UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

 

FORM 10-Q

__________________________

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

¨

For the quarterly period ended September 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________ to ___________________

 

Commission File Number 814-00991001-41472

__________________________

 

MILL CITY VENTURES III, LTD.

MILL CITY VENTURES III, LTD.
(Exact name of registrant as specified in its charter)

__________________________

 

Minnesota

 

Minnesota

90-0316651

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

328 Barry Avenue South #210,

1907 Wayzata Blvd, #205, Wayzata, Minnesota

55391

(Address of principal executive offices)

(Zip Code)

 

(952) 479-1923

(Registrant’s telephone number, including area code)

__________________________

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

__________________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes     ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x Yes     ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨

Accelerated filer¨

Non-accelerated filer¨

Smaller reporting companyx

Emerging growth company¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨ Yes     x No

 

As of September 30, 2017,November 18, 2022, Mill City Ventures III, Ltd. had 11,067,4026,185,255 shares of common stock, and no other classes of capital stock, outstanding.

 

 

MILL CITY VENTURES III, LTD.

 

Index to Form 10-Q

for the Quarter Ended September 30, 20172022

 

Page No.

PART I.

FINANCIAL INFORMATION

Page No.

Item 1.

Financial Statements (unaudited)

Condensed Balance Sheets – September 30, 20172022 and December 31, 20162021

3

Condensed Statements of Operations – Three and nine months ended September 30, 20172022 and September 30, 20162021

4

Condensed Statements of Changes in Net AssetsShareholders’ EquityNineThree and nine months ended September 30, 20172022 and September 30, 20162021

5

Condensed Statements of Cash Flows – Nine months ended September 30, 20172022 and September 30, 20162021

6

Condensed Schedule of Investments – September 30, 20172022 and Schedule of Investments – December 31, 20162021

7

 8

Condensed Notes to Financial Statements – September 30, 20172022

9

 10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 19

Item 4.

Controls and Procedures

21

 22

PART II.

OTHER INFORMATION

 23

Item 6.

Exhibits

23 

SIGNATURES

 24

 
PART II.OTHER INFORMATION
Item 6.Exhibits22
SIGNATURES22

 

PART I.  FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

 

ITEM 1. FINANCIAL STATEMENTS

MILL CITY VENTURES III, LTD.

CONDENSED BALANCE SHEETS

 

 September 30,
2017
(unaudited)
 December 31,
2016
(audited)
 

 

September 30, 2022

(unaudited)

 

 

December 31, 2021

 

ASSETS        

 

 

 

 

 

Investments at fair value:        
Non-control/non-affiliate investments (cost of $6,904,057 and $7,397,908, respectively) $6,793,306  $6,987,002 

Investments, at fair value:

 

$18,063,248

 

$14,098,675

 

Non-control/non-affiliate investments (cost: $17,913,927 and $13,933,057 respectively)

 

 

 

 

 

Cash  2,336,878   2,344,751 

 

1,861,650

 

1,936,148

 

Note receivable, related party

 

250,000

 

250,000

 

Prepaid expenses  63,142   61,661 

 

116,307

 

83,674

 

Interest and dividends receivable  28,137   4,853 
Leasehold improvements, net  9,584   15,665 
Property and equipment, net  7,862   9,946 

Receivable for sale of investments

 

 

 

Interest and dividend receivables

 

939,299

 

324,350

 

Right-of-use lease asset

 

21,563

 

4,984

 

Deferred taxes

 

 

4,000

 

 

 

 

Total Assets $9,238,909  $9,423,878 

 

$21,256,067

 

 

$16,697,831

 

        

 

 

 

 

 

LIABILITIES        

 

 

 

 

 

Current Liabilities:        

Line of credit

 

$2,313,000

 

$

 

Accounts payable $19,420  $25,097 

 

134,000

 

64,028

 

Deferred rent  10,901   11,373 
Total Current Liabilities  30,321   36,470 

Dividend payable

 

 

100

 

Payable for purchase of investments

 

 

1,900,000

 

Lease liability

 

21,672

 

5,654

 

Accrued income tax

 

128,800

 

1,269,000

 

Deferred taxes

 

 

 

 

 

45,000

 

Total Liabilities  30,321   36,470 

 

 

2,597,472

 

 

 

3,283,782

 

Commitments and Contingencies (Note 4)        

Commitments and Contingencies

 

 

 

 

 

        

 

 

 

 

 

SHAREHOLDERS’ EQUITY (NET ASSETS)        
Common stock, par value $0.001 per share (250,000,000 authorized; 11,067,402 and 12,151,493 issued and outstanding)  11,067   12,151 

SHAREHOLDERS EQUITY (NET ASSETS)

 

 

 

 

 

Common stock, par value $0.001 per share (111,111,111 authorized; 6,185,255 and 4,795,739 outstanding)

 

12,215

 

10,790

 

Additional paid-in capital  10,774,653   11,857,660 

 

15,043,291

 

10,694,163

 

Accumulated deficit  (1,159,665)  (1,159,665)

 

(1,159,665)

 

(1,159,665)
Accumulated undistributed investment loss  (1,068,702)  (1,330,205)

 

(1,100,397)

 

(1,877,667)
Accumulated undistributed net realized gains on investment transactions  761,986   418,373 

 

5,713,830

 

5,580,810

 

Net unrealized depreciation in value of investments  (110,751)  (410,906)
Total Shareholders’ Equity (net assets)  9,208,588   9,387,408 
        

Net unrealized appreciation in value of investments

 

 

149,321

 

 

 

165,618

 

Total Shareholders’ Equity (Net Assets)

 

 

18,658,595

 

 

 

13,414,049

 

Total Liabilities and Shareholders’ Equity $9,238,909  $9,423,878 

 

$21,256,067

 

 

$16,697,831

 

        
Net Asset Value Per Common Share $0.83  $0.77 

 

$3.02

 

 

$2.80

 

 

See accompanying Notes to Financial Statements

 

 

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 Three Months Ended  Nine Months Ended 

 

Three Months Ended

 

Nine Months Ended

 

 September 30,
2017
  September 30,
2016
  September 30,
2017
  September 30,
2016
 

 

September 30,

2022

 

 

September 30,

2021

 

 

September 30,

2022

 

 

September 30,

2021

 

Investment Income                

 

 

 

 

 

 

 

 

 

Interest income $44,362  $89,062  $95,413  $215,222 

 

$1,115,224

 

$755,601

 

$3,351,935

 

$1,977,992

 

Dividend income  7,992   24,170   30,014   64,061 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Income  52,354   113,232   125,427   279,283 

 

 

1,115,224

 

 

 

755,601

 

 

 

3,351,935

 

 

 

1,977,992

 

                
Operating Expenses                

 

 

 

 

 

 

 

 

 

Professional fees  39,175   47,632   165,725   133,116 

 

916,359

 

79,950

 

1,309,348

 

300,297

 

Payroll  51,562   40,487   160,349   122,445 

 

122,477

 

80,840

 

433,461

 

468,266

 

Insurance  24,030   18,782   60,170   58,869 

 

27,016

 

27,890

 

84,092

 

80,023

 

Occupancy  22,225   21,571   64,556   60,175 

 

18,589

 

16,689

 

54,542

 

49,716

 

Directors’ fees  15,000   15,000   45,000   43,956 
Depreciation and amortization  2,670   3,213   8,165   9,637 

Director’s fees

 

30,000

 

30,000

 

147,073

 

90,000

 

Interest expense

 

46,779

 

 

164,632

 

 

Other general and administrative  4,970   5,711   10,414   14,012 

 

 

18,572

 

 

 

4,213

 

 

 

34,717

 

 

 

35,294

 

Total Operating Expenses  159,632   152,396   514,379   442,210 

 

 

1,179,792

 

 

 

239,582

 

 

 

2,227,865

 

 

 

1,023,596

 

Net Investment Loss $(107,278) $(39,164) $(388,952) $(162,927)
                

Net Investment Gain (Loss)

 

 

(64,568)

 

 

516,019

 

 

 

1,124,070

 

 

 

954,396

 

Realized and Unrealized Gain (Loss) on Investments                

 

 

 

 

 

 

 

 

 

Net realized gain (loss) on investments $(404,457) $186,427  $343,613  $(346,854)

Net realized gain on investments

 

 

289,138

 

133,020

 

3,818,737

 

Net change in unrealized appreciation (depreciation) on investments  598,408   (5,009)  300,155   275,912 

 

 

 

 

 

(774,169)

 

 

(16,297)

 

(1,204,319)
Net Realized and Unrealized Gain (Loss) on Investments  193,951   181,418   643,768   (70,942)

 

 

 

 

 

(485,031)

 

 

116,723

 

 

 

2,614,418

 

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

 

 

(64,568)

 

 

30,988

 

 

 

1,240,793

 

 

 

3,568,814

 

 

 

 

 

 

 

 

 

 

Provision For (Benefit From) Income Taxes

 

 

(28,442)

 

 

(300)

 

 

346,800

 

 

 

1,010,978

 

Net Increase (Decrease) in Net Assets Resulting from Operations $86,673  $142,254  $254,816  $(233,869)

 

$(36,126)

 

$31,288

 

 

$893,993

 

 

 

2,557,836

 

                

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic and diluted $0.01  $0.01  $0.02  $(0.02)

 

$(0.01)

 

$0.01

 

 

$0.18

 

 

$0.53

 

                

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding  12,092,575   12,151,493   12,131,638   12,151,493 

Weighted-average number of common shares outstanding - basic and diluted

 

5,512,737

 

4,795,739

 

5,045,830

 

4,795,075

 

 

See accompanying Notes to Financial Statements

 

 

MILL CITY VENTURES III, LTD.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETSSHAREHOLDERS’ EQUITY (UNAUDITED)

 

  Nine Months Ended  Nine Months Ended 
  September 30, 2017  September 30, 2016 
Net Assets at Beginning of Period $9,387,408  $8,741,288 
Net investment loss  (388,952)  (162,927)
Net realized gain (loss) on investments  343,613   (346,854)
Net increase in unrealized appreciation on investments  300,155   275,912 
Net increase (decrease) in net assets resulting from operations  254,816   (233,869)
Total net increase (decrease) in net assets resulting from operations  254,816   (233,869)
Net decrease in net assets resulting from share repurchase  (433,636)  - 
Net Assets at End of Period $9,208,588  $8,507,419 
         
Accumulated undistributed net investment loss $(1,068,702) $(1,262,854)

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

(Depreciation)

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

 

 

Three Months Ended September 30, 2021

 

Common

Shares

 

 

Par

Value

 

 

Additional

Paid In

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Undistributed

Net

Investment

Loss

 

 

Accumulated

Undistributed

Net Realized

Gain on

Investments

Transactions

 

 

Net

Unrealized

Appreciation

(Depreciation)

in value of

Investments

 

 

Total

Shareholders’

Equity

 

Balance as of June 30, 2021

 

 

4,795,739

 

 

$10,790

 

 

$10,694,163

 

 

$(1,159,665)

 

$(2,697,320)

 

$6,071,449

 

 

$1,269,171

 

 

$14,188,588

 

Dividend Declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,079,041)

 

 

 

 

 

(1,079,041)

Common shares issued in consideration for expense payment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed net investment gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

516,319

 

 

 

 

 

 

 

 

 

516,319

 

Undistributed net realized gain on investment transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

289,138

 

 

 

 

 

 

289,138

 

Depreciation in value of investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(774,169)

 

 

(774,169)

Balance as of September 30, 2021

 

 

4,795,739

 

 

$10,790

 

 

$10,694,163

 

 

$(1,159,665)

 

$(2,181,001)

 

$5,281,546

 

 

$495,002

 

 

$13,140,835

 

 
- 5 -

Table of Contents

 

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

 

 

MILL CITY VENTURES III, LTD.

