647,600 15,639,394 13,155,207 10,504,563 11,473,535 Total investment return ( 7.27 )% 1.43 % 24.07 % 23.08 % ( 5.88 )% Portfolio turnover rate (3) 59.65 % 129.57 % 168.67 % 61.11 % 7.63 % Ratio of operating expenses to average net assets (3) ( 19.94 )% ( 21.73 )% ( 10.30 )% ( 7.16 )% ( 7.27 )% Ratio of net investment income (loss) to average net assets (3) ( 2.25 )% 5.12 % 9.89 % 5.35 % ( 5.86 )% Ratio of realized gains (losses) to average net assets (3) ( 3.00 )% 0.85 % 31.30 % 0.05 % 28.35 % (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 14 — SUBSEQUENT EVENTS None. F-21 Table of Contents ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.