STATEMENTS OF CASH FLOWS (UNAUDITED)

  Nine Months Ended 
  September 30,
2017
  September 30,
2016
 
Cash flows from operating activities:        
Net increase (decrease) in net asset value resulting from operations $254,816  $(233,869)
         
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) in operating activities:        
Net change in unrealized appreciation on investments  (300,155)  (275,912)
Net realized (gain) loss on investments  (343,613)  346,854 
Payments for purchases of investments  (1,872,499)  (2,049,581)
Payments for purchases of investments sold short  (111,913)  - 
Proceeds from sales of investments  2,735,940   1,381,928 
Proceeds from sales of investments sold short  85,936   - 
Depreciation and amortization expense  8,165   9,637 
         
Changes in operating assets and liabilities:        
Prepaid expenses  (1,481)  (17,051)
Interest and dividends receivable  (23,284)  (1,561)
Accounts payable  (5,677)  4,530 
Deferred interest income  -   (5,645)
Deferred rent  (472)  246 
Payable for investment purchase  -   (65,622)
Net cash provided (used) in operating activities  425,763   (906,046)
         
Cash flows from financing activities:        
Payments for repurchase of common stock  (433,636)  - 
         
Net cash used by financing activities  (433,636)  - 
         
Net decrease in cash  (7,873)  (906,046)
         
Cash, beginning of period  2,344,751   2,980,659 
Cash, end of period $2,336,878  $2,074,613 

Nine Months Ended September 30, 2021

 

Common

Shares

 

 

Par

Value

 

 

Additional

Paid In

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Undistributed

Net

Investment

Loss

 

 

Accumulated

Undistributed

Net Realized

Gain on

Investments

Transactions

 

 

Net

Unrealized

Appreciation

in value of

Investments

 

 

Total

Shareholders’

Equity

 

Balance as of December 31, 2020

 

 

4,793,739

 

 

$10,786

 

 

$10,673,014

 

 

$(1,159,665)

 

$(2,124,419)

 

$2,541,850

 

 

$1,699,321

 

 

$11,640,887

 

Common shares issued in consideration for expense payment

 

 

2,000

 

 

 

4

 

 

 

21,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,153

 

Dividend declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,079,041)

 

 

 

 

 

(1,079,041)

Undistributed net investment loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56,582)

 

 

 

 

 

 

 

 

(56,582)

Undistributed net realized gain on investment transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,818,737

 

 

 

 

 

 

 

3,818,737

 

Depreciation in value of investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,204,319)

 

 

(1,204,319)

Balance as of September 30, 2021

 

 

4,795,739

 

 

$10,790

 

 

$10,694,163

 

 

$(1,159,665)

 

$(2,181,001)

 

$5,281,546

 

 

$495,002

 

 

$13,140,835

 

 

See accompanying Notes to Financial Statements

 

 

MILL CITY VENTURES III, LTD.

SCHEDULECONDENSED STATEMENTS OF INVESTMENTS

September 30, 2017CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net increase in net assets resulting from operations

 

$893,993

 

 

$2,557,836

 

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

 

 

 

 

 

 

 

 

Net change in unrealized appreciation on investments

 

 

16,297

 

 

 

1,204,319

 

Net realized gain on investments

 

 

(133,020)

 

 

(3,818,737)

Purchases of investments

 

 

(13,924,333)

 

 

(18,133,352)

Proceeds from sales of investments

 

 

10,076,483

 

 

 

16,363,964

 

     Stock-based compensation

 

 

308,758

 

 

 

15,403

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(21,225)

 

 

(71,160)

Interest and dividends receivable

 

 

(614,949)

 

 

(405,429)

Receivable for investment sales

 

 

 

 

 

(40,767)

Payable for investment purchase

 

 

(1,900,000)

 

 

30,689

 

Accounts payable and other liabilities

 

 

53,903

 

 

 

(20,519)

Income taxes payable

 

 

 (1,185,200

)

 

 

 1,010,978

 

Net cash used in operating activities

 

 

(6,429,293)

 

 

(1,306,775)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering

 

 

4,041,795

 

 

 

 

Proceeds from line of credit

 

 

8,414,000

 

 

 

 

Repayments on line of credit

 

 

(6,101,000)

 

 

 

Payments for common stock dividend

 

 

 

 

 

(539,296)

Net cash provided (used) by financing activities

 

 

6,354,795

 

 

 

(539,296)

Net decrease in cash

 

 

(74,498)

 

 

(1,846,071)

Cash, beginning of period

 

 

1,936,148

 

 

 

5,440,579

 

Cash, end of period

 

$1,861,650

 

 

$3,594,508

 

 

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Common shares issued as consideration

 

$308,758

 

 

$5,750

 

Dividend declared to common stock shareholders

 

 

 

 

 

1,079,041

 

Investments(1) Investment Type Interest
Rate(2)
  Maturity
Date
 Principal
Amount
  Cost  Fair Value  Percentage
of Net
Assets
  Gross
Unrealized
Appreciation
  Gross
Unrealized
Depreciation
  Net Unrealized
Appreciation
(Depreciation)
 
Debt Investments                                    
Consumer                                    
Mix 1 Life, Inc. Secured Loan(4)  12% 2/6/2016 $500,000   500,000             500,000   (500,000)
Mix 1 Life, Inc. Secured Loan  12% 3/13/2016 $250,000   250,000             250,000   (250,000)
               750,000      0.00%     750,000   (750,000)
Financial                                    
Bravo Financial LLC Secured Loan  12% 8/31/2018 $500,000   500,000   500,000   5.43%         
                                     
Total Debt Investments              1,250,000   500,000   5.43%     750,000   (750,000)

See accompanying Notes to Financial Statements

 

Investments(1) Investment Type(5) Interest
Rate(6)
  Expiration
Date(7)
 Shares/Units  Cost  Fair Value  Percentage
of Net
Assets
  Gross
Unrealized
Appreciation
  Gross
Unrealized
Depreciation
  Net Unrealized
Appreciation
(Depreciation)
 
Equity Investments                                    
Advertising                                    
Creative Realities, Inc. Warrants(8)  n/a  12/28/2020  1,071,429      128,572   1.40%  128,572      128,572 
                                     
Bio-technology                                    
Bio Life Solutions, Inc. Warrants(8)  n/a  3/20/2021  100,000      96,000       96,000      96,000 
Combimatrix Corporation Warrants(8)  n/a  5/6/2019  2,732                    
Combimatrix Corporation Warrants(8)  n/a  6/28/2019  2,733                    
Combimatrix Corporation Warrants(8)  n/a  12/19/2018  8,333                    
                  96,000   1.04%  96,000      96,000 
Consumer                                    
Escalade Inc. Common Stock  n/a  n/a  7,929   93,975   107,835       13,860      13,860 
Famous Daves of America, Inc. Common Stock  n/a  n/a  38,614   164,584   160,090       3,159   7,653   (4,494)
Forward Industries, Inc. Common Stock(8)  n/a  n/a  20,100   23,969   24,703       758   24   734 
Mix 1 Life, Inc. Common Stock(10)  n/a  n/a  100,000   46,160   800          45,360   (45,360)
Stanley Furniture Co., Inc. Common Stock(8)  n/a  n/a  147,118   160,346   173,599       15,769   2,516   13,253 
Tzfat Spirits of Israel, LLC LLC Membership Units(8)  n/a  n/a  55,000   101,019   25,000          76,019   (76,019)
               590,053   492,027   5.34%  33,546   131,572   (98,026)
Education                                    
Nat'l Amer. Univ. Holdings, Inc. Common Stock  n/a  n/a  59,839   119,027   128,055   1.39%  9,032   4   9,028 
Financial                                    
OTC Markets Group Cl A Common Stock  n/a  n/a  12,618   203,015   372,231       169,216      169,216 
QC Holdings, Inc. Common Stock(8)  n/a  n/a  15,000   10,655   6,300          4,355   (4,355)
Planet Payment, Inc. Common Stock(8)  n/a  n/a  15,800   69,858   67,782          2,076   (2,076)
               283,528   446,313   4.85%  169,216   6,431   162,785 
Healthcare                                    
Enteromedics, Inc. Preferred LLC Units(4) (8)  n/a  n/a  156   155,321   120,112          35,209   (35,209)
Enteromedics, Inc. Warrants(8)  n/a  8/16/2024  67,860   679             679   (679)
HemaCare Corp. Common Stock(8)  n/a  n/a  84,284   263,937   252,852       1,156   12,241   (11,085)
               419,937   372,964   4.05%  1,156   48,129   (46,973)
Information Technology                                    
Insite Software Solutions, Inc Warrants(8)  n/a  12/30/2023  108,960                    
MAX 4G, Inc. Preferred Stock(8)  n/a  n/a  300,000   150,000   300,000       150,000      150,000 
Simulations Plus, Inc. Common Stock  n/a  n/a  25,001   246,710   387,508       140,798      140,798 
Travelzoo, Inc. Common Stock  n/a  n/a  30,000   324,848   258,000          66,848   (66,848)
               721,558   945,508   10.27%  290,798   66,848   223,950 
Leisure & Hospitality                                    
Bitesquad.com LLC Preferred LLC Units(4) (8)  n/a  n/a  73,543   1,014,893   2,020,226       1,005,333      1,005,333 
DBR Enclave US Investors, LLC LLC Membership Units    15% 1/31/2020  500,000   500,000   500,000              
               1,514,893   2,520,226   27.37%  1,005,333      1,005,333 
Oil & Gas                                    
Northern Capital Partners I, LP Limited Partnership Units(8)  n/a  n/a  550,000   550,000   488,629          61,371   (61,371)
Southern Plains Resources, Inc. Common Stock(8)  n/a  n/a  600,000   730,000             730,000   (730,000)
               1,280,000   488,629   5.31%     791,371   (791,371)
Publishing                                    
Educational Development Corp. Common Stock  n/a  n/a  63,702   641,971   612,762   6.65%  33,182   62,391   (29,209)
                                     
Telecommunications                                    
Tessco Technologies Inc. Common Stock  n/a  n/a  5,000   83,090   62,250   0.68%     20,840   (20,840)
                                     
Total Equity Investments              5,654,057   6,293,306   68.34%  1,766,835   1,127,586   639,249 
                                     
Total Cash and Cash Equivalents              2,336,878   2,336,878   25.38%         
                                     
Total Investments, Cash and Cash Equivalents             $9,240,935  $9,130,184   99.15% $1,766,835  $1,877,586  $(110,751)

(1)All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
(2)Interest is presented on a per annum basis.
(3)Investment is secured but payment and collateral are subordinated to the debt of another creditor by contract.
(4)Investment is convertible into common equity of the issuer.
(5)In the case of warrants, warrants provide for the right to purchase common equity of the issuer.
(6)In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.
(7)In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.
(8)Investment is not an income-producing investment.
(9)Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.

At September 30, 2017, aggregate non-qualifying assets represented approximately 0.0% of our total assets.

(10)Value reflects 20% discount for restricted nature of securities

 
- 7 -

Table of Contents

MILL CITY VENTURES III, LTD.

CONDENSED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2022

Investment / Industry

 

Cost

 

 

Fair Value

 

 

Percentage of Net Assets

 

 

 

 

 

 

 

 

 

 

 

Short-Term Non-banking Loans

 

 

 

 

 

 

 

 

 

Consumer - 15% secured loans

 

$$400,000

 

 

$$400,000

 

 

 

2.14%

AirDog Supplies, Inc.

 

 

1,250,000

 

 

 

1,250,000

 

 

 

6.70%

Intelligent Mapping, LLC

 

 

2,900,000

 

 

 

2,900,000

 

 

 

15.54%

Financial - 53% secured loans

 

 

635,086

 

 

 

635,086

 

 

 

3.40%

Financial - 33% secured loans

 

 

 

 

 

 

 

 

 

 

 

 

Benton Financial, LLC

 

 

1,976,667

 

 

 

1,976,667

 

 

 

10.59%

Financial - 36% secured loans

 

 

550,000

 

 

 

550,000

 

 

 

2.95%

Financial - 12% secured loans

 

 

500,000

 

 

 

500,000

 

 

 

2.68%

Information Technology - 15% convertible note

 

 

212,500

 

 

 

212,500

 

 

 

1.14%

Real Estate - 15% secured loans

 

 

216,495

 

 

 

216,495

 

 

 

1.16%

          Tailwinds, LLC

 

 

 3,000,000

 

 

 

 3,000,000

 

 

 

 16.08

Real Estate - 12% secured loans

 

 

 

 

 

 

 

 

 

 

 

 

Alatus Development Corp

 

 

1,000,000

 

 

 

1,000,000

 

 

 

5.36%

Real Estate - subordinated debt

 

 

 

 

 

 

 

 

 

 

 

 

Villas at 79th, LLC

 

 

3,400,000

 

 

 

3,400,000

 

 

 

18.22%

Total Short-Term Non-Banking Loans

 

 

16,040,748

 

 

 

16,040,748

 

 

 

85.96%

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Wisdom Gaming, Inc

 

 

900,000

 

 

 

900,000

 

 

 

4.82%

Information Technology

 

 

150,000

 

 

 

300,000

 

 

 

1.61%

Total Preferred Stock

 

 

1,050,000

 

 

 

1,200,000

 

 

 

6.43%

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

679

 

 

 

-

 

 

 

0.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

212,500

 

 

 

212,500

 

 

 

1.14%

Financial

 

 

600,000

 

 

 

600,000

 

 

 

3.22%

Financial

 

 

10,000

 

 

 

10,000

 

 

 

0.05%

Total Other Equity

 

 

822,500

 

 

 

822,500

 

 

 

4.41%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investments

 

$17,913,927

 

 

$18,063,248

 

 

 

96.80%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Cash

 

 

1,861,650

 

 

 

1,861,650

 

 

 

9.98%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investments and Cash

 

 $

 19,775,577

 

 

 $

 19,924,898

 

 

 

106.78

%

 
- 8 -

Table of Contents

  

MILL CITY VENTURES III, LTD.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 20162021

 

Investments(1) Investment Type Interest
Rate(2)
  Maturity
Date
 Principal
Amount
  Cost  Fair Value  Percentage
 of Net
Assets
  Gross
Unrealized
Appreciation
  Gross
Unrealized
Depreciation
  Net
Unrealized
Appreciation
(Depreciation)
 
Debt Investments                                    
Consumer                                    
Mix 1 Life, Inc. Secured Loan(4)  12% 2/6/2016 $500,000   500,000   180,000          320,000   (320,000)
Mix 1 Life, Inc. Secured Loan  12% 3/13/2016 $250,000   250,000             250,000   (250,000)
               750,000   180,000   1.92%     570,000   (570,000)
Financial                                    
Bravo Financial LLC Secured Loan  12% 8/31/2018 $500,000   500,000   500,000   5.32%         
Oil & Gas                                    
Dala Petroleum, Inc. Secured Loan  12% 12/31/2015 $25,000   25,000             25,000   (25,000)
Dala Petroleum, Inc. Secured Loan  12% 12/22/2016 $35,195   35,195             35,195   (35,195)
Dala Petroleum, Inc. Secured Loan  12% 12/16/2017 $22,500   22,500             22,500   (22,500)
               82,695      0.00%     82,695   (82,695)
                                     
Total Debt Investments              1,332,695   680,000   7.24%     652,695   (652,695)

Investments(1) Investment Type(5) Interest
Rate(6)
  Expiration
Date(7)
 Shares/Units  Cost  Fair Value  Percentage
 of Net
Assets
  Gross
Unrealized
Appreciation
  Gross
Unrealized
Depreciation
  Net
Unrealized
Appreciation
(Depreciation)
 
Equity Investments                                    
Advertising                                    
Creative Realities, Inc. Warrants(8)  n/a  12/28/2020  1,071,429      32,143   0.34%  32,143      32,143 
Bio-technology                                    
Bio Life Solutions, Inc. Warrants(8)  n/a  3/20/2021  100,000                    
Combimatrix Corporation Warrants(8)  n/a  5/6/2019  5,464                    
Combimatrix Corporation Warrants(8)  n/a  6/28/2019  5,464                    
Combimatrix Corporation Warrants(8)  n/a  12/19/2018  16,666                    
                     0.00%         
Consumer                                    
Escalade Inc. Common Stock  n/a  n/a  7,929   93,975   104,663       10,688      10,688 
Mix 1 Life, Inc. Common Stock(8)  n/a  n/a  40,051      15,219       15,219      15,219 
Mix 1 Life, Inc. Common Stock(10)  n/a  n/a  100,000   46,160   30,000          16,160   (16,160)
Tzfat Spirits of Israel, LLC LLC Membership Units(8)  n/a  n/a  55,000   101,019   25,000          76,019   (76,019)
               241,154   174,882   1.86%  25,907   92,179   (66,272)
Education                                    
Nat'l Amer. Univ. Holdings, Inc. Common Stock  n/a  n/a  59,839   119,027   116,686   1.24%  992   3,333   (2,341)
Financial                                    
Comm. Sales & Leasing Common Stock(9)  n/a  n/a  2,000   65,620   50,820          14,800   (14,800)
OTC Markets Group Cl A Common Stock  n/a  n/a  19,074   297,381   438,702       141,321      141,321 
QC Holdings, Inc. Common Stock(8)  n/a  n/a  15,000   10,655   11,100       445      445 
               373,656   500,622   5.33%  141,766   14,800   126,966 
Healthcare                                    
WaferGen Bio-Systems, Inc. Common Stock(8)  n/a  n/a  85,210   369,800   420,085       50,285      50,285 
WaferGen Bio-Systems, Inc. Warrants(8)  n/a  10/21/2020  40,000                    
               369,800   420,085   4.48%  50,285      50,285 
Information Technology                                    
Insite Software Solutions, Inc Warrants(8)  n/a  12/30/2023  108,960                    
MAX 4G, Inc. Preferred Stock(8)  n/a  n/a  300,000   150,000   300,000       150,000      150,000 
Mitek Systems Inc. Common Stock(8)  n/a  n/a  7,772   50,540   47,798          2,742   (2,742)
Simulations Plus, Inc. Common Stock  n/a  n/a  18,639   173,310   179,862       10,659   4,107   6,552 
Travelzoo, Inc. Common Stock  n/a  n/a  15,100   177,459   141,940          35,519   (35,519)
               551,309   669,600   7.13%  160,659   42,368   118,291 

Investment Fund

                                    
Calamos Conv. & High Inc. Fund Common Stock(9)  n/a  n/a  10,000   128,357   105,500          22,857   (22,857)
Solar Senior Capital Ltd Common Stock(9)  n/a  n/a  6,047   91,983   99,412       7,429      7,429 
               220,340   204,912   2.18%  7,429   22,857   (15,428)
Leisure & Hospitality                                    
Bitesquad.com LLC Preferred LLC Units(4) (8)  n/a  n/a  100,000   1,380,000   2,747,011   29.26%  1,367,011      1,367,011 
Media                                    
Discovery Communications Inc. Common Stock(9)  n/a  n/a  5,000   149,609   137,050   1.46%     12,559   (12,559)
Oil & Gas                                    
Dala Petroleum, Inc. Preferred Stock(8)  n/a  n/a  500   500,000             500,000   (500,000)
Dala Petroleum, Inc. Warrants(8)  n/a  6/3/2017  714,286                    
Northern Capital Partners I, LP Limited Partnership Units(8)  n/a  n/a  550,000   550,000   488,629          61,371   (61,371)
Southern Plains Resources, Inc. Common Stock(8)  n/a  n/a  600,000   730,000             730,000   (730,000)
               1,780,000   488,629   5.21%     1,291,371   (1,291,371)
Publishing                                    
Educational Development Corp. Common Stock  n/a  n/a  36,905   409,380   367,205   3.91%  3,141   45,316   (42,175)
                                     
Telecommunications                                    
AT&T Common Stock(9)  n/a  n/a  5,000   175,260   212,650       37,390      37,390 
CenturyLink, Inc. Common Stock(9)  n/a  n/a  5,000   157,360   118,900          38,460   (38,460)
MagicJack VocalTek Ltd. Common Stock(8) (9)  n/a  n/a  5,754   34,141   39,415       5,274      5,274 
Tessco Technologies Inc. Common Stock  n/a  n/a  5,000   83,090   65,000          18,090   (18,090)
Windstream Holdings Inc. Common Stock(9)  n/a  n/a  1,666   21,087   12,212          8,875   (8,875)
               470,938   448,177   4.78%  42,664   65,425   (22,761)
                                     
Total Equity Investments              6,065,213   6,307,002   67.18%  1,831,997   1,590,208   241,789 
                                     
Total Cash and Cash Equivalents              2,344,751   2,344,751   24.98%         
                                     
Total Investments, Cash and Cash Equivalents             $9,742,659  $9,331,753   99.40% $1,831,997  $2,242,903  $(410,906)

Investment / Industry

 

Cost

 

 

Fair

Value

 

 

Percentage of

Net Assets

 

Short-Term Non-banking Loans

 

 

 

 

 

 

 

 

 

Consumer - 15% secured loans

 

 

 

 

 

 

 

 

 

AirDog Supplies, Inc.

 

$1,250,000

 

 

$1,250,000

 

 

 

9.32%

Financial - 52% secured loans

 

 

500,000

 

 

 

500,000

 

 

 

3.73%

Financial - 12% secured loans

 

 

500,000

 

 

 

500,000

 

 

 

3.73%

Litigation Financing - 23% secured loans

 

 

 

 

 

 

 

 

 

 

 

 

The Cross Law Firm, LLC

 

 

1,805,750

 

 

 

1,800,000

 

 

 

13.42%

Real Estate - 15% secured loans

 

 

700,000

 

 

 

700,000

 

 

 

5.22%

Tailwinds, LLC

 

 

3,000,000

 

 

 

3,000,000

 

 

 

22.36%

Real Estate - 12% secured loans

 

 

 

 

 

 

 

 

 

 

 

 

Alatus Development, LLC

 

 

3,900,000

 

 

 

3,900,000

 

 

 

29.07%

Total Short-Term Non-Banking Loans

 

 

11,655,750

 

 

 

11,650,000

 

 

 

86.85%

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

Financial Services

 

 

414,128

 

 

 

436,175

 

 

 

3.25%

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Wisdom Gaming, Inc

 

 

900,000

 

 

 

900,000

 

 

 

6.71%

Information Technology

 

 

150,000

 

 

 

300,000

 

 

 

2.24%

Total Other Equity

 

 

1,050,000

 

 

 

1,200,000

 

 

 

8.95%

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

679

 

 

 

-

 

 

 

0.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

212,500

 

 

 

212,500

 

 

 

1.58%

Financial

 

 

600,000

 

 

 

600,000

 

 

 

4.47%

Total Other Equity

 

 

812,500

 

 

 

812,500

 

 

 

6.05%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investments

 

$13,933,057

 

 

$14,098,675

 

 

 

105.10%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Cash

 

 

1,936,148

 

 

 

1,936,148

 

 

 

14.43%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investments and Cash

 

$15,869,205

 

 

$16,034,823

 

 

 

119.53%

 

(1)- 9 -
All investments and all cash, restricted cash and cash equivalents are “qualifying assets” under Section 55(a)

Table of the Investment Company Act of 1940 unless indicated to the contrary in the table or by footnote.
(2)Interest is presented on a per annum basis.
(3)Investment is secured but payment and collateral are subordinated to the debt of another creditor by contract.
(4)Investment is convertible into common equity of the issuer.
(5)In the case of warrants, warrants provide for the right to purchase common equity of the issuer.
(6)In the case of preferred stock, this represents the right to annual cumulative dividends calculated on a per annum basis.
(7)In the case of warrants, purchase rights under the warrants will expire at the close of business on this date.
(8)Investment is not an income-producing investment.
(9)Investment is neither a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, nor a restricted security.

At December 31, 2016, aggregate non-qualifying assets represented approximately 8.3% of our total assets.

(10)Value reflects 20% discount for restricted nature of securitiesContents

 

- 8 -

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

NOTE 1 – ORGANIZATION

 

Mill City Ventures III, Ltd. is an investment company incorporated in the State of Minnesota on January 10, 2006. 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.“Company. The Company follows accounting and reporting guidance in Accounting Standards (“ASC”) 946.

 

We are an internally managed closed-end non-diversified management investment company. We havewere 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 be regulated asbecome a business development company or “BDC,”(“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). To date,We operated as a BDC until we withdrew our BDC election at the end of December 2019. Since that time, we have not made an electionremained 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 loans, primarily to be treated as a regulated investment company, or “RIC,”small businesses, both private and public, and high-net-worth individuals. To avoid regulation under the Internal Revenue Code of 1986 (the “Code”).

We primarily focus on investing in or lending1940 Act, we generally seek to privately held and small-cap publicly traded U.S. companies, and making managerial assistance available to such companies. Thesestructure our investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory notes that may be convertible into stock by their terms or that may be accompanied by the issuance to us of warrants or similar rights to purchase stock. Our investments may be madeso they do not constitute “securities” for purposes of financing acquisitions, recapitalizations, buyouts, organic growthfederal securities laws, and working capital. Our future revenues will relatewe 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 gain we realize from the sale of securities we purchase, and to dividends and interest we derive from those securities. Our investment objective is to generate both current income and capital appreciation that ultimately become gains.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, 20172022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022.

 

The condensed balance sheet atas of December 31, 20162021 has been derived from the audited consolidated 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 consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.2021.

 

Use of estimates: estimates: The preparation of financial statements in conformity with GAAP requires management and our independent board membersBoard of Directors 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.estimates, and the differences could be material. For more information, see the “Valuation of portfolio investments” caption below, and “Note 4 – Fair Value of Financial Instruments” below. For purposes of its financial statement presentation, the Company is an investment company following accounting and reporting guidance in ASC 946.

 

Cash deposits: 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: 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 Valuation Committee of 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.

 

 - 9 -

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

For more information, see Note 4 “Fair Value of Financial Instruments.”

Income taxes: We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. For more information, see Note 7 “Income Taxes.”

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. 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 interested 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 to 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.

Recent accounting pronouncements: No new accounting pronouncement issued or effective during the fiscal quarter covered by this report has had or is expected to have a material impact on our condensed financial statements.

Allocation of net gains and losses: All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned.

Management and service fees: We do not incur expenses related to management and service fees. Our executive management team manages our investments as part of their employment responsibilities.

NOTE 3 – INVESTMENTS

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of September 30, 2017 (together with the corresponding percentage of total portfolio investments):

  As of September 30, 2017 
  Investments at
Amortized Cost
  Percentage of
Amortized Cost
  Investments at
Fair Value
  Percentage of
Fair Value
 
Senior Secured Loans $1,250,000   18.1% $500,000   7.4%
Preferred Stock  1,320,214   19.1   2,440,338   35.9 
Common Stock  3,182,145   46.1   2,614,767   38.5 
Warrants  679   -   224,572   3.3 
Other Equity  1,151,019   16.7   1,013,629   14.9 
Total $6,904,057   100.0% $6,793,306   100.0%

 

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

The following table shows the composition of our investment portfolio by major class, at amortized cost and fair value, as of December 31, 2016 (together with the corresponding percentage of total portfolio investments):

  As of December 31, 2016 
  Investments at
Amortized Cost
  Percentage of
Amortized Cost
  Investments at
Fair Value
  Percentage of
Fair Value
 
Senior Secured Loans $1,332,695   18.0% $680,000   9.7%
Preferred Stock  2,030,000   27.4   3,047,011   43.6 
Common Stock  3,384,194   45.8   2,714,219   38.8 
Warrants  -   -   32,143   0.5 
Other Equity  651,019   8.8   513,629   7.4 
Total $7,397,908   100.0% $6,987,002   100.0%

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of September 30, 2017:

  As of September 30, 2017 
  Investments at
Fair Value
  Percentage of
Fair Value
 
Advertising $128,572   1.9%
Bio-technology  96,000   1.4 
Consumer  492,027   7.3 
Education  128,055   1.9 
Financial  946,313   13.9 
Healthcare  372,964   5.5 
Information Technology  945,508   13.9 
Leisure & Hospitality  2,520,226   37.1 
Oil & Gas  488,629   7.2 
Publishing  612,762   9.0 
Telecommunications  62,250   0.9 
Total $6,793,306   100.0%

The following table shows the composition of our investment portfolio by industry grouping, based on fair value as of December 31, 2016:

  As of December 31, 2016 
  Investments at
Fair Value
  Percentage of
Fair Value
 
Advertising $32,143   0.5%
Consumer  354,882   5.1 
Education  116,686   1.7 
Financial  1,000,622   14.3 
Healthcare  420,085   6.0 
Information Technology  669,600   9.6 
Investment Fund  204,912   2.9 
Leisure & Hospitality  2,747,011   39.3 
Media  137,050   2.0 
Oil & Gas  488,629   7.0 
Publishing  367,205   5.2 
Telecommunications  448,177   6.4 
Total $6,987,002   100.0%

- 11 -

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

We do not “control,” and we are not an “affiliate” (as each of those terms is defined in the 1940 Act), of any of our portfolio companies as of September 30, 2017. Under the 1940 Act, we would generally be presumed to “control” a portfolio company if we owned more than 25% of its voting securities, and be an “affiliate” of a portfolio company if we owned at least 5% and up to 25% of its voting securities.

NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS

General information: 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.

 

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 present value 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 the Valuation Committee of our Board of Directors, pursuant to our written Valuation Policyvaluation policy and Procedures.procedures. These policies and procedures generally require that we value our Level 3 equity investments at cost plus any accrued interest, unless circumstances warrant a different approach. Our Valuation Policy and Procedures provide examplesAn example of thesesuch circumstances such as whenmay include a situation in which a portfolio company has engaged in a subsequent financing of more than ade 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 situations identified in our Valuation Policyvaluation policy and Proceduresprocedures that may serve as 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 Policyvaluation policy and Proceduresprocedures indicate that value will generally be the difference between 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 securities with a residual maturity less than or equal to 60 days, the value will generally be based on a present value approach, considering the straight-line amortized face value of the debt unless justification for impairment exists.

- 12 -

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017 The fair value for short-term non-banking loans is determined as the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent to those cash flows. The applied discount ranges from 12% to 53% and approximate rates currently observed in publicly traded debt markets for debt of similar terms issued by companies with comparable credit risk.

 

On a quarterly basis, our management provides members of our Valuation CommitteeBoard of Directors with (i) valuation reportsupdates for each portfolio investment (which reports include our cost, the most recent prior valuation and any current proposed valuation, and an indication of the valuation methodology used, together with any other supporting materials);loan we hold; (ii) Mill City Ventures’ bank and other statements pertaining to our cash and cash equivalents; and (iii) quarter- or period-end statements from our custodial firms holding any of our portfolio investments.investments; and (iv) recommendations to change any existing valuations of our investments or loans, or hierarchy levels, for purposes of determining the fair value of such investments or loans based upon the foregoing. The committeeboard then discusses these materials and, consistent with the policies and approaches outlined above, makes final determinations respecting the valuation and hierarchy levels of our portfolio investments.

 

Income taxes:

We made noaccount 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.

- 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 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, 2019 through 2021, which were the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2022. 

Revenue recognition:  Realized gains or losses on the sale of investments are calculated using the specific investment method.

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Discounts from and premiums to par value on securities purchased are accreted or amortized, as applicable, into interest income over the life of the related security using the effective-yield method. The amortized cost of investments represents the original cost, adjusted for the accretion of discounts and amortization of premiums, if any. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more, or when there is reasonable doubt that principal or interest will be collected in full. Loan origination fees are recognized when loans are issued. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past-due principal and interest is paid and, in management’s judgment, are likely to remain current. We may make exceptions to the policy described above if a loan has sufficient collateral value and is in the process of collection.

Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.

Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal or stated value of the investment on the respective interest- or dividend-payment dates rather than being paid in cash, and generally becomes due at maturity or upon being repurchased by the issuer. PIK interest or dividends is recorded as interest or dividend income, as applicable. If at any point we believe that PIK interest or dividends is not expected be realized, the PIK-generating investment will be placed on non-accrual status. Accrued PIK interest or dividends are generally reversed through interest or dividend income, respectively, when an investment in placed on non-accrual status.

Allocation of net gains and losses:  All income, gains, losses, deductions and credits for any investment are allocated in a manner proportionate to the shares owned.

Management and service fees: We do not incur expenses related to management and service fees. Our executive management team manages our Valuation Policyinvestments as part of their employment responsibilities.

NOTE 3 – INVESTMENTS AND LOANS

The following table shows the composition of our investments and Proceduresloans by major class, at amortized cost and fair value, as of September 30, 2022 (together with the corresponding percentage of the fair value of our total investments):

 

 

As of September 30, 2022

 

 

 

Investments at

Amortized Cost

 

 

Percentage of

Amortized Cost

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Short-term Non-banking Loans

 

$16,040,748

 

 

 

89.5%

 

$16,040,748

 

 

 

88.8%

Preferred Stock

 

 

1,050,000

 

 

 

5.9

 

 

 

1,200,000

 

 

 

6.6

 

Warrants

 

 

679

 

 

 

 

 

 

 

 

 

 

Other Equity

 

 

822,500

 

 

 

4.6

 

 

 

822,500

 

 

 

4.6

 

Total

 

$17,913,927

 

 

 

100.0%

 

$18,063,248

 

 

 

100.0%

- 12 -

Table of Contents

The following table shows the composition of our investments by major class, at amortized cost and fair value, as of December 31, 2021 (together with the corresponding percentage of the fair value of our total investments):

 

 

As of December 31, 2021

 

 

 

Investments at

Amortized Cost

 

 

Percentage of

Amortized Cost

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Short-term Non-banking Loans

 

$11,655,750

 

 

 

83.7%

 

$11,650,000

 

 

 

82.6%

Preferred Stock

 

 

1,050,000

 

 

 

7.5

 

 

 

1,200,000

 

 

 

8.5

 

Common Stock

 

 

414,128

 

 

 

3.0

 

 

 

436,175

 

 

 

3.1

 

Warrants

 

 

679

 

 

 

 

 

 

 

 

 

 

Other Equity

 

 

812,500

 

 

 

5.8

 

 

 

812,500

 

 

 

5.8

 

Total

 

$13,933,057

 

 

 

100.0%

 

$14,098,675

 

 

 

100.0%

The following table shows the composition of our investments and loans by industry grouping, based on fair value as of September 30, 2022:

 

 

As of September 30, 2022

 

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Consumer

 

$5,662,500

 

 

 

31.35%

Financial

 

 

4,261,753

 

 

 

23.59

 

Information Technology

 

 

512,500

 

 

 

2.84

 

Real Estate

 

 

7,626,495

 

 

 

42.2

 

Total

 

$18,063,248

 

 

 

100.0%

The following table shows the composition of our investments by industry grouping, based on fair value as of December 31, 2021:

 

 

As of December 31, 2021

 

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Consumer

 

$2,362,500

 

 

 

16.8%

Financial

 

 

3,836,175

 

 

 

27.2

 

Information Technology

 

 

300,000

 

 

 

2.1

 

Real Estate

 

 

7,600,000

 

 

 

53.9

 

Total

 

$14,098,675

 

 

 

100.0%

For the three months ended September 30, 2022, one investment accounted for 49% of the interest income earned.  This investee did not make any cash interest payments during the reporting period.three months ended September 30, 2022, and owes accrued interest of approximately $650,000 at September 30, 2022.  The Company believes it is probable that all interest will be collected from this investee. 

 

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 investment portfolioinvestments and loans as of September 30, 20172022 may differ materially from values that would have been used had a readily available market for the securitiesinvestments and loans existed.

 

The following table presents the fair value measurements of our portfolio investments and loans by major class, as of September 30, 2017,2022, according to the fair value hierarchy:

 

 As of September 30, 2017 

 

As of September 30, 2022

 

 Level 1  Level 2  Level 3  Total 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Senior Secured Loans $-  $-  $500,000  $500,000 

Short-term Non-banking Loans

 

$

 

$

 

$16,040,748

 

$16,040,748

 

Preferred Stock  -   120,112   2,320,226   2,440,338 

 

 

 —

 

1,200,000

 

1,200,000

 

Common Stock  2,613,967   800   -   2,614,767 
Warrants  -   224,572   -   224,572 

 

 

 

 

 

Other Equity  -   -   1,013,629   1,013,629 

 

 

 

 

 

 

 

 

822,500

 

 

 

822,500

 

Total $2,613,967  $345,484  $3,833,855  $6,793,306 

 

$

 

 

$

 

 

$18,063,248

 

 

$18,063,248

 

- 13 -

Table of Contents

 

The following table presents the fair value measurements of our portfolio investments and loans by major class, as of December 31, 2016,2021, according to the fair value hierarchyhierarchy:

 

 As of December 31, 2016 

 

As of December 31, 2021

 

 Level 1  Level 2  Level 3  Total 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Senior Secured Loans $-  $-  $680,000  $680,000 

Short-term Non-banking Loans

 

$

 

$

 

$11,650,000

 

$11,650,000

 

Preferred Stock  -   -   3,047,011   3,047,011 

 

 

 

1,200,000

 

1,200,000

 

Common Stock  2,684,219   30,000   -   2,714,219 

 

436,175

 

 

 

436,175

 

Warrants  -   32,143   -   32,143 
Other Equity  -   -   513,629   513,629 

 

 

 

 

 

 

 

 

812,500

 

 

 

812,500

 

Total $2,684,219  $62,143  $4,240,640  $6,987,002 

 

$436,175

 

 

$

 

 

$13,662,500

 

 

$14,098,675

 

 

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment and loan assets for the nine months ended September 30, 2017:2022:

 

  Senior Secured
Loans
  Preferred Stock  Common Stock  Warrants  Other Equity 
Balance as of December 31, 2016 $680,000  $3,047,011  $-  $-  $513,629 
Net change in unrealized appreciation (depreciation)  (97,305)  138,321   -   -   - 
Purchases and other adjustments to cost  10,000   -   -   -   500,000 
Sales and redemptions  (182,695)  (746,225)  -   -   - 
Net realized gain  90,000   (118,881)  -   -   - 
Balance as of September 30, 2017 $500,000  $2,320,226  $-  $-  $1,013,629 

 

 

For the nine months ended September 30, 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 appreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and other adjustments to cost

 

 

13,914,333

 

 

 

-

 

 

 

 

 

 

 

 

 

10,000

 

Sales and redemptions

 

 

(9,523,585)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2022

 

$16,040,748

 

 

$1,200,000

 

 

$

 

 

$

 

 

$822,500

 

 

The net change in unrealized depreciationappreciation for the nine months ended September 30, 20172022 attributable to Level 3 portfolio investments and loans still held atas of September 30, 20172022 is $541,678,$0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.

 

The following table lists our Level 3 investments held as of September 30, 2022 and the unobservable inputs used to determine their valuation:

Security Type

 

9/30/22 FMV

 

 

Valuation Technique

 

Unobservable Inputs

 

Range

 

ST Non-banking Loans

 

$16,040,748

 

 

discounted cash flow

 

determining private company interest rate based on credit

 

12-53

%

Other Equity

 

 

822,500

 

 

last secured funding known by company

 

economic changes since last funding

 

 

 

Preferred Stock

 

 

1,200,000

 

 

last funding secured by company

 

economic changes since last funding

 

 

 

 

 

$18,063,248

 

 

 

 

 

 

 

 

 
- 1314 -

Table of Contents

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

 

The following table presents a reconciliation of the beginning and ending fair value balances for our Level 3 portfolio investment and loan assets for the periodyear ended December 31, 2016:2021:

 

 Senior Secured
Loans
  Preferred Stock  Common Stock  Warrants  Other Equity 

 

For the year ended December 31, 2021

 

 

Balance as of December 31, 2015 $1,850,000  $1,080,000  $-  $-  $1,230,258 

 

ST Non-banking Loans

 

 

Preferred

Stock

 

 

Common

Stock

 

 

Warrants

 

 

Other

Equity

 

Balance as of January 1, 2021

 

$2,789,000

 

$300,000

 

$

 

$

 

$278,897

 

Net change in unrealized appreciation  (122,500)  1,367,011   -   -   (5,579)

 

 

 

 

 

 

Purchases and other adjustments to cost  64,500   600,000   -   -   50,000 

 

24,765,333

 

900,000

 

 

 

812,500

 

Sales and redemptions  (724,000)  -   -   -   (761,050)

 

(15,904,333)

 

 

 

 

(278,897)
Net realized gain  (388,000)  -   -   -   - 
Balance as of December 31, 2016 $680,000  $3,047,011  $-  $-  $513,629 

Balance as of December 31, 2021

 

$11,650,000

 

 

$1,200,000

 

 

$

 

 

$

 

 

$812,500

 

 

The net change in unrealized appreciationdepreciation for the periodyear ended December 31, 20162021 attributable to Level 3 portfolio investments and loans still held atas of December 31, 2016 was $713,932,2021 is $0, and is included in net change in unrealized appreciation (depreciation) on investments on the statement of operations.

 

The following table lists our Level 3 investments held as of December 31, 2021 and the unobservable inputs used to determine their valuation:

Security Type

 

12/31/21 FMV

 

 

Valuation Technique

 

Unobservable Inputs

 

Range

 

ST Non-banking Loans

 

$11,650,000

 

 

discounted cash flow

 

determining private company credit rating

 

12-44

%

Other Equity

 

 

812,500

 

 

last secured funding known by company

 

economic changes since last funding

 

 

 

Preferred Stock

 

 

1,200,000

 

 

last funding secured by company

 

economic changes since last funding

 

 

 

 

 

$13,662,500

 

 

 

 

 

 

 

 

NOTE 5 – RELATED-PARTY TRANSACTIONS

 

We maintain a Code of Ethics and certain other policies relating to conflicts of interest and related-party transactions as well as policies and procedures relating to what regulations applicable to BDCs generally describe as “affiliate transactions.”policy. Nevertheless, from time to time we may hold investments in portfolio companies in which certain members of our management, our Board of Directors, or significant shareholders of ours, are also directly or indirectly invested.  Our Board of Directors has adopted a policy to require our disclosure of these instances in our periodic filings withIn this regard, we entered into the SEC. Ourfollowing related-party transactions requiring disclosure under this policy are:transactions:

 

·

Mr. Joseph A. Geraci, II,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 Chief Financial Officer, and Mr. Douglas M. Polinsky, our Chief Executive Officer, hold direct and indirect interestscommon 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 in December 2022. 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 of Southern Plains Resources,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 company in which we made investments in common stock in eachNevada corporation, and Lyle A. Berman, as trustee of March and July 2013.

·A formerthe Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our company, Christopher Larson, hadCompany. Under the Loan Agreement, the Lenders made available to us a direct interest$5 million revolving line of credit for us to use in Mix 1 Life, Inc. and served as that company’s Chief Financial Officer at the timeordinary course of a portfolio investment we made in secured convertible debt of Mix 1 Life (together with common stock purchase warrants) in February 2014. In June 2014, Mr. Larson became a director of Mix 1 Life. In August 2014, we exercised our common stock purchase warrant on a cashless basisshort-term specialty finance business. See note 7 for the purchase of Mix 1 Life common stock. In March 2015, we invested in additional secured debt of Mix 1 Life. Mr. Larson resigned from his position as a director of Mill City Ventures in November 2015.further details.

 

·Lantern Advisors, LLC is a limited liability company equally owned by Messrs. Geraci and Polinsky, and owns a cashless warrant to purchase up to 153,846 shares of Creative Realities, Inc. at a price of $0.70 per share through July 14, 2019. We made an initial investment in secured convertible debt of Creative Realities (together with common stock purchase warrants) in February 2015, and then a subsequent investment in secured convertible debt of Creative Realities (together with common stock purchase warrants) in December 2015. In December 2015, we also exchanged our common stock purchase warrant obtained in February 2015 for shares of Creative Realities common stock.

- 14 -

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

NOTE 6 – COMMITMENTS AND CONTINGENCIESINCOME TAXES

 

WePresently, we are a C-corporation for tax purposes and have booked an agreement to lease approximately 1,917 square feet of commercial space, and two parking spots, for a period of 62 months. The 62-month lease term began October 1, 2013 and runs through November 30, 2018. The total base rent expenseincome tax provision for the periods described below.

As of September 30, 2022 and December 31, 2021, we have a deferred tax asset of $4,000 and a deferred tax liability of $45,000, respectively. As of September 30, 2022, our net deferred tax asset consists of foreign tax credit carryforwards, unrealized gain/loss, and other book to tax timing differences. 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.

- 15 -

Table of Contents

As of September 30, 2022 and December 31, 2021 we had accrued income taxes of $128,800 and $1,269,000, respectively. The change in accrued income taxes was largely driven by $1,536,000 of federal and state tax payments made during 2022. We recorded a benefit from  income taxes of $28,442 (27% effective tax rate) and a benefit from income taxes of $300 (27% effective tax rate) during the three and nine-month periodsmonths ended September 30, 2017 was $11,3452022 and $34,034,September 30, 2021, respectively. The table below sets forthWe recorded income taxes of approximately $346,000 (27% effective tax rate) and $1,010,978 (30.4% effective tax rate) during the required annual minimum lease payments:nine months ended September 30, 2022 and September 30, 2021, respectively.

 

Year Amount 
2017 $12,655 
2018  46,988 
Total $59,643 

NOTE 7 – INCOME TAXES

We plan to be taxed as a regulated investment company, or “RIC,” and intend to comply with the requirements of the Code applicable to RICs. Currently, however, we have not elected to be treated as a RIC. Upon our election to be taxed as a RIC, we will be required to distribute at least 90% of our investment company taxable income, and we intend at that time to distribute to shareholders (or retain through a deemed distribution) all of our investment company taxable income and net capital gain. Based on the foregoing, we have made no provision for income taxes. The characterization of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.

NOTE 8 – SHAREHOLDERS’ EQUITYLINE OF CREDIT

 

On September 25, 2017January 3, 2022, we repurchasedentered into a Loan and retired 1,084,091Security Agreement (the “Loan Agreement”) with Eastman Investment, Inc., a Nevada corporation, and Lyle A. Berman, as trustee of the Lyle A. Berman Revocable Trust (collectively, the “Lenders”). Mr. Berman is a director of our Company.  Under the Loan Agreement, the Lenders made available to us a $5 million revolving line of credit for us to use in the ordinary course of our short-term specialty finance business. Amounts drawn under the Loan Agreement accrue interest at the per annum rate of 8%, and all our obligations under the Loan Agreement are secured by a grant of a collateral security interest in substantially all of our assets.

As a Lender, Mr. Berman is obligated to furnish only one-half of the aggregate $5 million available under the Loan Agreement. The Loan Agreement has a five-year term ending on January 3, 2027, at which time all amounts owing under the Loan Agreement will become due and payable; subject, however, to each Lender’s right, including Mr. Berman, to terminate the Loan Agreement, solely with respect to such Lender’s obligation to provide further credit, at any time after January 3, 2023. In the event that a Lender, including Mr. Berman, terminates its lending obligations, the Loan Agreement requires that we repay such Lender, prior to the five-year maturity date, with the proceeds derived from specified investments.

During the period January 3 to June 30, 2022, the Loan Agreement provided for us to pay a quarterly unused commitment fee equal to one-quarter of one percent of the amount of credit available but unused under the Loan Agreement, and requires us to pay such fee in the form of shares of our common stock at a per-share pricebased on our net asset value per share on the last day of $0.40.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 September 30, 2017,2022, the balance outstanding on the line was $2,313,000 with a maturity date of January 3, 2027.

NOTE 8 – SHAREHOLDERS’ EQUITY

At September 30, 2022, we had 11,067,4026,185,255 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.

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.  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.

- 16 -

Table of Contents

NOTE 9 – PER-SHARE INFORMATION

 

Basic net lossgain (loss) per common share is computed by dividing net lossincrease 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 (loss) per common share is set forth below:

 

 For the Three Months Ended
September 30,
 

 

For the Three Months

Ended September 30,

 

 2017  2016 

 

2022

 

2021

 

Numerator: Net increase in net asset value resulting from operations $86,673  $142,254 

Numerator: Net increase in net assets resulting from operations

 

$(36,126)

 

$31,288

 

Denominator: Weighted-average number of common shares outstanding  12,092,575   12,151,493 

 

 

5,512,737

 

 

 

4,795,739

 

Basic and diluted net gain per common share $0.01  $0.01 

 

$(0.01)

 

$0.01

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2022

 

 

2021

 

Numerator:  Net increase in net assets resulting from operations

 

$893,993

 

 

$2,557,836

 

Denominator:  Weighted-average number of common shares outstanding

 

 

5,045,830

 

 

 

4,795,075

 

Basic and diluted net gain per common share

 

$0.18

 

 

$0.53

 

 

  For the Nine Months Ended
September 30,
 
  2017  2016 
Numerator:  Net increase (decrease) in net asset value resulting from operations $254,816  $(233,869)
Denominator:  Weighted-average number of common shares outstanding  12,131,638   12,151,493 
Basic and diluted net gain (loss) per common share $0.02  $(0.02)

- 15 -

MILL CITY VENTURES III, LTD.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

NOTE 10 – OPERATING LEASES

We are subject to two non-cancelable operating leases for office space expiring April 2, 2023. These leases do not have significant lease escalations, holidays, concessions, leasehold improvements, or other build-out clauses. Further, the leases do not contain contingent rent provisions. The leases do not include options to renew.

Because our lease does not provide an implicit rate, we use our incremental borrowing rate in determining the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The weighted-average discount rate as of December 31, 2021 was 4.5% and the weighted-average remaining lease term is one year.

Under ASC 840, rent expense for office facilities for the three months ended September 30, 2022 and September 30, 2021 was $18,589 and $16,689, respectively.

The components of our operating lease were as follows for the three and nine months ended September 30, 2022:  

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2022

 

 

 

 

 

 

 

 

Operating lease costs

 

$5,504

 

 

$15,787

 

Variable lease cost

 

 

4,601

 

 

 

13,724

 

Short-term lease cost

 

 

8,484

 

 

 

25,031

 

Total

 

$18,589

 

 

$54,542

 

Supplemental balance sheet information consisted of the following at September 30, 2022:

Operating Lease

 

 

 

    Right-of-use assets

 

$21,563

 

 

 

 

 

 

Operating Lease Liability

 

$21,672

 

    Less: short term portion

 

 

(21,672)

    Long term portion

 

$

 

- 17 -

Table of Contents

Maturity analysis under lease agreements consisted of the following as of September 30, 2022:

 

 

Operating

Leases

 

2022

 

$6,357

 

2023

 

 

14,859

 

Total lease payments

 

 

21,216

 

Plus: interest

 

 

456

 

Present value of lease liabilities

 

$21,672

 

NOTE 11 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights for the nine months ended September 30, 2017 and 2016:2022 through 2018:

 

  Nine Months Ended
September 30, 2017
  Nine Months Ended
September 30, 2016
 
Per-share data(1):        
Net asset value at beginning of period $0.77  $0.72 
Net investment loss  (0.04)  (0.01)
Net realized and unrealized gains (losses)  0.06   (0.01)
Repurchase of common stock  0.04   - 
Net asset value at end of period $0.83  $0.70 
         
Ratio/supplemental data:        
Per-share market value of investments at end of period $0.59  $0.52 
Shares outstanding at end of period  11,067,402   12,151,493 
Weighted-average shares outstanding for period  12,131,638   12,151,493 
Net assets at end of period $9,208,588  $8,507,419 
Average net assets(2) $9,446,407  $8,601,680 
Portfolio turnover rate(3)  21.01%  16.07%
Ratio of operating expenses to average net assets(3)  (7.21)%  (6.51)%
Ratio of net investment loss to average net assets(3)  (5.47)%  (2.52)%
Ratio of realized gains (losses) to average net assets(3)  4.89%  (5.35)%

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

Per Share Data (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value at beginning of period

 

$2.80

 

 

 

2.43

 

 

 

2.05

 

 

 

2.30

 

 

 

1.96

 

Net investment gain (loss)

 

 

0.18

 

 

 

0.20

 

 

 

0.05

 

 

 

(0.11)

 

 

(0.09)

Net realized and unrealized gains (losses)

 

 

0.02

 

 

 

0.54

 

 

 

0.14

 

 

 

0.02

 

 

 

0.34

 

Provision for income taxes

 

 

(0.05)

 

 

(0.20)

 

 

0.00

 

 

 

0.00

 

 

 

0.00

 

Stock-based compensation

 

 

0.05

 

 

 

0.00

 

 

 

0.00

 

 

 

0.00

 

 

 

0.00

 

Repurchase of common stock

 

 

 0.00

 

 

 

 0.00

 

 

 

 0.05

 

 

 

 0.00

 

 

 

 0.00

 

Other changes in equity

 

 

 0.02

 

 

 

 0.00

 

 

 

 0.00

 

 

 

 0.00

 

 

 

 0.00

 

Payment of common stock dividend

 

 

0.00

 

 

 

(0.23)

 

 

0.00

 

 

 

(0.11)

 

 

0.00

 

Net asset value at end of period

 

$3.02

 

 

 

2.74

 

 

 

2.29

 

 

 

2.10

 

 

 

2.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio / Supplemental Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share market value of investments at end of period

 

$2.92

 

 

 

2.30

 

 

 

1.71

 

 

 

1.58

 

 

 

1.85

 

Shares outstanding at end of period

 

 

6,185,255

 

 

 

4,795,739

 

 

 

4,754,104

 

 

 

4,918,845

 

 

 

4,918,845

 

Average weighted shares outstanding for the period

 

 

5,045,830

 

 

 

4,795,075

 

 

 

4,836,170

 

 

 

4,918,845

 

 

 

4,918,845

 

Net assets at end of period

 

$18,658,595

 

 

 

13,140,835

 

 

 

10,805,062

 

 

 

10,588,689

 

 

 

11,278,889

 

Average net assets (2)

 

$15,081,352

 

 

 

13,090,497

 

 

 

10,220,482

 

 

 

12,304,975

 

 

 

9,955,674

 

Total investment return

 

 

6.07%

 

 

22.22%

 

 

8.79%

 

 

(8.82)%

 

 

12.64%

Portfolio turnover rate (3)

 

 

66.81%

 

 

124.55%

 

 

18.18%

 

 

7.11%

 

 

11.55%

Ratio of operating expenses to average net assets (3)

 

 

(19.24)%

 

 

(10.31)%

 

 

(6.49)%

 

 

(7.70)%

 

 

(6.98)%

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

 

 

10.09%

 

 

9.87%

 

 

3.35%

 

 

(6.40)%

 

 

(5.53)%

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

 

 

1.18%

 

 

40.81%

 

 

7.06%

 

 

57.36%

 

 

(12.79)%

 

(1)

(1)

Per-share data was derived using the weighted-averageending number of shares outstanding for the period.

(2)

(2)

Based on the monthly average of net assets as of the beginning and end of each period presented.

(3)

(3)

Ratios are annualized.

 

NOTE 11 – SUBSEQUENT EVENTS

None.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections:

 

·

Overview

·

Portfolio and Investment Activity

·

Results of Operations

·

Financial Condition

·

Critical Accounting Estimates

·

Off-Balance Sheet Arrangements

·

Forward Looking Statements

 

OVERVIEW

 

Mill City Ventures III, Ltd. is an investment companywas incorporated in the State of Minnesota on January 10, 2006. 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.”

 

We are an internally managed closed-end non-diversified management investment company. We have electedengaged in the business of providing short-term non-bank lending and specialty finance solutions to be regulated as a business development company, or “BDC,” under the Investment Company Act of 1940 (the “1940 Act”). To date, we have not made an election to be treated as a regulated investment company, or “RIC,” under the Internal Revenue Code of 1986 (the “Code”).

We primarily focus on investing in or lending to privately held and small-cap publicly traded U.S. companies and making managerial assistance availableindividuals, generally on a secured basis. The loans we provide typically have maturities that are nine months or shorter, highly illiquid, and ordinarily involve a pledge of collateral or, in the case of loans made to such companies. These investments are typically structured as purchases of preferred or common stock, investment contracts, or loans evidenced by promissory notes that may be convertible into stock by their terms or that may be accompaniedcompanies, personal guarantees by the issuance to usprincipals of warrants or similar rights to purchase stock.the borrower. Our investmentsloans may be made for purposesreal estate acquisitions, renovation and sale, or other projects relating to real estate, title loans, inventory needs, inventory financing, solve for short-term liquidity needs, or for other similar purposes. We intend to remain opportunistic, however, and may occasionally engage in transactions that involve our acquisition of financing acquisitions, recapitalizations, buyouts, organic growth and working capital.other rights (such as stock, warrants or other equity-linked investments) or that are structured differently or uniquely. Our revenues relate to the gain we realize from the sale of securities we purchase, and to dividends and interest we derive from those securities. Our investmentbusiness objective is to generate both current incomerevenues from the interest and fees we charge, and capital appreciation that ultimately become gains.from any related investments we make.

 

Our principal sources of income are interest and fees associated with our loans such as origination fees, closing fees or exit fees. In connection with the short-term non-bank specialty finance loans we provide, we may receive reimbursement of legal costs associated with loan documentation. We occasionally derive income from dividends paid on equity securities we earn on our investments, and proceedshold from time to time, or from the sale or redemption of our investments.equity securities. Our statementsstatement of operations also reflect gain from increases and decreases in the carrying value of our assets and investments (i.e., unrealized appreciation)appreciation and depreciation). Our principal expenses relate to operating expenses, the largest components of which are generally professional fees, payroll, occupancy, and insurance expenses. Our statements of operations also reflect loss from decreases in the carrying value of our investments (i.e., unrealized depreciation).

As a BDC, we are required to comply with certain regulatory requirements. For example, we must invest at least 70% of our total assets in “qualifying assets,” including securities of private or small-cap publicly traded U.S. companies and cash, cash equivalents, U.S. government securities and high quality debt investments that mature in one year or less. We may from time to time invest up to 30% of our assets opportunistically in other types of investments, including the securities of larger public companies and foreign securities. In addition, we will be permitted, under certain conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock, but only if our “asset coverage,” as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must not make any dividend distribution to our shareholders or repurchase securities unless we meet the applicable asset-coverage ratios at the time of the dividend distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes.

 

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2021, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. In addition, the following discussion of our results of operations and financial condition should be read in the context of this overview.

 

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PORTFOLIO AND INVESTMENT ACTIVITY

 

During the nine months ended September 30, 2017,2022, we made $1,984,412 in purchases$13,924,333 of investments in portfolio companiesand loans and had $2,821,876$10,076,483 of redemptions and repayments, resulting in net investments at amortized cost of $6,904,057 for$17,913,927 at the end of the period.

During the nine months ended September 30, 2016,2021, we made $2,049,581 in purchases$18,133,352 of investments in portfolio companiesand loans and had $1,381,928$16,363,964 of redemptions and repayments, resulting in net investments at amortized cost of $7,538,930 for$10,562,451 at the end of that period.

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Our portfolioinvestment composition by major class, based on fair value at September 30, 2017,2022, was as follows:

 

  Investments at
Fair Value
  Percentage of
Fair Value
 
Senior Secured Loans $500,000   7.4%
Equity/Other  6,293,306   92.6 
Total $6,793,306   100.0%

 

 

Investments at

Fair Value

 

 

Percentage of

Fair Value

 

Short-term Non-banking Loans

 

$16,040,748

 

 

 

88.8%

Preferred Stock

 

 

1,200,000

 

 

 

6.6

 

Other Equity

 

 

822,500

 

 

 

4.6

 

Total

 

$18,063,248

 

 

 

100.0%

 

RESULTS OF OPERATIONS

 

Our operating results for the three and nine months ended September 30, 20172022 and September 30, 20162021 were as follows:

 

  For the three months ended
September 30,
  For the nine months ended
September 30,
 
  2017  2016  2017  2016 
Total investment income $52,354  $113,232  $125,427  $279,283 
Total expenses  (159,632)  (152,396)  (514,379)  (442,210)
Net investment loss $(107,278) $(39,164) $(388,952) $(162,927)

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Investment Income:

 

$1,115,224

 

 

$755,601

 

 

$3,351,935

 

 

$1,977,992

 

Operating Expenses:

 

 

(1,179,792)

 

 

(239,582)

 

 

(2,227,865)

 

 

(1,023,596)

Net Investment Gain (Loss)

 

$(64,568)

 

$516,019

 

 

$1,124,070

 

 

$954,396

 

Investment Income

 

We generate revenue primarily in the form of interest income and capital gains, if any, onderived from the debt securitiesshort-term non-banking loans we own. We may also generate revenue from dividends and capital gains on equity investmentsprovide, together with fees we make, if any,charge in connection with those loans, such as commitment, origination, structuring, diligence, or on warrants or other equity interests that we may acquire.consulting fees.  Any such fees will be recognized as earned.  In some cases, the interest payable to us on our investmentsthe short-erm loans we provide may accrue or be paid in the form of additional debt. The principal amount of the debt instruments, together with any accrued but unpaid interest thereon, will generally become due at the maturity date of those debt instruments.  WeOn occasion, we may also generate revenue in the form of commitment, origination, structuring, diligence,from dividends and capital gains on equity investments we make, if any, or consulting fees. Any such fees will be recognized as earned.on warrants or other equity interests that we may acquire.  

 

For the three and nine months ended September 30, 2017,2022, interest earned on our total investment incomeloan portfolio was $52,354$1,053,714 and $125,427,$2,840,425, respectively, and our fees charged in connection with the loans was attributable$61,510 and $511,510, respectively. For the three and nine months ended September 30, 2021, interest earned on our loan portfolio was $663,101 and $1,756,492, respectively, and our fees charged in connection with the loans was $92,500 and $221,500, respectively.  The increase in the most recent period is primarily due to a combination of strong demand for our short-term loans and our enhanced ability to satisfy that demand with the additional cash resources we have derived from prior loans that have been repaid to us.  Our loan portfolio generates interest income, from two eligible portfolio companies, Bravo Financial, LLC and DBR Enclave LLC, and dividend payments receivedwith a weighted-average interest rate on accountthe loans of investments in five eligible portfolio companies - OTC Markets Group Cl A, Simulations Plus, Inc., Tessco Technologies, Inc., Escalade Inc., and National American University Holdings, Inc., and dividends received on account of investments in three non-eligible portfolio companies.26%.

        Professional Fees

 

For the three and nine months ended September 30, 2016, our total investment income was $113,2322022, we had $916,359 and $279,283, respectively, and was attributable to interest income from four eligible portfolio companies - Bravo Financial, LLC, Mix 1 Life, Inc., Creative Realities, Inc. and DBR Phase III US Investors, LLC - and dividend payments received on account of investments in five eligible portfolio companies - Educational Development Corp., OTC Markets Group Cl A, Tessco Technologies, Inc., National American University Holdings, Inc., and Simulations Plus, Inc .- and on account of investments in seven non-eligible portfolio companies.

Operating Expenses

The composition of our operating expenses for the three and nine months ended September 30, 2017 and September 30, 2016 was as follows:

  For the three months ended
September 30,
  For the nine months ended
September 30,
 
Expense item 2017  2016  2017  2016 
Professional fees $39,175  $47,632  $165,725  $133,116 
Payroll  51,562   40,487   160,349   122,445 
Occupancy  22,225   21,571   64,556   60,175 
Insurance  24,030   18,782   60,170   58,869 
Directors’ fees  15,000   15,000   45,000   43,956 
Depreciation and amortization  2,670   3,213   8,165   9,637 
Other general and administrative  4,970   5,711   10,414   14,012 
Total $159,632  $152,396  $514,379  $442,210 

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For the three and nine months ended September 30, 2017, our$1,309,348 professional feefees expense, was $39,175 and $165,725, respectively.  For the three and nine months ended September 30, 2016, our2021, we had $79,950 and $300,297 professional feefees expense, was $47,632 and $133,116, respectively. The increase for the nine months in 20172022 is due to legal costs incurred to close on several new short-term banking loans, to obtain our listing on the paymentNasdaq exchange,and our efforts to seek additional financing through a public offering of legal fees in connection with our collection efforts on bad debt, specifically relatingcommon stock to the Mix 1 Life Notes.grow our business.

        Net Realized Gain from Investments

 

For the three and nine months ended September 30, 2017, our payroll expense was $51,5622022, we had $2,098,585 and $160,349,$10,076,483, respectively, of sales of investments, resulting in $0 and $133,020 of realized gains, respectively. For the three and nine months ended September 30, 2016, our payroll expense was $40,4872021, we had $6,474,137 and $122,445, respectively. The increase$16,363,964, respectively, of sales of investments, resulting in 2017 is due to the payment$289,138 and $3,818,737, respectively, of the Officers’ health insurance benefits beginning in 2017.realized gains.  

 

Net Realized Gain fromChange in Unrealized Appreciation (Depreciation) on Investments

 

For the three and nine months ended September 30, 2017, we2022, our investments had $338,241$0 of unrealized appreciation and $2,821,876, respectively,$16,297 of principal repayments, resulting in ($404,457) and $343,613, respectively, of realized gains and losses.unrealized depreciation, respectively. For the three and nine months ended September 30, 2016, we2021, our investments had $350,549$774,169 and $1,381,928, respectively,$1,204,319 of principal repayments, resulting in $186,427 and ($346,854), respectively, of realized gain and losses.unrealized depreciation, respectively.  

 

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        Changes in Net Change in Unrealized Appreciation (Depreciation) on InvestmentsAssets from Operations

 

For the three and nine months ended September 30, 2017, our investments had $598,408 and $300,155 of unrealized appreciation, respectively. For the three and nine months ended September 30, 2016, our investments had ($5,009) and $275,912 of unrealized appreciation (depreciation), respectively.

Changes in Net Assets from Operations

For the three and nine months ended September 30, 2017,2022, we recorded a net decrease in net assets from operations of $36,126 and a net increase in net assets from operations of $86,673 and $254,816,$893,993, respectively.  Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2017,2022, our per-share net increasedecrease in net assets from operations was $0.01 and $0.02,our per share net increase from operations was $0.18, respectively. For the three and nine months ended September 30, 2016,2021, we recorded a net increase (decrease) in net assets from operations of $142,254$31,288 and ($233,869),$2,557,836, respectively.  Based on the weighted-average number of shares of common stock outstanding for the three and nine months ended September 30, 2016,2021, our per-share net increase (decrease) in net assets from operations was $0.01 and ($0.02),$0.53, respectively.

 

Cash Flows for the Nine Monthsmonths Ended September 30, 20172022 and 20162021

 

The level of cash flows used in or provided by operating activities is affected primarily by the timingour provision of short-term loans, purchases of other investments, redemptions and repayments of portfolioour loans or investments, amongand other related factors. For the nine months ended September 30, 2017, net cash provided in operating activities was $425,763. Cash flows provided in operating activities for the nine months ended September 30, 2017 were primarily related to redemptions and repayments of $2,821,876, offset mostly by purchases of investments totaling $1,984,412. For the nine months ended September 30, 2016,2022, net cash used in operating activities was $906,046.$6,429,293.  Cash flows used in operating activities for the nine months ended September 30, 20162022 were primarily related to the funding of our short-term loans and purchases of investments aggregating $13,924,333, offset mostly by redemptions and repayments of $1,381,928 offset mostly by purchases ofshort-term loans and investments totaling $2,049,581.

The level of cash flows used in or provided by financing activities is affected by the issuance or retirement of common stock, among other factors.$10,076,483. For the nine months ended September 30, 2017,2021, net cash used in operating activities was $1,306,775.  Cash flows used in operating activities for the nine months ended September 30, 2021 were primarily related to the funding of our short-term loans and purchases of investments aggregating $18,133,352, offset mostly by redemptions and repayments of short-term loans and investments totaling $16,363,964.

For the nine months ended September 30, 2022, net cash provided in financing activities was $6,354,795. Cash flows provided in financing activities for the nine months ended September 30, 2022 were primarily related to our public offering and our draw on the available line of credit, offset by payments against the line of credit. For the nine months ended September 30, 2021, net cash used in financing activities was $433,636.$539,296. Cash flows used in financing activities for the nine months ended September 30, 2017 was2021 were related to the purchase and retirementpayment of 1,084,091 shares of commonour stock during the third quarter. For the nine months ended September 30, 2016, there was no cash provided or used by financing activities.dividend to investors.

 

FINANCIAL CONDITION

 

As of September 30, 2017,2022, we had cash of $2,336,878,$1,861,650, a decrease of $7,873$74,498 from December 31, 2016. The primary use of2021.  We expect that our existing funds, andtogether with any funds raised in the future, is expectedwill be used primarily to be forfund our investments in portfolio companies, cash distributions to our shareholdersprovision of short-term non-bank loans and specialty finance solutions or for other general corporate purposes, including paying forour operating expenses or debt service to the extentand servicing our existing debt.  Pending use of our cash as described, we borrow or issue senior securities. Pending investmentmay invest some portion of our cash in portfolio companies, our investments may consist of cash, cash equivalents, U.S. government securities or other high quality debt securities maturing in one year or less from the time of investment, whichinvestment.

On August 9, 2022, we refer to collectively as “temporary investments.” As of the date of this filing, we expect that substantially alleffected a stock combination (reverse stock split) of our temporary investments will be redeployedcommon 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 portfolio company investmentsone 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 December 31, 2017.

- 19 -

To the extent our Board of Directors determinesin accordance with Minnesota law, and resulted in a proportionate reduction in the future, based onnumber of authorized shares of capital stock available for issuance under our financial condition andarticles of incorporation.  On a post-reverse-split basis, we are authorized to issue up to 111,111,111 shares of capital market conditions, that additional capital would allow us to take advantage of additional investment opportunities, we may seek to raise additional equity capital or to engage in borrowing, subject to the limitations on borrowing applicable to BDCs.stock.

 

RELATED-PARTY TRANSACTIONSOn August 11, 2022, we completed a 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.  We sold these shares at $4.00 per share, resulting in gross proceeds of $5,000,000.  As part of the registered public offering, we 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, we issued the underwriter a five-year warrant to purchase up to 75,000 common shares at the per-share price of $5.00.  Our net proceeds after the payment of underwriting discounts, underwriting expenses, and offering-related expenses we incurred were otherwise obligated to pay, were approximately $4,041,000.

 

See Note 5 to our Financial Statements for disclosure of our related-party transactions and potential conflicts of interest.

CRITICAL ACCOUNTING ESTIMATES

 

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.

 

In preparing the financial statements, management will make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management also will utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results will almost certainly differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating results occur, we will describe additional critical accounting policies in the notes to our financial statements. Our most critical accounting policies relate to the valuation of our portfolio investments, and revenue recognition.  For more information, see Note 2 “Significant Accounting Policies.”refer to our Annual Report on Form 10-K for the year ended December 31, 2021.

 

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Table of Contents

OFF-BALANCE-SHEET ARRANGEMENTS

 

During the nine months ended September 30, 2017,2022, we did not engage in any off-balance sheet arrangements as described in Item 303(a)(4) of Regulation S-K.

 

FORWARD-LOOKING STATEMENTS

 

Some of the statements made in this section of our report are forward-looking statements based on our management’s current expectations for our company.  These expectations involve assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance, and can ordinarily be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words.  Important assumptions include our ability to identify and consummate new investments, achieve certain margins and levels of profitability, the availability of any needed additional capital, and the ability to maintain compliance with regulations applicable to us.  Some of the forward-looking statements contained in this report relate to, and are based our current assumptions regarding, the following:

 

·

our future operating results;

·

our business prospects and the prospects of our portfolio companies;
·the outcome of compliance inspections conducted from time to time by the SEC’s Office of Compliance and Inspections;
·

the success of our investments;

·

our relationships with third parties;

·

the dependence of our success on the general economy and its impact on the industries in which we invest;

·

the ability of our portfolio companies to achieve their objectives;

·

our expected financings and investments;

·

our regulatory structure and tax treatment;

·

our ability to operate as a BDC and to be taxed as a RIC;
·

the adequacy of our cash resources and working capital; and

·

the timing of cash flows, if any, we receive from the operations of our portfolio companies.investments.

- 20 -

 

The foregoing list is not exhaustive.  For a more complete summary of the risks and uncertainties facing our company and its business and relating to our forward-looking statements, please refer to our Annual Report on Form 10-K filed on March 28, 201710, 2021 (related to our year ended December 31, 2016)2021) and in particular the section thereof entitled “Risk Factors.” Because of the significant uncertainties inherent in forward-looking statements pertaining to our company, the inclusion of those statements should not be regarded as a representation or warranty by us or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this filing. The forward-looking statements made in this report relate only to events as of the date on which the statements are made, and are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

 

As of September 30, 2017,2022, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of September 30, 2017.2022.

 

There were no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls.

 

 

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

 

Exhibit

Number

Exhibit
Number

Description

3.1

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed January 23, 2013)

3.2

Amended and Restated Bylaws of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10-SB filed on January 29, 2008)

31.1

Section 302 Certification of the Chief Executive Officer

31.2

Section 302 Certification of the Chief Financial Officer

32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

MILL CITY VENTURES III, LTD.

   
Date: November 14, 201718, 2022By:/s/ Douglas M. Polinsky

Douglas M. Polinsky
 Chief Executive Officer
  Chief Executive Officer 

Date: November 14, 201718, 2022By:/s/ Joseph A. Geraci, II

Joseph A. Geraci, II
 Chief Financial Officer

 
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